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'No evidence' in HBOS short selling probe

Friday, 1 August 2008 12:00 AM

The Financial Services Authority (FSA) has failed to uncover any evidence of a malicious attempt to distort the HBOS share price as part of a short selling investigation.

However, the authority did discern fictitious rumours with regard to the company did damage its share price.

On of March 19th the FSA - following a period of irregular trading in the company's shares - launched an investigation to determine whether a person or persons may have been spread misleading, false or deceptive information regarding HBOS to profit from a reduction in its share price.

The investigation followed a 17 per cent drop in the HBOS share price - seeing it fall to 398 pence per share on 19th March - largely based on false rumours the governor of the Bank of England had cancelled Easter travel plans in order to "bail out HBOS".

This was not the case - with HBOS reporting that day it had an "exceptionally strong balance sheet" - leading the FSA to investigate whether unscrupulous traders spreading false rumours were behind the fall.

During this investigation FSA staff interviewed a number of market participants at investment banks, broker dealers and hedge funds - including traders, senior management and compliance staff - to ascertain the source of any rumours.

The FSA also examined transaction monitoring databases and the spread of rumours through the global press in an attempt to ascertain what impact, if any, the news had on the HBOS share price.

It is this investigation which has now concluded.

However, while the FSA finds "there is no doubt that false and damaging rumours.had some impact on HBOS' share price", there is no evidence they "were spread as part of a concerted attempt by individuals to profit by manipulating the share price."

Instead the FSA asserts HBOS "very uncertain market conditions in relation to the UK banking sector" and the near collapse of American bank Bear Stearns the previous weekend created an atmosphere in which rumours such as these could be believed.

While it found no evidence of malpractice on this occasion the FSA warns: "Market participants should, however, expect that our surveillance and investigation activity will continue at a high level of intensity.

"Where individuals or firms appear to have benefited following false or misleading rumours, we will require individuals and/or firms to provide immediate access to traders, information and trading strategies as well as to make available email, messaging and telephone records."

Chris O'Toole

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