Naked Short Selling

Morgan Keegan Fires Fairfax Analyst on Early Report Disclosure

By Anthony Effinger and Thom Weidlich

Sept. 10 (Bloomberg) -- Morgan Keegan & Co. Inc., a Tennessee-based brokerage, said it fired stock analyst John Gwynn in August for giving his reports on Canada's Fairfax Financial Holdings Ltd. to selected clients before publication.

Fairfax had sued Morgan Keegan, Gwynn and a group of hedge- fund managers including Jim Chanos of Kynikos Associates Ltd. and Steven Cohen of SAC Capital Advisors LLC in July 2006, alleging they had ganged up to drive down Fairfax's shares and profit from the decline. The defendants have denied the claims.

Fairfax said Gwynn, 62, collaborated with the hedge funds to write negative reports on the Toronto-based insurer, and that the funds knew when the reports would be released and what they would say.

``Gwynn was discharged from Morgan Keegan for violation of a firm policy relating to his apparent advance disclosure of his pending research coverage of Fairfax Financial Holdings,'' spokeswoman Kathy Ridley said by e-mail in response to questions. ``Advance notice of pending research is not permitted by the firm.''

Gwynn's dismissal doesn't support Fairfax's claim that the analyst at the Memphis, Tennessee-based firm was paid to tarnish Fairfax's reputation, Ridley said.

``The evidence shows that Mr. Gwynn strongly believed in the accuracy of the facts in his report,'' Ridley wrote. ``The apparent advance disclosure of coverage has no bearing on the content or accuracy of the report. We continue to believe that the lawsuit is completely without merit.''

`Indirectly'

Gwynn, reached at home, said his dismissal was ``indirectly'' related to the dispute with Fairfax and referred questions to lawyers at Carrington, Coleman, Sloman & Blumenthal LLP in Dallas. Bruce Collins, a lawyer at the firm, declined to comment on the dismissal.

Morgan Keegan is a unit of Regions Financial Corp., Alabama's biggest bank, based in Birmingham.

Fairfax, owners of U.S. and Canadian insurers, filed its complaint in New Jersey Superior Court in Morris County, alleging racketeering, commercial disparagement, tortious interference with contractual relationships and conspiracy. Judge Deanne Wilson is handling the case.

Other defendants include Daniel Loeb, founder of Third Point LLC; Adam Sender, founder of Exis Capital Management Inc.; William Gahan, a trader at Institutional Credit Partners LLC; and Spyro Contogouris, head of MI4 Reconnaissance LLC.

The hedge funds denied the allegations in court documents. In November, ICP countersued, saying Fairfax subjected it to a campaign of harassment and intimidation. It said Fairfax sued the hedge funds to deflect scrutiny of its accounting problems.

Two Reports

Gwynn started covering Fairfax Jan. 16, 2003, with a report that said Fairfax was short $5 billion of reserves needed to cover future insurance claims, the complaint said. Fairfax shares listed in Toronto tumbled 28 percent in three trading sessions, to C$85 ($55.40), a seven-year low. Its U.S. shares also plunged.

Hedge funds run by the other defendants profited, the complaint said, because they borrowed Fairfax shares and sold them, betting the stock would fall so they could buy back the shares at a lower price, return them to the owner, and keep the difference.

Two weeks later, in a Jan. 30 report, Gwynn trimmed his shortfall estimate by 40 percent, to $3 billion. Fairfax shares in Toronto jumped 9.7 percent. Gwynn continued to issue negative reports on Fairfax the complaint said.

`Pressure Investors'

``Enterprise members used Gwynn's unreasonably negative and materially misleading analysis to pressure investors, analysts and rating agencies into selling their shares or downgrading their ratings,'' Fairfax said in its complaint.

Gwynn sued Fairfax in April. He said the company defamed him by asserting that he had issued fraudulent research. Fairfax posted those allegations on its Web site, and drew attention to them by publishing a press release, Gwynn said.

Fairfax asked the judge to dismiss Gwynn's libel complaint as insufficient to support the claim. At an Aug. 8 hearing, Gwynn's lawyer, Collins, defended the complaint, saying Fairfax ``specifically targeted the dissemination'' of the press statement to Memphis, where Gwynn lives.

