Sept. 15 (Bloomberg) -- The U.S. Securities and Exchange Commission will likely stiffen rules targeting manipulative short selling after a stock-market rout triggered the bankruptcy of Lehman Brothers Holdings Inc., a person familiar with the matter said.
The SEC may strengthen rules this week by requiring brokers to deliver shares that have been sold short, according to the person, who declined to be identified because the plans aren't complete. The SEC also will consider it securities fraud when short sellers deceive brokers about their intention to deliver shares to buyers, the person said.
The SEC doesn't plan to revive an ``emergency'' order that expired last month aimed at curtailing so-called naked short- selling in Lehman, Fannie Mae, Freddie Mac and 16 securities firms. The rule required investors betting on a decline in stock prices to arrange to borrow the shares before completing a sale.
``The emergency order was mostly a symbolic action,'' said James Angel, a finance professor at Georgetown University in Washington who studies short-selling. ``I see no evidence that there was rampant naked short-selling in those particular stocks.''
SEC spokesman John Heine declined to comment.
Lehman, facing losses from mortgage holdings, today filed a record Chapter 11 bankruptcy petition in Manhattan, declaring more than $613 billion of debt. The decision came after Lehman shares slid 77 percent last week in New York Stock Exchange composite trading and Barclays Plc and Bank of America Corp. abandoned talks to buy the New York-based securities firm.
Manipulative Concerns
The changes the SEC may issue as early as this week target naked short-selling, in which traders never borrow shares. The agency is concerned manipulative investors may use the sales, which are legal in some circumstances, to drive down prices by flooding the market with orders to sell shares they don't have.
In traditional short sales, traders borrow shares that they sell. If the price drops, they profit by buying back the stock, repaying the loan and pocketing the difference.
The new rules may eliminate an exemption that options market-makers had from delivering shares of companies placed on so-called threshold lists. Companies are listed when they have a high number of borrowed shares that have not been delivered.
Threshold List
The SEC may also shorten the time brokers have before they must step in and buy a company's stock to clear a short sale. For companies on the threshold list, the SEC mandates that brokers act after 13 days.
In March, the SEC drafted a rule that would make it a fraud for investors to lie to their broker about locating shares they sell short. Under the 2004 Regulation SHO rules, brokers were able to rely on customers' assurance that they had located shares that could be used to cover a short sale.
``These rules would not have made a difference in the case of Lehman Brothers,'' Angel said. ``The problem was not a loss in confidence by the equity markets. The problem was a loss of confidence in the debt markets brought on by Lehman's real- estate related losses.''
The SEC moved up consideration of new short-selling regulations to this week after the Lehman bankruptcy and Bank of America's announcement today that it would buy Merrill Lynch & Co. for about $50 billion. New York-based Merrill, the third largest U.S. brokerage firm, was in danger of becoming the next casualty of the collapse of the subprime-mortgage market.
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