FSA finds no sign of HBOS share manipulation

LONDON (Reuters) - The Financial Services Authority has found no evidence that illegal dealing was behind an abrupt fall in the shares of mortgage lender HBOS HBOS.L in March, but warned it would not relax its surveillance of the market.

Britain's biggest provider of home loans saw its shares abruptly plunge more than 17 percent to a record low on March 19 following a flurry of rumours in a market unsettled by the weekend rescue of U.S. bank Bear Stearns.

The drop prompted an unusual intervention by regulators, still smarting from criticism of their failures over Northern Rock, who vowed they would probe the share price moves.

In its report concluded on Friday, however, the country's financial watchdog said it had not been able to show how much impact the rumours had, given broader worries on the day, and said it had not uncovered evidence they were spread as part of a concerted effort to manipulate the share price.

"Despite the likelihood that the rumours contributed to the fall in the share price, the FSA has not uncovered evidence that they were spread as part of a concerted attempt by individuals to profit by manipulating the share price," it said.

The failure to uncover a "smoking gun" is likely to prompt fresh criticism of the FSA's ability to prosecute high-profile cases that may involve insider dealing and market abuse, despite a hardened stance on financial crime.

The FSA said it spoke to "a number" of market participants at banks, broker dealers and hedge funds, scrutinised trading records and reviewed emails and messages during its probe.

"There is no doubt that false and damaging rumours were circulating about HBOS on 19 March 2008 and these would have had some impact on HBOS' share price," the watchdog said in a statement. "It is difficult, however, to say how much impact, as the share price was also affected by the interaction of a number of other complex factors on the day."

These included a lack of liquidity and the effect of algorithmic trading strategies which amplified the drop.