``They are accusing my client of being part of a criminal conspiracy,'' Collins said at the hearing. ``The allegations against my client, Mr. Gwynn, are extraordinarily damaging, and they make accusations which we know are absolutely false.''

Fairfax lawyer Michael Bowe of Kasowitz, Benson, Torres & Friedman LLP in New York said at the hearing that the statement was ``a full, fair and accurate report of the complaint,'' and that there was no evidence of malice in sending it out.

Wilson denied Fairfax's motion to dismiss Gwynn's defamation claim, without ruling on its merits. The case is proceeding.

The case is Fairfax Financial Holdings Ltd. v. SAC Capital Management LLC, L-2032-06, Superior Court of New Jersey, Morris County (Morristown).

To contact the reporters on this story: Anthony Effinger in Portland, Oregon, at aeffinger@bloomberg.net; Thom Weidlich in New York at tweidlich@bloomberg.net

Last Updated: September 10, 2008 11:03 EDT
 
FFH 33 214.67 1.26 2.67 157,600

Farifax has made frequent appearances on regsho. This time, for 33 days.

Oh, By the way. Chanos is on CNBC this afternoon. Think they'll ask him about this, and Ashley Dupree? Me either.

LOL.

Now, spin this, Waterboy.
 
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Deutsche unit to pay record fine for short sales
Wed Sep 10, 2008 12:07pm EDT
By Karey Wutkowski

WASHINGTON (Reuters) - Deutsche Bank Securities Inc has agreed to pay a $575,000 fine for short-selling violations in the largest penalty to date from NYSE Regulation.

NYSE Regulation, the watchdog arm of the New York Stock Exchange (NYX.N: Quote, Profile, Research, Stock Buzz)(NYX.PA: Quote, Profile, Research, Stock Buzz), said on Wednesday that Deutsche Bank Securities made a significant number of short sales in securities that were not on the firm's easy-to-borrow list between January 2005 and October 2006.

It said the firm completed the sales without borrowing the securities or having reasonable grounds that they could be borrowed.

Short sellers arrange to borrow shares they consider overvalued and sell them in hopes of making a profit when the price drops.

Deutsche Bank Securities is the U.S. investment banking and securities arm of German banking giant Deutsche Bank AG (DBKGn.DE: Quote, Profile, Research, Stock Buzz). A spokesman from Deutsche Bank said the firm was pleased to resolve the matter.

Robert Marchman, head of NYSE Regulation's division of enforcement and risk, said the case against Deutsche involved failures to locate the securities to cover the short sales, not necessarily a failure to deliver the securities.

A failure to deliver is associated with so-called naked short selling -- the subject of a recent U.S. Securities and Exchange Commission emergency rule designed to crack down on abusive short selling.

"The crux of this case is really the fact they didn't have adequate procedures in place to be able to locate the securities," Marchman said.

NYSE Regulation also found that two of Deutsche Bank Securities' trading desks incorrectly marked an unquantified but significant number of short sale orders as long, and some of the incorrectly marked short sale orders were improperly executed.

Deutsche Bank consented to a censure and the fine without admitting or denying the violations.

The regulator also said Wednesday it fined Citigroup (C.N: Quote, Profile, Research, Stock Buzz) Global Markets Inc $235,000 for various trading violations.

The regulator found the company, the brokerage and securities arm of Citigroup Inc, entered proprietary trades ahead of or along with customer orders from January 2004 through November 2006.

It said the firm either did not obtain permission from institutional customers or did not properly follow the provisions of customer permission as documented.

NYSE Regulation also found that from February 2007 through October 2007, Citigroup Global Markets failed to properly record, maintain and transmit certain data related to orders in various NYSE securities.

The firm agreed to the censure and penalty without admitting or denying the violations. It did not immediately return a call seeking comment.

