The Financial Services Authority yesterday signalled it might crack down on short-selling after being alerted to a massive short position in an AIM-listed company which has left a group of private investors claiming unfair treatment.
The City watchdog said it had taken a "keen interest" in the case and was "working closely" with the London Stock Exchange to see whether regulations had been breached.
The FSA said its investigation focused on events at Room Service, a cash shell which used to run an online food delivery service, and a trade in the stock by Evolution Beeson Gregory, a market-maker in the company.
The financially troubled Room Service, which has debts of £219,000, attracted the interest of private investors after its shares were released from suspension - a state imposed in September.
However, many investors found they were unable to take possession of their shares.
It has emerged that this was because Evolution had adopted a huge short position in the company. The broker is thought to have sold stock worth more than the entire value of Room Service, possibly equalling more than 162 per cent of the company.
Because the position was bigger than the value of the company, Evolution was unable to actually deliver shares, the group of private investors has alleged.
The situation was complicated by the fact that Room Service's shares were again suspended, on 22 October, meaning Evolution was unable to complete its position.
Gay Huey Evans, the director of markets and exchanges at the FSA, warned earlier this week that the watchdog was looking at a particular short-selling situation, but did not name the company.
The FSA had considered short selling in March and concluded the practice had a positive impact on the market.
A group of more than 50 shareholders has hired the law firm Edwin Coe to negotiate with Evolution. David Grossbard, a solicitor at the firm, said: "We are trying to resolve this amicably. The shareholders are offering to sell Evolution the shares it is short of at a premium, to compensate them for the inconvenience caused." Evolution would not comment.Reuse content