Wall Street Firms Provide Way Around Short-Sell Ban

Hedge funds executives have told CNBC that several Wall Street firms are marketing a new hedging product that would allow them to "short" stocks—even those on the banned short sale list.

The new "product" is being pitched to major hedge funds today to gauge their interest—it's unclear if any funds have agreed to implement it.

But the move is controversial: Wall Street firms were behind the SEC's latest move to ban short-selling. Morgan Stanley CEO John Mack told employees that short sellers spreading false rumors tanked the firm's stock last week. Morgan Stanley was later forced to convert itself into a bank.

Citigroup officials have been among those pitching the new shorting technique—which involves the use of derivatives. An official there who spoke on condition on anonymity said the technique is still in the discussion stages, adding that if it is rolled out, it will be used purely for hedging purposes. Hedge funds will not be able to use the technique to create a "net short" position. Rather, the technique will be used to hedge against potential losses from going long on a financial stock on the banned list

The Citigroup official said other firms are pitching similar trades. Spokespeople from the firm had no immediate comment.

Still, hedge fund managers interviewed by CNBC say the move is hypocritcal and easily abused. Some Wall Street firms pitching the idea called it a "loophole" in the SEC's short-selling ban.

It's unclear if the firms rolling out the trade have consulted with the Securities and Exchange Commission.