A London-based hedge fund was today reported to have circulated rumours about UK companies in a bid to make money when their share prices fell.
The fund, which has not been named, is said to have employed private detectives to hack into the emails and telephone records of executives at two companies in which it had an interest, according to the Daily Telegraph.
It is also said to have set up front companies to enable traders to pose as independent researchers and journalists and approach company executives to get information on their firms.
The negative information they gathered was then circulated to leading investment banks in the hope that the rumours would spark share price falls.
Traders can make millions of pounds through so-called short-selling, under which they borrow stock in a company and sell it in the hope of buying it back at a lower price later to return to the original owner – pocketing the difference as profit.
The practice, while unpopular with company directors and those who want to see stock markets go up, is not illegal.
But borrowing stock to sell and then attempting to hit the share price with false rumours is illegal, and is punishable with fines or even imprisonment.
The allegations about the hedge fund come after Britain’s biggest mortgage lender HBOS saw its share price dive after a rumour claiming it faced funding problems swept the markets.
The group’s shares fell by nearly 20% during trading on Wednesday, closing more than 7% down, although it recovered some of the drop in trading yesterday.
The bank strongly denied any such problems, dismissing the rumours as being “malicious” and “lies”.
But the sharp share movement caused City watchdog the Financial Services Authority to launch an inquiry into potential stock market abuse.
Today’s report will further increase concern about underhand tactics and short-selling being used in the current volatile markets.
The Daily Telegraph said it had seen the allegations made in a sworn statement which had been sent to the financial regulators.
The Financial Services Authority declined to comment, saying it did not comment on individual cases.
But a spokeswoman added: “We get information from a range of sources and if information comes to light that we need to follow up on, we do that.”