(Reporting by Karey Wutkowski; Editing by Brian Moss/Jeffrey Benkoe)


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THIS ARREST IS ABSOLUTELY HUGE. I CAN'T WAIT TO SEE WHAT THE CHARGES ARE. THIS IS READY TO IMPLODE. I'VE KNOWN ABOUT THIS CRUMB FOR 6 YEARS. FOR YOU UAUA GUYS, THE GUYS WHO GOT CURSHEN ARE ON YOUR PROBLEM. :D


A Bad Day for Criminals and the Journalists Who Love Them
September 10th, 2008 by Mark Mitchell
The mainstream financial media says that the SEC should not crack down on criminal short sellers because short sellers are vital to the markets (and vital ghost-writers of a lot of what appears in the financial media). But much of the world has come to understand the enormity of the illegal short selling scandal, and there is a palpable feeling that the days are numbered for the miscreants who are turning our markets to mush.

Consider the events of just the last 24 hours.

Yesterday, we received word that Jonathan Curshen of Red Sea Management was arrested in New York. As described in “The Story of Deep Capture,” Curshen used to work for Pacific International, a Mafia-infested brokerage that has been favored by criminal naked short sellers and serves as a popular source to journalists, such as Dow Jones Reporter Carol Remond, who insist that illegal naked short selling isn’t a problem.

A Deep Capture team member, working undercover, once traveled to Costa Rica to meet Curshen. On multiple occasions, this creep admitted to our undercover vigilante that he participated in illegal naked short selling – and threatened to kill anyone who revealed this. Curshen also admitted laundering money for criminal short sellers, and described special debit cards that could not be traced to their users. These cards, Curshen said, were used to pay off government officials and journalists.

We are awaiting details of the charges against Curshen. They should be interesting.

Meanwhile, it was announced today that Deutsche Bank Securities has agreed to pay the largest fine ever levied by the New York Stock Exchange for short-selling violations. Only the Associated Press and Reuters reported this news. Reuters noted that Deutsche Bank completed sales of securities “without borrowing the securities or having reasonable grounds that they could be borrowed.” This is otherwise known as illegal naked short selling.

Strangely, however, Reuters suggested it wasn’t naked short selling at all. It wasn’t naked short selling,said Reuters, because the case involved “failures to locate the securities to cover short sales, not necessarily a failure to deliver the securities.”

How does one deliver securities that one has not located? Late in the day, Reuters put out a corrected story with a quote from a NYSE official who said, yes, “if you can’t locate the securities, it may lead to a fail to deliver” – and, yes, that is naked short selling, which is another way of saying that Deutsche Bank Securities sold massive amounts of phantom stock.

This is not at all surprising. For years, a devoted crew of bloggers have pegged Deutsche Bank as a central player in the naked short selling scandal. This was a big reason why the bloggers were called “conspiracy theorists” and “crazies,” and I suppose it would be pretty nutty of me to suggest that one of these days there’s going to be jail time for the criminal hedge funds that ordered Deutsche Bank to sell all that phantom stock in an effort to destroy public companies for profit.

But short sellers are vital to the markets, so let’s pretend not to notice the third interesting news item of the day, which is that Morgan Keegan & Co., a Tennessee-based brokerage, has fired stock analyst John Gwynn for allowing short-selling clients to see his research reports before they were made available to the public. As Deep Capture reporter Judd Bagley noted in our previous blog post, the reports in question all concerned a company called Fairfax Financial.

A small group of short-sellers are alleged to have participated in a scheme – dubbed the “Fairfax Project” – to drive down Fairfax’s stock price. We noted in “The Story of Deep Capture,” that one of the short selling hedge funds, an affiliate of Steve Cohen’s SAC Capital, went so far as to hire a thug named Spyro Contogouris to threaten Fairfax’s executives and their families. The thug (later jailed for ripping off a Greek shipping magnate) even wrote a letter to the church pastor of Fairfax’s CEO, accusing the CEO, who is an honest family man, of being a sado-masochist group-sex afficionado who had scammed the Catholic Church out of millions of dollars.

In a lawsuit filed in 2006, Fairfax claimed that this group of short sellers – Steve Cohen, David Rocker, Jim Chanos and Dan Loeb – conspired with Morgan Keegan to manufacture false, negative research about Fairfax. Morgan Keegan, no doubt to avoid liability, maintains that the research was accurate, but I’ve seen some of that research, and it can hardly be called “truth.” In any case, by firing Gwynn, Morgan Keegan makes it plenty clear that the short-sellers who attacked Fairfax were up to no good.

