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TORONTO - A Canadian company warned U. S. regulators about the damage inflicted by "naked" short selling nearly two years before the Securities and Exchange Commission moved this week to curb the practice and shore up the battered share prices of financial services powerhouses such as Freddie Macand Lehman Brothers Holdings Inc.

In a letter to the SEC in September of 2006, Fairfax Financial Holdings Ltd. urged the regulator to look into the abuse of "locate" requirements of short selling, where trades are done even though stock has not been borrowed as is required to cover the trade. On Tuesday, SEC chairman Christopher Cox invoked an "emergency" measure that requires short positions in 19 financial services companies to be covered by stock that is borrowed. The measure could be extended. Short selling is a legitimate trading method that bets a company's share price will decline. But the practice of naked short selling, which hypothetically allows the same block of shares to be spoken for by numerous traders, has been pinpointed as a cause of the relentless sell-off of major U. S. financial services companies this year.

"We had the dubious distinction of being one of the largest companies to be attacked with this method but it now appears that we were just a stepping stone," said Paul Rivett, author of the Fairfax letter, on Thursday.

"After practising their tactics on companies like Fairfax, certain short sellers were ready to attack the most powerful financial institutions in the world and, once again, it worked," said Rivett, vice-president and chief legal officer of the holding company that has operations in the property and casualty-insurance business. The SEC is investigating whether trading abuses including short selling contributed to the near-collapse of brokerage Bear Stearns Cos., which was bailed out by the Federal Reserve and then folded into JP Morgan Chase & Co. at a steep discount.

Firms on the SEC's "emergency" list such as Lehman Bros., and mortgage giants Fannie Mae and Freddie Mac, have lost roughly 80 per cent of their market values this year, driven by the credit crisis and turmoil in the U. S. housing market. The shares partially recovered this week, aided by better than expected financial results from JP Morgan, falling oil prices, and a "short squeeze" as those who bet the shares would decline rushed to cover their positions.

The SEC began to hone in on short-selling abuses just after Bear Stearns narrowly averted bankruptcy.

In testimony the following month to a House of Representatives subcommittee on financial services, Cox described a focus on short sellers who "sometimes intentionally fail to deliver securities to the buyer as part of a scheme to manipulate the price of a security" or to avoid borrowing costs.

Fairfax raised the problem of "failure to deliver" transactions in its 2006 letter to the SEC, calling on the regulator to demand daily disclosure of such transactions by broker-dealers, after using Freedom of Information legislation to undercover the volume of such trades in its own shares.