First bank short-seller breaks cover

23 Sep 2008 • by Natalie Aster

Fortelus Capital today became the first hedge fund to admit short selling a financial company.

Following the crackdown announced late last week, Fortelus said its Special Situations Master Fund held a short position amounting to 5.33% of London Scottish Bank's share capital on September 19. Fortelus, based close to Pall Mall in London, is an investment fund specialising in European distressed debt and equity.

London Scottish Bank runs doorstep loan services, and suspended new lending in February after racking up losses.

On Friday the Financial Services Authority imposed a temporary ban on creating short positions in 28 companies, later increased to 32. It also set a deadline of 3.30pm today for short sellers of a group of financial stocks to declare any existing short positions.

The 28 company stocks named by the City regulator saw their share prices soar on Friday, partly because hedge funds scrambled to buy shares that they had previously gone short on.

The FSA has been criticised over its short-selling crackdown. In a letter to the Financial Times published today, Alan Richards, managing director of West Hill Corporate Finance, wrote that the recent surge in online trading suggested it was not only hedge funds that have been shorting wounded bank stocks.

"The wide availability and uptake of contracts for difference and financial spread-betting accounts means that tens of thousands of private individuals acting with the same intent could have an impact similar to that of a few large hedge funds," he wrote. "Hedge funds intent on busting a bank have options other than short selling the equity. For example, driving up credit default swap spreads does the job well."