A LEADING small shareholder group last night called for a complete ban on "shorting" stock in rights issues.
The move comes after the disclosure that Morgan Stanley took a 2.3 per cent short position in HBOS after the banking giant's rights issue closed last Friday.
Roger Lawson, director of the United Kingdom Shareholders Association (UKSA), said he acc
epted that the investment bank, a leading underwriter to HBOS's £4 billion share-issue flop, had not acted illegally.
But he said the equity trading side of Morgan Stanley would have known from all the publicity ahead of the rights issue close that a massive rump of shares would be left with the underwriters, and that it would depress the share price. In the event nearly 92 per cent was left over.
Lawson said: "My concern is that these people move the market by their actions. If they short the stock there is only one place for the stock to go. That is market manipulation. Selling short is a self-fulfilling exercise."
He added that such practices, even though technically legal, were "questionable activities that should be stopped in rights issue periods".
He said UKSA, an influential stock-market pressure group, believed it would be better to ban all such shorting during rights issues.
UKSA believed the alternative of just banning leading underwriters from shorting during cash calls on shareholders was impractical.
If UKSA's suggestion were adopted it would go further than the recent order by the Financial Services Authority for any investor shorting 0.25 per cent or more in a rights issue period to have to make it public.
In a share rollercoaster ride, HBOS's shares closed 20p below the 275p rights issue price last Wednesday, when most institutions made up their minds not to take up their rights.
The stock bounced to 282p on the day the cash call closed on Friday and various hedge funds are believed to have approached Morgan Stanley to cover their own short positions in HBOS.
The gamble came good for the investment bank on Monday, however, when following news of the amount left with underwriters – 62 per cent – HBOS's shares duly fell 6 per cent to 264.5p.
Morgan Stanley would not comment last night. But it is understood the bank believes it acted properly throughout.
It is understood the FSA agrees that the bank broke no rules, and City sources say Morgan kept the regulator abreast of the possibility of it shorting HBOS stock once the rights issue closed up to two days before that closure.
In addition, City experts say it is important that Morgan Stanley did not seek out clients for the stock but were approached.
Last night leading City bodies appeared to suggest there had been no conflict of interest.
The Association of British Insurers, National Association of Pension Funds and Investment Management Association said they had received no complaints from their members.
HBOS shares last night closed 3.5p lower at 261p.
BACKGROUNDSHORTING stock is common City practice, a gamble that shares are going to fall farther.
Sometimes shorting is used to hedge positions institutions hold in shares, catering for market volatility, and other times as part of a trading strategy to make quick profits.
Shorters sell shares they do not own, but have borrowed from other institutions – often pension funds – for a fee.
Gauging market sentiment, those shorting the stock are betting that it will continue to go down in value. If this happens the shorters buy the shares at the cheaper price and return them to the original owner.
They pocket the difference in price as profit after subtracting the fees they have had to pay.
If a firm's shares were at £10 and a short seller bought 100, they would sell them immediately for £1,000.
If the price dropped to £5, they would then buy them at that price, £500, return the shares to their owner, making £500, minus the fee paid to the institution who lent the shares.
The full article contains 673 words and appears in The Scotsman newspaper.