This same clique of short-sellers has attacked dozens of other companies, almost always resorting to similar tactics: false “independent” research (dictated by the short-sellers, who trade ahead of it); harassment of targeted executives by thugs and criminals; scurrilous rumor-mongering; so-called “bashers” who are paid by the shorts to flood the Internet with smears and distortions; corporate espionage; government investigations (which are instigated by the shorts, and drain corporate resources, but usually end in no action); and bogus class action lawsuits (usually filed by a corrupt law firm called Milberg Weiss until Milberg’s top partners went to jail for bribing plaintiffs).

A hugely disproportionate number of the companies that have been targeted by this clique of short-sellers have also been victimized by massive levels of phantom stock. Ultimately the SEC will have to say who was behind the illegal naked short selling, and so far it has not prosecuted anyone. However, it has launched an investigation into Dan Loeb, who aside from being named as a leader of the “Fairfax Project,” has featured prominently on Deep Capture for paying a minion to manage a stable of criminals and knaves to smear corporations and whitewash the naked short selling scandal.

The media has dutifully mimicked Loeb’s claim that the SEC is only investigating whether he has “communicated” with other hedge fund managers – and, golly, there can’t be anything wrong with sharing ideas with one’s colleagues. But we’ll wager that Loeb isn’t telling the whole truth, and the SEC is investigating the full range of tactics employed by his crew of short-selling scallywags.

It is par for the course that the media has been kind to Loeb. For years, his clique of short-sellers have been the primary sources of negative information for a small cast of influential, but dishonest journalists. The journalists’ stories were often false, but they — along with the phony financial research, the criminal bashers, the hired thugs, the bogus lawsuits, the dead-end government investigations, and the piles of phantom stock – helped pummel stock prices. When the stock prices fell, the journalists wrote more stories blaming the companies for their falling stock prices.

Not once have any of these journalists written about the shenanigans of their short-selling sources. Not once have the journalists suggested that the short-sellers’ tactics or phantom stock could have contributed to the falling stock prices that were the subjects of so many of their stories. Indeed, the most degenerate of these journalists — CNBC’s Herb Greenberg, former BusinessWeek reporter Gary Weiss, Bethany McLean of Fortune Magazine, Carol Remond of Dow Jones, Joe Nocera of the New York Times – have gone to lengths to convince the American public that short-sellers do not commit crimes.

Perhaps following the lead of their eminent colleagues, or perhaps because they simply don’t have time to clear away the smoke blowing from the hedge fund lobby, a number of other journalists continue to behave as if illegal naked short selling is not a problem. And today, with the emergence of yet more evidence to the contrary — with the criminals backed against the wall, and the spotlight creeping closer — there was from the complicit journalists nothing but silence.

HTTP://WWW.DEEPCAPTURE.COM
 
SECURITIES FRAUD!!!!!! GOD THIS IS WONDERFUL. DOJ!!!!! LOL


COMPLAINT as to Jonathan Curshen (1), Bruce Grossman (2). In Violation of 18 U.S.C. 371 (Conspiracy to Commit Securities Fraud) (Signed by Judge Magistrate Judge Andrew J. Peck) (dif)
Minute Entry for proceedings held before Magistrate Judge Andrew J. Peck:Initial Appearance as to Jonathan Curshen held on 9/5/2008., with Retained Attorney Anthony Lombardino and AUSA Alexander Wilscher for the government. Detention Hearing Scheduled at Defendant's Request for 9/9/08 at Noon.; ( Preliminary Examination set for 10/6/2008 at 10:00 AM before Judge Unassigned.) (dif)
Case Summary
1:08-mj-01930-UA USA v. Curshen et al
Date filed: 09/04/2008
Date of last filing: 09/05/2008


Jonathan Curshen (1)
Office: Foley Square Filed: 09/04/2008
County: NewYork Terminated: Reopened:
Other Court Case: None


Complaint Citation: Offense Level: 4
18 U.S.C. 371 (CONSPIRACY TO COMMIT SECURITIES FRAUD)
Def Custody Status: Custody This Court

Defendant: Jonathan Curshen represented by Anthony V. Lombardino(Designation Retained) Phone: (718) 849-7070
Fax: (718) 805-6532
Email: sabrina_singh@hotmail.com

Plaintiff: USA represented by Alexander J. Willscher Phone: (212) 637-2736
Fax: (212) 637-2390
Email: alex.willscher@usdoj.gov
 
Good post regarding Deutsche Bank. I noticed the fine was $575k, a drop in the bucket when publicized figures range as high as $8 billion a day attributed to naked short selling.
 
