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Did Hedge Shorting Kill Bear?

Date: Thursday, March 20, 2008
Author: HFN Daily Report

[Quit Rolling Your Eyes at This Headline]

It took 'em long enough but the witch hunt to see if a hedge fund conspiracy caused the downfall of Bear Stearns is underway.

The SEC is looking into the possibility that hedge funds bet on a drop in Bear Stearns stock while spreading gossip that the investment bank was set to collapse. The New York Stock Exchange is also in on the probe.

Last week, word that Bear was in trouble coincided with a run-on-the-bank that led to its sale to rival JPMorgan for $2 a share.

Last Friday, Alan Schwartz, chief executive officer of Bear Stearns, said "fiction" sparked the panic selling. Schwartz maintained that Bear was in good financial health prior to the selloff.

The characterization of the short-selling hedge fund as the stock-market boogeyman has become commonplace. Overstock claimed it was under attack from short-bias hedge fund Rocker. In a more recent illustration, Allied Capital blamed Greenlight for "naked shorting." In 2005, a Web-based organization, National Coalition Against Naked Shorting, launched.

To make a case for hedge fund manipulation, the SEC would have to show that a trader spread rumor about Bear Stearns while seeking to profit from a drop in its stock price. Proving that happened to Bear Stearns would be a long-shot, considering the piling on that took place as speculation spread.