Uphill task as UK targets "trash and cash" traders

LONDON, March 19 (Reuters) - Britain's financial watchdog made a rare move to bare its teeth on Wednesday with a stark warning on market abuse, but experts say prosecuting those behind the rumours and rollercoaster market is a tough task.

The process behind Wednesday's steep drop in UK bank shares is known in the market as "trash and cash" -- negative market rumours followed by vigorous short-selling of shares.

This is exactly what Britain's Financial Services Authority and other European regulators say they are targeting as volatile market conditions, where every rumour topples a stock, heightens the temptation for dealers trying to cover unlucky bets.

But catching those behind the process is an uphill task as to prosecute over misleading information, UK regulators need to prove, with email or other documents, that the person in question was aware of the company's real state of health.

"It is very hard to build a case on making misleading statements to the market," said Sara George, a former FSA prosecutor, now at City law firm Allen & Overy.

"You usually have to demonstrate, using huge amounts of email backup, precisely what someone did believe was the true position -- and then contrast it with what they told the market. These are very hard prosecutions to bring, but it can be done."

To date, the FSA has not carried out any prosecutions for "trash and cash" cases, though it has prosecuted the directors of at least one company, software group AIT, for publishing misleading information.

Though the FSA has prosecuted some for market abuse -- a very wide category -- the only other comparable UK case was the "City Slickers" affair, when tipsters working for a UK tabloid, the Daily Mirror, were accused of using a newspaper column to misrepresent the value of certain investments. They were eventually found guilty of market manipulation.

The FSA warned on Wednesday it would investigate share price moves sparked by "unfounded rumours" and said it would be monitoring the markets, a statement echoed elsewhere in Europe [nL19116131].