Short-selling investigation expanding

New York Attorney General Andrew Cuomo is broadening his investigation of short selling on Wall Street, according to a senior official in his office.

Cuomo is turning to the massive credit-default swap market, which he believes may have been manipulated in order to give the impression that certain companies were in trouble.

The official said Friday that Cuomo has subpoenaed information from providers of market data in what could be a huge probe into one of the factors contributing to volatility in the stock and credit markets. The official spoke on the condition of anonymity because the investigation hasn't been announced.

Cuomo believes the swap contracts may have been abused by short-sellers who spread negative rumors as a way to drive down a company's share price.

Credit default swaps protect an investor in the event a company defaults on its debt. The price is a measure of a company's soundness, so a higher price for the swap should be a signal of trouble with a company's financial standing.

Cuomo suspects short sellers used credit default contracts to make a company's position appear worse than it actually was. That could help short-sellers profit from a decline in a company's shares.

In a short sale, investors borrow shares of a company, usually from their broker, and then immediately sell them at their market price. If the share price subsequently falls, investors buy back the shares at the lower price and pocket the difference.

The federal government blamed massive short selling by hedge funds for contributing to the collapses of Lehman Brothers Holdings Inc., American International Group Inc. and other troubled companies.

Big drops in share prices can be particularly damaging to financial companies by making them appear weak to lenders, clients and other participants in financial markets, as well as making it harder for them to raise capital when they need it. The Security and Exchange Commission's temporary ban on short-selling gave a number of companies time to stabilize.

The subpoenas this week went to trading information companies Markit Group Ltd., Depository Trust & Clearing Corp. and Bloomberg LP.

Markit Vice President John Dooley declined comment Friday.

Spokesmen for Depository Trust & Clearing Crop. and Bloomberg didn't immediately respond to requests for comment on Friday.

The senior official said Cuomo is looking at data on the transactions over the last several weeks involving American International Group Inc., Merrill Lynch & Co., Morgan Stanley, Goldman Sachs Group and Washington Mutual Inc.