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In a dramatic move to protect the beleaguered financial services industry, the Securities and Exchange Commission (SEC) said Friday that it is temporarily banning short sales of nearly 800 stocks, including Minneapolis-based U.S. Bancorp, Ameriprise Financial Inc. and Piper Jaffray Companies.
Short-selling -- in which traders profit when a stock price goes down -- has long had a legitimate place in the stock market. But critics accuse short-sellers of hastening the recent failures of investment banks Bear Stearns and Lehman Brothers.
"Unbridled short-selling is contributing to the recent, sudden price declines in the securities of financial institutions unrelated to true price valuations," according to an SEC statement. "Financial institutions are particularly vulnerable to the crisis of confidence and panic selling."
Financial firms have been particularly vulnerable, because they constantly need to replenish their pools of capital, experts say.
Widespread short-selling might push down a bank stock to the point where it can't raise money to stay afloat.
"The SEC wanted to put in some circuit breakers and give the industry some time and breathing space," said Felix Meschke, a professor of finance at the University of Minnesota's Carlson School of Management.
Unless it is extended, the SEC ban will run through Oct. 2. Other Minnesota companies that are covered include TCF Financial Corp., the Travelers Companies Inc., health services firm UnitedHealth Group Inc. and HMN Financial Inc. of Rochester.
Short-sellers have long attracted criticism from CEOs and investors of smaller, lesser-traded companies who believe that short-sellers deliberately spread false information to depress the stocks.
Twin Cities investor Irwin Jacobs famously blamed short-sellers for the falling stock prices of Conseco and AremisSoft.
Digital River Inc. CEO Joel Ronning once accused an analyst of conspiring with short-sellers to undermine the company's stock price.
But experts say short-selling is a useful market tool that allows investors to sniff out trouble and keep overly optimistic companies in check. For example, short-sellers were among the first to uncover problems at Enron and WorldCom.
"If you outlaw short-selling, people with bad information [about a stock but who don't own it] have no way to vote," Meschke said.
This year, short-sellers have targeted MoneyGram International Inc., ValueVision Media Inc. and Select Comfort Corp., companies that have performed poorly and face extensive problems ranging from accounting irregularities to falling sales and management turmoil.
Short-sellers have proliferated over the past decade, as financial companies increasingly offered "products on the edge that take advantage of the unsophisticated investor," said Mike Sullivan, a professor of finance at the University of St. Thomas' Opus College of Business.
A technique called "naked" short-selling, where investors don't even borrow the shares before they short them, can be used by manipulators to force prices down.
The SEC this week tightened its rules on naked short-selling by penalizing brokers if the borrowed shares aren't returned within three days of a transaction.
Matthew Finn, portfolio manager of the Thrivent Large Cap Value Fund, said short sales provide much-needed liquidity to the markets. But short-selling has long operated without rules and proper oversight, he said.
"It's like shooting fish in a barrel," Finn said.
Thomas Lee • 612-673-7744