11 2008 By Emily Chasan and Rachelle Younglai
NEW YORK/WASHINGTON, Sept 11 (Reuters) - A steep sell-off in shares of struggling investment bank Lehman Brothers Holdings Inc has revived questions about whether the U.S. Securities and Exchange Commission is doing enough to fight short-selling abuses.
During late July and early August, Lehman was under the protection of an emergency SEC rule to curb abusive short-selling. The SEC also said in July it was boosting efforts to stop the spread of false rumors that threaten financial institutions.
But the emergency rule expired Aug. 12 with a promised permanent rule still to come.
"It is no coincidence that the bottom of the market in July was the exact day that the SEC announced the rule to restrict naked short selling, and the top of the rally was the day when the SEC announced they would end the rule," said Dylan Wetherill, president of short interest tracking service ShortSqueeze.com.
This week, Lehman shares dropped 45 percent on Tuesday after reports of a collapsed deal with a Korean bank, and fell 42 percent on Thursday as investors doubted its plan to sell assets to cover trouble real estate investments.
"If the SEC has an interest in helping to save the market from the powerful short sellers, it will reinstate (the rule to curb illegal shorting,)" Wetherill said.
But it isn't clear how short sellers were involved in the drop in Lehman shares this week. About 11 percent of Lehman's shares outstanding were held short in late August, according to the latest New York Stock Exchange data.
SEC spokesman John Nester said agency staff expect to present recommendations for commission consideration as early as this month to provide additional protections against abusive naked short selling.
EMERGENCY RULE
As the markets swooned in mid-July, driven by fears that mortgage giants Fannie Mae and Freddie Mac would collapse, the SEC issued an emergency rule requiring short sellers to pre-borrow stock when shorting 19 major financial stocks, including the mortgage titans and Lehman.
It was greeted with skepticism from short sellers, who said they were being unfairly targeted, and anger from companies wanting the same protections.
Short sellers arrange to borrow shares they consider overvalued and sell them in hopes of buying them back at a profit when the price drops. Naked shorting is when an investor sells stock that has not yet been borrowed. It is illegal if done intentionally.
While often criticized by companies and shareholders, the short sellers say they stop shares from being overvalued.
James Chanos, a well known short seller, has said short selling plays a vital role in market stability. Similarly, the SEC has been quick to say that short selling is legitimate.
"Short sellers are really the people you want at the bottom to be able to get in and out of a stock," said Bill Rhodes, president of Rhodes Analytics, noting how Malaysia's stock market suffered from liquidity problems after it banned short-selling in 1997 during the Asian financial crisis.
"You want to shut down the abuses and you want to shut down the sloppiness, but you don't want to throw the baby out with the bathwater.
During the emergency rule, traders were required to pre-borrow stock in the 19 companies before executing a short sale. Short sellers were also required to deliver those securities by the settlement date. Market makers were exempted from the pre-borrow requirement.
From mid-July to late July, short interest in 17 of the stocks listed on the New York Stock Exchange dropped an average 5.3 percent, but it wasn't clear how much of that decline came from legitimate short selling or illegal naked shorting.
Two studies reported that the emergency rule had little impact on the stock prices of the protected financial firms and may have backfired.
Finance professor Arturo Bris, at the IMD business school in Lausanne, Switzerland, found market efficiency had deteriorated for the 19 stocks, and the firms lost about 3.8 percent of their value, while the rule was in effect, compared to their peers.
NEW SHORT SALE RULES
Now, the SEC is back at the drawing board and expected to go through its regular rulemaking process to strengthen rules against abusive illegal shorting.
"There's strong political pressure to curb short selling and there is little support for naked short selling," said John Coffee, a professor at Columbia University Law School.
"They should follow up fairly promptly. Before the end of the summer... is appropriate for them to come up with proposed rules."
SEC Chairman Christopher Cox has said he wants a market-wide solution and is considering proposing that investors be required to publicly disclose substantial short positions in stocks, as investors already do for substantial long positions.
The American Bankers Association, a trade group representing banks of all sizes, has pushed the SEC to extend the emergency rule to all stocks.
The SEC has already proposed a rule that would no longer allow option market makers to short stock without pre-borrowing the security. Currently, option and equity market makers are not required to locate a source of shares ahead of time to ensure markets remain liquid.
The SEC is also expected to strengthen its current short selling rule, also known as Regulation SHO, which requires investors to locate a share to borrow before executing a short sale and to deliver those securities by settlement date. (Editing by Tim Dobbyn)

