The Securities and Exchange Commission, Wall Street's regulator, has laid charges against a trader who spread false rumours during the nervous period at the height of the credit crisis, and promised to root out others who manipulated the market with a "witch's brew" of damaging gossip and short selling. Shares in Alliance Data Systems plunged 17 per cent in the space of 30 minutes last November amid speculation that Blackstone, the private equity group which had agreed to buy the company for $6.4bn, was negotiating a lower price.
But officials at the SEC traced the story to instant messages sent by Paul Berliner, a proprietary trader for a little-known firm called Schottenfeld Group, who made up the story that lunchtime.
The charges are the first on either side of the Atlantic since authorities began investing irregular trading during the skittish markets of the past few months. The SEC is looking into whether rumour-mongers contributed to the collapse in confidence that felled Bear Stearns, while the UK's Financial Services Authority is searching for the source of "lies" that knocked shares in HBOS last month.
No charges have yet been identified in either of these cases.
"ADS getting pounded – hearing the board is now meeting on a revised proposal from Blackstone," Mr Berliner wrote in a message sent to 31 hedge fund traders and other Wall Street contacts. Within minutes, the story had done the rounds of trading floors and it was even picked up by financial news channels. Trading in ADS shares had to be suspended while the company rushed out a denial.
Mr Berliner, 31, made $26,129 from bets he had earlier placed against the ADS share price. Without admitting wrongdoing, he has given that money back and paid a $130,000 fine. SEC chairman Christopher Cox said: "We will vigorously investigate and prosecute those who manipulate markets with this witch's brew of damaging rumors and short sales."Reuse content