The Alabama Securities Commission has asked former Securities and Exchange Commission Chairman Harvey L. Pitt to help investigate allegations that traders deliberately sold Colonial BancGroup Inc. shares short to lower their value.
Last week the Alabama Attorney General's Office named Mr. Pitt a deputy attorney general. The position is an unpaid one but gives him access to investigative documents.
Mr. Pitt, who chaired the SEC from 2001 to 2003, is currently the chief executive of the Washington consulting firm Kalorama Partners LLC.
David B. Byrne Jr., Colonial's general counsel, wrote in an e-mail to American Banker that the $26 billion-asset Montgomery, Ala., company asked both the SEC and the Alabama agency to investigate short-selling in its stock dating back to Jan. 1. Mr. Byrne did not say when Colonial made the request or how long the investigations had been open.
The state agency made the decision to bring Mr. Pitt aboard, Mr. Byrne wrote. He would not discuss the matter further. Mr. Pitt did not respond to requests for comment. The SEC would not comment.
J. Randal McNeill, the Alabama agency's deputy director, would say only that it is examining allegations of naked short-selling, in which a investor shorts a stock without borrowing the shares first. Last week the agency said it had issued subpoenas, though it did not identify the targets.
Colonial has said short-selling has hurt its stock, which has fallen 55% this year. However, like many other banking companies, it has reporting rising delinquencies in its loan portfolio, particularly in its Florida residential construction book.
For the second quarter, Colonial posted a net loss of $9 million. Its loan-loss provision grew ninefold from a year earlier, to $79 million. Nonperforming assets grew at the same rate, to $408.4 million on June 30.
Robert E. Lowder Jr., Colonial's chairman, president, and CEO, downplayed some of the real estate loan exposure in a July 16 call to discuss the second-quarter results. "By and large, these are 'A' properties, and we think that we can move them off the balance sheet," he said.
Colonial also has touted its "healthy" capital position since it raised $289 million and cut its dividend by half in April.
Several analysts were reluctant to discuss Colonial or the allegations of short-selling, but J. Robert Brown Jr., a securities professor at the University of Denver, said other banking companies could follow Colonial's lead in petitioning state regulators to address such issues in their shares, because of frustration over how the SEC handles enforcement.
Colonial seems in general to favor a state approach. In June it dropped its national banking charter in favor of an Alabama one.
Prof. Brown said that when it comes to short-selling, many states may "lack the expertise" to investigate the problem adequately. However, one analyst, who requested anonymity, said that Mr. Pitt provides Alabama with "a link to the SEC."
According to Prof. Brown, it remains unclear whether an aggressive investigation will produce any prosecutions, though it could deliver another positive benefit for Colonial.
"Once subpoenas are handed out, short-sellers are going to go somewhere else," he said.
