Hedge funds scramble as U.S. SEC cracks down

By Svea Herbst-Bayliss

BOSTON, July 16 (Reuters) - Dozens of hedge funds and broker dealers are scrambling to send reams of e-mails and trading records to U.S. regulators probing suspected stock price manipulation, several sources at hedge funds said.

The U.S. Securities and Exchange Commission recently sent subpoenas to more than 50 firms concerning trading in investment banks Bear Stearns, which was rescued in March, and Lehman Brothers Holdings Inc LEH.N, whose shares have been hurt badly by rumors about its financial health, said four sources, who have seen the documents but were not authorized to speak about them publicly.

Among those receiving subpoenas was investment bank Goldman Sachs Group Inc (GS.N: Quote, Profile, Research) and prominent hedge fund firms SAC Capital Advisors LLC and Citadel Investment Group. All three were named in a recent article about the Bear collapse in Vanity Fair.

Spokesmen for the two hedge funds declined to comment and calls to Goldman Sachs were not immediately returned. SEC spokesman John Nester also declined to comment about the investigation and discuss which hedge funds and banks received subpoenas.

At the same time, hedge fund managers are also reacting to the SEC's emergency decision to limit short-selling, which was announced on Tuesday and to an announcement on Sunday that regulators would immediately examine whether broker-dealers and investment advisers have controls in place to prevent market manipulation.

"This will likely have a chilling effect on short sellers," said Martin Sklar who works with hedge funds as a partner at Kleinberg, Kaplan, Wolff & Cohen PC.

Washington's triple assault signals how politically charged the matter is at a time when corporate executives and politicians have been blaming speculators and short sellers, who bet a stock price will fall, for undermining financial stocks.

Hedge fund managers acknowledged that, even though the SEC often asks for them for information, the agency rarely sends out subpoenas to this many firms all at once.