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U.S. securities regulators need to be more aggressive in attacking manipulative rumor-mongering and short selling abuses, a prominent New York law firm said Monday.

In a memo to clients, Wachtell, Lipton, Rosen & Katz urged the Securities and Exchange Commission to conduct a 45-day study of the extent to which "abusive and manipulative short-selling and spreading of false rumors is taking place," and to issue a public report on its findings.

The law firm also called for the SEC to adopt rules as appropriate in response to its findings, and to bring enforcement actions against wrongdoers, coordinating efforts with criminal prosecutors where necessary.

Wachtell, Lipton's call to arms came one day after an unusual Sunday announcement from the SEC that it plans to begin immediate examinations into controls at brokerage firms, mutual funds, money management companies and hedge funds to prevent the deliberate spreading of false rumors to manipulate stock prices.

The SEC's examination into industry practices came after a rocky week of trading and concerns about the outlook for federal housing-finance giants Fannie Mae (FNM) and Freddie Mac (FRE) and for commercial and investment banks, including Lehman Brothers Inc. (LEH).

"While this is an important first step, the SEC needs to undertake additional bold measures to constrain abusive short-selling and rumor-mongering," according to the memo, signed by Wachtell, Lipton partners Edward Herlihy and Theodore Levine. The two recently urged the SEC to bring back restrictions on short sales when stock prices are declining, recommending a return to so-called "tick test" that forbade short sales when markets are ticking down.

SEC spokesman John Nester declined to comment.

Wachtell, Lipton is a leading advisor in corporate mergers, including the acquisition of Bear Stearns Cos. by JPMorgan Chase & Co. (JPM). Some former Bear executives have blamed the firm's collapse on market manipulation by short sellers and JPMorgan Chase Chief Executive Jamie Dimon recently said that the SEC should investigate whether Bear was brought down by a smear campaign.

Short sellers sell borrow shares in hopes of replacing them later at a lower price, profiting when the stock declines. While the practice is legal, critics say regulators have been ineffective in curbing abusive, manipulative short selling.


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