Robert Preston at BBC News reports about the extraordinary insider trading that took place after the HBOS rights issue flopped miserably and the underwriters were left holding the bulk of the issue:
On Friday, Dresdner and Morgan Stanley both knew that existing shareholders had shunned the rights issue, since they were organising the share sale. But the market was only given the information this morning.
That information was - in theory at least - highly price sensitive. You’d think therefore that both Dresdner and Morgan Stanley would be banned from dealing in HBOS on their own account till the market had been told the extent of the rights take-up.
But apparently no such prohibition applied.
Well after the rights closed at 11am on Friday, they were both allowed to take a short position in HBOS, to cover themselves against a future fall in the HBOS share price.
So they duly shorted HBOS in massive size. I understand Morgan Stanley took a 2.4 per cent short position in the mortgage bank - which is huge.
If this story is true, it means that the UK Financial Services Authority (FSA) has given up all pretence of being a referee rather than a market player itself. The FSA’s stand against what it called abusive short selling now sounds truly hollow.