THE TRUTH IS, BRIS IS ATOOL OF THE NAKEDSHORTS. HE SAY S WHAT THEY WANT, TWISTING FACTS. THE SEC CAN'T DO ANYTHING. THEY ARE SOON TO POST NEW RULES, INCL GETTING RID OF THE OPTION MAKER EXEMPTION. BUT THEY NEED A COMMENT PERIOD PER LAW, HAVING SHOT THEIR WAD ON THE EMERGENCY STUFF. WALL ST. HAS CREATED THE MONSTER THAT IS THE ARCHITECT OF THEIR DEMISE. LEHMAN IS DONE, THEN MERRILL AND AIG. A CNBC TALKING HEAD SAID THEY WILL GO AFTER GOLDMAN SACHS. WHY? BECAUSE THEY CAN.
 
Lehman Mess Puts Shorts on Hot Seat
Lauren Tara LaCapra
09/12/08 - 06:59 AM EDT
Editor's note: Our "On the Brink" series will provide daily insight into the financial firms facing capital shortfalls and the growing pressure from short-sellers in the market.
That Lehman Brothers' (LEH Quote - Cramer on LEH - Stock Picks) stock is under assault is not in question. Who is most responsible for the firm being on the brink of collapse, however, is a topic of much fiercer debate.

Lehman Brothers shares closed down 41.8% to $4.22 Thursday, and traded as low as $3.79 earlier in the day, as several analysts downgraded the shares, citing a lack of confidence about the company's strategic initiatives and even the firm's viability.

The session prolonged months of declines for the beleaguered stock. Terms like "uncertainty," "confidence issues," "perception of weakness" and the need to "turn around market sentiment" pervaded analyst reports, despite the fact that some, like Ladenburg Thalmann analyst Richard Bove, still see great value in Lehman.

"Outsiders driven by as much ill-advised conviction as they had in the belief that the Internet had eliminated negative economic cycles, the likelihood of housing prices never falling, and the credit derivatives market eliminating risk in subprime securities are focusing their biggest guns on Lehman Brothers," Bove said in a Thursday note on the firm.

Bove's is a thinly veiled reference to short-sellers, the standard bogeyman in times of panic on Wall Street. Shorts bet on a stock to fall by borrowing shares and selling them in the hopes that prices decline before they have to sell them back to the original owner.

Defenders say they help keep bubbles in check by tempering enthusiasm. On the other hand, critics charge shorts have been on a spree, taking down one financial firm after another this year with whisper campaigns to spread negative information.

That camp reportedly includes Lehman CEO Richard Fuld, who has called executives at competing firms to complain that their brokers were hyping bad news to push Lehman shares lower, according to a report in The Wall Street Journal.

Whether that is the case, it is almost certain that shorts have helped to drive down shares in an exacerbated manner as panic swept the markets. The evaporation of confidence -- in the wake of billions of dollars in losses and other missteps -- has also helped to take down Bear Stearns, Fannie Mae (FNM Quote - Cramer on FNM - Stock Picks) and Freddie Mac (FRE Quote - Cramer on FRE - Stock Picks), all of which were ultimately valued at $2 a share or less, a tiny fraction of prices just months earlier.

The most recent report from the New York Stock Exchange shows that short interest in Lehman declined in the second half of August, while such positions in Fannie and Freddie surged about 30%. The federal government last weekend seized the two government-sponsored mortgage giants, basically ending their run as public companies.

