By Cydney Posner

The SEC has posted a new emergency order designed to address recent market disruptions arising out of the circulation of false rumors and naked short selling in the market, such as is suspected to have occurred in connection with the Bear Stearns debacle. The SEC has concluded, as a result of these recent developments, "that there now exists a substantial threat of sudden and excessive fluctuations of securities prices generally and disruption in the functioning of the securities markets that could threaten fair and orderly markets." Accordingly, the SEC has exercised its its emergency powers under Section 12(k)(2) of the Exchange Act. Under the emergency order, for securities of identified investment banks as well as Fannie Mae and Freddie Mac, short sales are prohibited unless the trader or its agent has borrowed or arranged to borrow the security or otherwise has the security available to borrow in its inventory prior to effecting the short sale and delivers the security on the settlement date. The order doesn't take effect until July 21, 2008 and terminates on July 29, 2008. In testimony today before the Senate Banking Committee, Chairman Cox intimated that a broader extension of a rule of this type was under consideration. See also an article in the NYT. And, as reported in the WSJ today, rumor has it that SEC Enforcement has issued a number of subpoenas to hedge fund advisors in connection with trading in Bear and Lehman stock.

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