Hedge funds reaped £1 billion in profits from Northern Rock’s collapsing share price over the past seven months, according to one of London’s most prominent hedge fund managers.

Philip Richards, co-founder of RAB Capital and the biggest shareholder in Northern Rock, launched a ferocious attack on some rival hedge funds for fomenting panic, and accused regulators of failing to properly regulate trading in Rock shares.

He told The Times: “When you have a group of funds shorting and shorting and shorting, you start to create an atmosphere of panic.”

Mr Richards, who bought more than £50 million of Rock shares earlier this week for his RAB Special Situations Fund, gave warning that activist hedge funds would target other banks if they succeeded in bringing down Northern Rock.

“If the Bank allows the shorts [investors betting on a falling share price] to draw blood in this way, it creates the incentive for them to replicate the crisis at other banks,” he said . Mr Richards estimated that hedge funds, proprietary trading desks and other investors had already made about £1 billion by shorting the bank all the way down from its February peak of £12.50 to the current price of 194.25p.

He believes an unprecedented wall of hedge fund money is betting that the shares will fall further. He estimated that shorts account for more than half the entire issued share capital of the beleaguered bank.

He also called on regulators to crack down on short-sellers who put in sell orders for Rock stock they did not hold, leaving themselves exposed to a rally in the price, or “uncovered”, sometimes for weeks.

Most hedge funds obeyed the rules, he said, borrowing stock before selling it. “But there are people out there who are uncovered and don’t give two hoots about it.”

Bankers issued a plea to the Financial Services Authority yesterday to do more to crack down on rumour-mongers putting out false stories about banks in trouble and profiting from them.

Angela Knight, chief executive of the British Bankers’ Association, came close to accusing some people of disseminating lies.

“We don’t know where the rumours are coming from but it seems to us it’s more than just idle gossip,” she said.

Alliance & Leicester and HBOS were targeted this week, their shares plunging by as much as 31 per cent and 8 per cent respectively before they were able to issue denials. Ms Knight said: “It’s extremely serious both for the individual institutions targeted and for public confidence as well. It’s a matter the FSA should act upon.”

A spokesman for the FSA said: “Our market surveillance operations are extremely alert and looking carefully for any misbehaviour”. On short-sellers covering their positions, he said: “The normal rules continue to apply.”

Putting out false information about a company and profiting from it by shorting the shares is illegal under the market abuse rules.

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