A widening regulatory inquiry into potentially illegal short selling by hedge funds has led to the expulsion of a small Pennsylvania brokerage from the securities industry.

An NASD hearing panel issued an administrative order barring from future securities business Ryan & Co. and its principal partner, Scott W. Ryan, for failing to cooperate with an ongoing investigation. The hearing panel took the action after Ryan failed to produce documents sought by regulators, who are looking into allegations the firm engaged in "impermissible short selling activity on behalf of three hedge fund clients."

NASD spokesman Herb Perone declined to identify the hedge funds under scrutiny, or comment on the investigation. The ruling can still be appealed.

An attorney for Ryan did not return a telephone call. A person answering the phones at Ryan & Co., located outside of Philadelphia, declined to comment.

Shorting is a market bet that a stock will fall in price. While there's nothing inherently wrong with shorting -- indeed, most say short sellers provide a necessary check-and-balance on the market -- regulators are becoming increasingly concerned about allegations that some hedge funds are trying to manipulate stock prices.

The NASD, for instance, made it more difficult this spring for hedge funds to engage in "naked shorting," an unsavory practice in which traders place short bets without actually borrowing shares from a broker, as normally occurs. Critics say naked shorting lends itself to potential abuse, because it enables the dishonest trader to short a stock more heavily than would be permitted.

The development in the NASD's short-selling investigation, which began in December 2002, comes at a time the Securities and Exchange Commission is looking into potential illegal shorting by hedge funds in the $14 billion PIPEs market -- an acronym for private investments in public equity market. TheStreet.com first reported in May that the SEC sent subpoenas and requests for documents to 20 brokerages that are major players in arranging PIPE deals for cash-strapped companies and finding hedge funds to invest in them.

If you liked this article you might like

SEC Charges Ex-CIBC Broker

SEC Charges Ex-CIBC Broker

Durus Manager Gets Hard Time

Durus Manager Gets Hard Time

Shift for SAC's Cohen

Shift for SAC's Cohen

New Frontier Holder Selling

New Frontier Holder Selling

PIPE Deal Shines Up Sun

PIPE Deal Shines Up Sun