By JENNY ANDERSON

In the days when galleons plied the spice route to the East, the Dutch outlawed a band of rebels that they feared might plunder their new-found riches. The troublemakers were neither Barbary pirates nor Spanish spies - they were certain traders on the stock exchange in Amsterdam. Their offense: shorting the shares of the Dutch East India Company, purportedly the first company in the world to issue stock.
Short sellers, who sell assets like stocks in the hope that the price will fall, have been reviled for centuries. These days these market bears are being accused of spreading rumors, persecuting companies and unsettling entire economies. Even on Wall Street, where money is the ultimate measure of success, some wonder if the shorts have gone too far.
Some Wall Street executives question whether unscrupulous short sellers caused the collapse of the investment bank Bear Stearns this year. Others complain that shorts have been telling lies about other firms in an attempt to sink stock prices.
The uproar has drawn the attention of Washington. “This goes beyond rumors, Senator Christopher J. Dodd said at a recent Senate hearing about Bear Stearns. “This is about collusion.
Short sellers dismiss the idea that they killed off Bear Stearns.
They say they often get the blame when things go wrong in the markets.
“Show me the evidence, said James S. Chanos, one of Wall Street’s most prominent short sellers. “It’s always easier to blame someone else, some unnamed market force than the people responsible.
But short sellers are coming under new scrutiny. British regulators are looking into rumor mongering in London, Europe’s financial hub. The Financial Services Authority there recently announced that it would investigate how rumors spread .
Market watchdogs in Iceland are looking into whether short sellers are behind a plunge in that nation’s currency, the krona, which has lost a quarter of its value this year. Their counterparts in Ireland have started investigations into short selling and market rumors, too.
In the United States, concern about short sellers’ growing power gained new urgency recently when the Securities and Exchange Commission accused a former trader of spreading rumors about a big takeover and then profiting from the ploy.
Hedge funds that specialize in this kind of trading are being scrutinized because they are making a lot of money at a time many other investors are losing. On average, short funds returned 7.43 percent during the first three months of this year, according to Hedge Fund Research, while the Standard & Poor’s 500-stock index fell almost 10 percent. And one hedge fund manager, John Paulson, made a staggering $3.7 billion last year by betting against subprime mortgages .
But many Wall Streeters have long argued that short selling is healthy for the markets. The practice tempers investors’ exuberance and helps market participants value securities properly. As the financier Bernard M. Baruch once said, “A market without bears would be like a nation without a free press.