Is there anything wrong with short selling? - Clarifying the issue (1)

It’s a while ago now that short-sellers were accused of being “bank robbers” by the Church of England.  Embarrassingly, it came the same week that the think-tank ekklesia flagged the C of E’s many and varied investments in hedge funds (many of whom are active short sellers), and their willingness to be paid to lend their own shares (the borrowed shares being overwhelmingly used to “sell short”!).  The moral high-ground proved to be so much sinking sand, and needless to say, it wasn’t the easiest week to be a Christian in financial services. 

Six months on, I’m still to see anything coherent on the ethics of short-selling, so here the beginnings of a few quick thoughts based on something I etched on my commute home that week:

Ethically, separate practice of misleading information and market rumour from the mechanical activity of short-selling.

Some market participants have reputedly done the following known as "short and distort":

1. Short sold shares in COMPANY A (borrowing shares they didn’t themselves own and selling them). Let’s say they sold them for 100p/share
   
2. Disseminated a false rumour about COMPANY A – that it was struggling to find working capital or had just lost a major contract or whatever… 
   
3. Watched the share price of COMPANY A fall – as other third party investors acted on this untrue market rumour as other shareholders lowered the price at which they were willing to sell it.
   
4. Bought back shares in COMPANY A at the newly depressed level, (say 70p) and closed out their short position at a profit (of 30p per share in this example).
   

In this type of behaviour, the short seller profits from because of their lie, while other shareholders lose out because of it.  They have sold shares at a depressed price on the basis of misleading information, reducing their profits or incurring a loss.  They have shorted a security and then distorted the market in that security.  

At some point, the company has the opportunity to correct the untrue rumour and the share price corrects. Or potentially worse - the rumour becomes a self-fulfilling prophesy (market participants refuse to provide capital) and the business is permanently damaged. 

 
There is a clear ethical issue here arising out of the deception that pushes the share price down, and is unconnected to short selling activity that enables someone to profit from it. (The lie is equivalent to buying shares in an oil exploration company, and then concocting a rumour that it has struck oil. Watching the share price soar. And then cutting and running before anyone discovers the lie).  

But that is rarely the issue that is discussed by commentators.  The general tone of debate would suggest that normal short-selling activity based on a reasonable investment view of the underlying share derived from publicly available information is immoral and corrupt.  

So what (if any) is the problem with short-selling in and of itself?  There are scarcely any ethical analogies in everyday life. (We aren't in the habit of borrowing and selling what we don't have!).  So how can we peel apart the issue Biblically?   How does what the Bible says about stewardship, investing capital, gambling and the question of efficient markets come to bare on the issue of short selling?

I'll come back to that...