Now that Fannie and Freddie have been taken down, the next NYSE report may show that shorts have set their sights squarely on Lehman.

The first indication of short-sellers' interest in the firm came last spring, as Lehman was still garnering praise from analysts and the media as being one of the few Wall Street banks to escape from the housing and credit crises with minimal damage. But on May 21, hedge fund manager David Einhorn became vocal about his short position, after noticing a footnote on Lehman's quarterly report indicating that it might have billions of dollars in writedowns ahead.

Confidence began to evaporate once Lehman started facing up to the results Einhorn predicted, with a $2.8 billion second-quarter loss. Lehman started off May at around $45.

While the Securities and Exchange Commission in July put in place temporary restrictions on "naked" short-selling -- selling shares short before borrowing them from another party -- and has vowed to investigate reports of rumor-mongering, its efforts have done little to stem Lehman's precipitous decline.

Short interest in Lehman reached a height of about 4.4% in mid-May, when the price was near $45. Of course, naked short interest, which can't be measured, isn't included in that total. And even as the SEC's naked short ban went into effect in July, limiting short interest, Lehman's stock continued to plummet.

In a client note on Thursday, Bove recognized that Lehman's dramatic stock spiral is being "driven by mass hysteria." He maintained a buy rating on Lehman, calling it "one of the best firms on Wall Street" and incredibly undervalued. He noted that its current market value below $5 billion represents a price that "even the National Bank of Kazakhstan can afford."

But the question remains as to whether such "outsiders" Bove blamed for driving the stock down are arsonists who set fires at companies that could have withstood the housing- and credit-market meltdowns, or whether they are simply kindling a blaze that would have devoured the firms anyway, merely at a slower pace.

On one hand, says Mark Coffelt, president and chief investment officer of Empiric Funds, rumors of a firm's impending demise wouldn't have legs if there weren't an utter lack of confidence to begin with.

"Shorting is not what caused the problem with Bear Stearns; it didn't cause the problem with Lehman and it's certainly not the problem with Fannie and Freddie," says Coffelt, whose fund has both long and short positions. "Fannie and Freddie are technically bankrupt and that's why the stocks are so low."

Coffelt made those comments about a week before the government intervened to take over the mortgage giants.

On the other hand, there is great potential for stock manipulation in a hypersensitive, panic-driven market -- one in which a false report of United Airlines' bankruptcy sent its shares down more than 75% in a single session. While United's parent company UAL's (UAUA Quote - Cramer on UAUA - Stock Picks) drop was the result of accidental misinformation, underhanded forces can use the same kind of misinformation to make robust profits. And companies outside the financial sector can arguably withstand rumor campaigns better, because their business transactions don't rely as heavily on the market's confidence.

"Their ability to access capital on a timely basis may be more important than other industries'," Eric Marshall, portfolio manager and director of research at Hodges Capital Management, says of financial firms. "If you artificially knock down those stock prices, then you artificially knock up the cost of capital at the time when they most need the capital."

Financials are facing many headwinds in today's market, in which short-selling garners six times as much interest as it did a decade ago, according to ShortSqueeze.com. That factor, combined with a proliferation of electronic trading and hedge funds -- which can hasten the trajectory of stock movements by the sheer size of their trades -- creates a situation where time is of the essence.

"Lots of information floats around about the health of a company from one financial organization to another," says Scott Stewart, a finance professor at Boston University. "So much of the business is based on trust and confidence that a company's fortunes can change overnight."

Stewart notes that it's not the first time the financial sector has been engulfed by a lack of confidence, though it may be the first time doubt has swept it so hard and so fast. Unless regulators take dramatic steps to change the rules behind short-selling and stock declines, financials will have to learn to operate better in this new environment, he says.

While Bove says it would be smarter for Lehman to weather the storm and not succumb to fire-sale asset prices, he also recognizes that the market won't support such a strategy. Lehman, he says, must take action to survive.

"It would be a great mistake to break this company up due to another frenzy in Wall Street," he writes. "However, a man living in a concrete house in a hurricane may believe he is safe just before the floods develop and he drowns."


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