Short Selling

The subprime mortgage meltdown has taken a toll on the financial sector, triggering the collapse of one of Wall Street's oldest firms, wild gyrations in the market and a loss of faith by investors in some institutional cornerstones. Yet the most vigorous responses have come from the Federal Reserve and the Treasury Department, not the cop on the beat -- the Securities and Exchange Commission. This month, the SEC appeared to rouse itself from its torpor.

One quick glance around the Palo Alto offices of Feshbach Bros. suffices to show that this is no typical bullish investment firm. First, there are the bears: stuffed Teddy bears, bronze bears, ceramic bears, crystal bears, paintings of bears. Then there is the bust of the late L. Ron Hubbard, self-styled management guru and founder of the controversial Church of Scientology, which has waged fierce battle with the Internal Revenue Service over its tax-exempt status.

European stock market regulators are investigating whether the masterminds of last week's terrorist attacks attempted to profit by short-selling the stocks of insurance companies in the days leading up to the attacks, according to the regulators and sources at European insurance firms. Regulators in Germany, England, France, Italy and Switzerland are all studying unusual patterns of stock trading, sources said.

The Securities and Exchange Commission on Tuesday stepped up its war against what it believes is manipulation of stocks by "short sellers" -- traders who bet on falling share prices. SEC Chairman Christopher Cox surprised Wall Street with a plan to curb illegal short selling in 19 major financial company shares, including embattled mortgage titans Fannie Mae and Freddie Mac. Shares of Fannie and Freddie have been big targets of bearish traders this year.

In April, 1987, when federal regulators were investigating suspicious dealings at American Continental Corp., three brothers in Palo Alto were laying a bet that the regulators would find trouble. The Feshbach Bros.

Weeks after IHOP Corp. went public in July, short-sellers began swarming around the Glendale restaurant chain's stock in hopes that its price would tumble. Since then, short interest in IHOP has surged to an unusually high 12% of the company's common stock. That compares with overall short interest of less than 1% of outstanding shares for all stocks listed on the NASDAQ over-the-counter index, on which IHOP is traded.

Bill Lobdell made quite a name for himself in this newsroom writing about faith gone wrong. He called out crooked ministers, fraudulent faith healers and abusive priests. Now Lobdell has launched a new journalism website with a partner who once was convicted and sent to prison for a multimillion-dollar swindle. The veteran religion writer hopes to do to crooked businesses what he did to ministers who did not live up to their calling. What has many traditional journalists agog is not just that Lobdell threw in with onetime ZZZZ Best con man Barry Minkow, but what the duo, operating as iBusinessreporting.

The Securities and Exchange Commission on Wednesday proposed rules to loosen some restrictions on short selling, the first time in 27 years that the agency has considered changing rules on trading practices that make money when stocks fall. Under the proposal, the SEC would conduct a two-year experiment for about 300 widely traded companies, eliminating rules that bar short selling when a stock's price is falling.

Wall Street's bears have turned more cautious recently, despite the market's pullback since mid-May. Short interest on the New York Stock Exchange--the number of shares borrowed and sold, usually in a bet on lower prices--rose 1.2% from mid-May to mid-June, the smallest increase this year, the NYSE said Thursday. Total short interest was 5.58 billion shares as of June 15, up 64.6 million shares from mid-May.