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Probe of short sales said to expand

New York state is eyeing credit default swaps, an official says.

September 27, 2008|From the Associated Press

New York Atty. Gen. Andrew M. Cuomo is broadening his investigation of short selling on Wall Street, according to a senior official in his office.

Cuomo is turning to the massive credit default swap market, which he believes may have been manipulated to give the impression that certain companies were in trouble.

The official said Friday that Cuomo had subpoenaed information from providers of market data in what could be a huge probe into one of the factors contributing to volatility in the stock and credit markets. The official spoke on the condition of anonymity because the investigation hadn't been announced.

Cuomo believes the swap contracts may have been abused by short sellers who spread negative rumors as a way to drive down a company's share price.

Credit default swaps protect an investor in the event a company defaults on its debt. Their price is a measure of a company's soundness, so a higher price for the swap should be a signal of trouble with a company's financial standing.

Cuomo suspects short sellers used credit default contracts to make a company's position appear worse than it actually was. That could help short sellers profit from a decline in a company's shares.

In a short sale, an investor borrows shares of a company, usually from a broker, and immediately sells them at market price. If the share price subsequently falls, the investor buys back the shares and pockets the difference.

The federal government blamed massive short selling by hedge funds for contributing to the collapses of Lehman Bros. Holdings Inc., American International Group Inc. and other troubled companies.

The subpoenas this week went to trading information companies Markit Group Ltd., Depository Trust & Clearing Corp. and Bloomberg LP.

Markit Vice President John Dooley declined to comment Friday. Spokesmen for Depository Trust and Bloomberg didn't immediately respond to requests for comment.

The senior official said Cuomo was looking at data on transactions over the last several weeks involving AIG, Merrill Lynch & Co., Morgan Stanley, Goldman Sachs Group and Washington Mutual Inc.

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