June 30, 2006

SEC Probes Use of Independent Analysts

The relationship between hedge funds and independent analysts is under scrutiny by the Securities Exchange Commission (SEC) and the Department of Justice after two companies lodged complaints against hedge funds for selling shares that they did not own, in the hope of buying them back at lower prices. Online discount store Overstock has sought legal action against Rocker Partners, while Canadian pharma company Biovail has railed against the Connecticut-based fund SAC. Both companies claim the funds paid research company Gradient Analytics to propagate false rumors on the declining values of their stock. Even as SAC, Gradient, and Rocker Partners deny any instance of foul play, the issue is under investigation by a Senate Judiciary Committee. MSNBC reports:

The allegations about independent researchers have centered on short sellers. Companies targeted by short sellers often complain that their share prices are pushed down by aggressive shorting. The allegations about fraudulent reports by analysts lend a new dimension to the conflict.

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