SEC enacts new order to curb short selling

Mikaila Adams Associate Editor

Just last month, Oil & Gas Financial Journal covered the issue of short selling stocks. At the time, an unprecedented emergency order put in place by The Securities and Exchange Commission (SEC) aimed to shield certain financial institutions (Fannie Mae, Freddie Mac, and others) against unlawful market manipulation had just ceased. It seemed the order had no tangible affect one way or the other.

Now, with the continued meltdown of the financial markets (Lehman Brothers, AIG, and others), the SEC has acted once again.

According to the SEC, concerns about “possible unnecessary or artificial price movements based on unfounded rumors regarding the stability of financial institutions and other issuers exacerbated by naked short selling” are no longer limited to the financial institutions that were the subject of the July Emergency Order.

“Recent market conditions have made us concerned that short selling in the securities of a wider range of financial institutions may be causing sudden and excessive fluctuations of the prices of such securities in such a manner so as to threaten fair and orderly markets,” noted SEC acting secretary Florence Harmon.

As a result, on September 18, the SEC released yet another order to curtail the short selling of stock of financial institutions. This time, the order goes beyond the 19 institutions protected earlier this year…well beyond. Seven hundred and ninety nine companies made the list. A complete list of those included can be found online at www.sec.gov (Release No. 34-58592). At press time, the order was set to expire at midnight on October 2. While the SEC is ready to extend the order past that date if deemed necessary, it says it will not last more than 30 days.

The action follows that of a similar order the day before in the UK. Securities regulators there have passed a ruling banning the short selling of financial sector stocks until January 16, 2009.

While the focus is still on the financial institutions, some in the energy sector still feel the protection should be extended across the board. In the meantime, some financial institutions play major roles in the energy sector, and some are now, at least temporarily, receiving shelter.

One such institution is Rodman & Renshaw Capital Group Inc. Its subsidiary, Rodman & Renshaw LLC is an investment banking firm with particular emphasis on industries with significant capital needs, including energy (especially upstream oil and gas).

Another is Guaranty Bancorp. Its subsidiary, Guaranty Bank, holds assets of nearly $16 billion and is one of the largest financial institutions headquartered in Texas. Guaranty’s Energy Banking Group provides financing to small and mid-cap independent oil and gas producers and midstream energy businesses throughout the US.

Blackstone Group LP is yet another major player in the energy sector. It has helped secure $800 million to Kosmos Energy, $478 million to Osum Oil Sands Corp., and, most recently, $500 million to Crestwood Midstream Partners.

Other companies involved in the industry that appear on the list include: Bank of America, CitiGroup Inc., Comerica Inc., Deutsche Bank AG, FBR Capital Markets Corp., Royal Bank of Scotland Group, Raymond James Financial Inc., Wells Fargo Inc., and Travelers Companies Inc.

Two major players that were not included in the order are General Electric Co. and CIT Group. Both feel they should be included, and CIT has made a formal request to the SEC to be added.

With $19 billion in assets, GE Energy Financial Services, based in Stamford, Conn., invests more than $5 billion annually in two of the world’s most capital-intensive industries, energy and water.

CIT Energy, a subsidiary of CIT Group, provides financing and advisory products and services to companies throughout the energy sector. Early in 2007, CIT provided Houston-based, privately-held Layline Petroleum with $17 million to acquire four fields from EnergyQuest.

While the SEC has stated that it is willing to consider adding comparable financial companies as appropriate, the outcome of the order remains to be determined. If the shield works, should it be extended long-term? If it stabilizes financial markets, should it be blanketed across other sectors, namely the energy sector? Keep your eyes peeled for the next update.