THE Financial Services Authority is considering publishing a report into the HBOS short-selling scandal, even though it may not find the culprits that caused the bank’s share price to plunge.

Shares in HBOS crumbled by 17% 11 days ago after e-mails were circulated round the City suggesting that the bank was facing a liquidity crisis. The rumours are thought to have emanated from the Far East.

The FSA is conducting an extensive inquiry and publication of the report would be unprecedented. It has already received material from compliance departments at several investment banks. It is also studying every short position in HBOS shares and asking the traders for explanations as to when and why they took the position.

The City regulator is aware that identifying those who perpetrated the rumours will be difficult, but by conducting a thorough investigation it will cause anxiety for those who profited from taking a position.

The FSA will also ask traders to explain their rationale for shorting HBOS shares.

The bank itself confirmed this week that there was truth behind some of the e-mails circulating in the City over the past fortnight.

One said the bank had made it a priority for staff to attract corporate deposits from business customers. A spokesman said: “All banks are actively seeking to attract more deposits. Everyone is in the same boat.”

Last week the FSA sent letters to spread-betting firms demanding the e-mail and phone records of investors that were suspiciously short-selling HBOS shares in the week running up to the morning of March 19.

One firm has been ordered to provide information on 14 out of the 100-plus clients that were trading HBOS shares with it in the week prior to the bank’s catastrophic morning.

“A few of them are reasonably high-profile City bankers,” a source close to the spread-betting firm said.

He added that the watchdog’s suspicions may have been aroused by the fact that about half of those singled out by the regulator put a guaranteed stop-loss on the trades, which in effect controls the risk in dealing in extremely volatile stocks by automatically selling the shares once they fall to a specified level. The source said: “This would suggest that there was a reasonable amount of knowledge on the part of the investors. How else would they know that there would be such violent movement in the shares?”

He added: “They all made substantial amounts of money out of this with very little risk and without having to put down much money.”

The spread-betting firm has until early this week to provide a detailed dossier on its clients. This will include the investors’ previous trading records, their employment details and any connection they may have to each other.

It is understood that a number of those involved in this particular case may know each other, though they were careful not to replicate strategies by trading at different prices and setting varying guaranteed stop-loss levels.

While it seems odd that people would engage in this kind of trading fraud in their own name, it has been suggested that even they did not expect the level of market panic witnessed.

Additional reporting: Brendan Malkin

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