Investments, tenth edition

  The Sarbanes-Oxley Act 

 The scandals of 2000–2002 centered largely on three broad practices: allocations of shares 

in initial public offerings, tainted securities research and recommendations put out to the 

 Short-selling has long been viewed with suspicion, if not 

outright hostility. England banned short sales for a good 

part of the 18th century. Napoleon called short-sellers 

enemies of the state. In the U.S., short-selling was widely 

viewed as contributing to the market crash of 1929, and 

in 2008, short-sellers were blamed for the collapse of the 

investment banks Bear Stearns and Lehman Brothers. With 

share prices of other financial firms tumbling in September 

2008, the SEC instituted a temporary ban on short-selling 

of nearly 1,000 of those firms. Similarly, the Financial Ser-

vices Authority, the financial regulator in the U.K., pro-

hibited short sales on about 30 financial companies, and 

Australia banned shorting altogether. 

 The rationale for these bans is that short sales put 

downward pressure on share prices that in some cases may 

be unwarranted: Rumors abound of investors who first put 

on a short sale and then spread negative rumors about the 

firm to drive down its price. More often, however, short-

ing is a legitimate bet that a share price is too high and 

is due to fall. Nevertheless, during the market stresses of 

late 2008, the widespread feeling was that even if short 

positions were legitimate, regulators should do what they 

could to prop up the affected institutions. 

 Hostility to short-selling may well stem from confusion 

between bad news and the bearer of that news. Short-

selling allows investors whose analysis indicates a firm is 

overpriced to take action on that belief—and to profit 

if they are correct. Rather than  

causing  the stock price 

 WORDS FROM THE STREET