SEC Subpoenas Funds in Short-Selling Probe

WASHINGTON -- The Securities and Exchange Commission has subpoenaed more than two dozen hedge funds as it ramps up its investigation into whether traders were spreading rumors to manipulate shares, according to people familiar with the matter.

The subpoenas, dated Sept. 22, have identified six financial institutions the SEC believes may have been subject to such manipulation. The subpoenas seek a wide range of trading data and email communications over a period of three weeks involving American International Group Inc., Goldman Sachs Group Inc., Lehman Brothers Holdings Inc., Morgan Stanley, Washington Mutual Inc. and Merrill Lynch & Co., according to a subpoena, which has been viewed by The Wall Street Journal.

The broad investigation, which was announced Friday, is part of an effort to crack down on rumor mongering and abusive short selling, which some believe contributed to the collapse of Bear Stearns & Cos.

In a regular short sale, a trader sells borrowed stock in hopes that it drops and can be bought at a lower price. Under SEC rules, a trader needs to locate stock to borrow ahead of a short sale, and the stock needs to be delivered within three trading days.

Concerns about abusive short sales increased leading up to Lehman Brothers' bankruptcy filing and moves by other financial companies to seek cash infusions or merger partners. The SEC took the extraordinary step last week of temporarily banning short selling in stocks of financial companies.

The subpoena requested detailed and extensive information about transactions conducted between Sept. 1 and Sept. 19, when certain financial markets came close to freezing up, threatening the broader economy. The requests include details of funds' positions in stocks, derivatives, swaps and other financial instruments, as well as when trades were initiated and settled and whom they involved.

Write to Kara Scannell at kara.scannell@wsj.com