Morgan’s Stock Falls on Rumor of U.S. Probe : Brokerages: Morgan Stanley says it isn’t aware of any investigation into its Treasury issues trading practices.

Morgan Stanley Group Inc., trying to squash market rumors that sent its stock down sharply, said Tuesday that it was not aware of any government probe into its trading practices in the U.S. bond market.

The rumors left Morgan shares down $3.375 at $41.50 on the New York Stock Exchange.

Morgan Stanley spokeswoman Mary Stubbs said rumors “are spreading all over the market” that the company was under investigation for alleged manipulation of the government securities market.

“We have conducted an internal review of our practices in the Treasury securities markets,” the brokerage firm said in a statement.

“On the basis of that review, we are satisfied that Morgan Stanley has not engaged in any market manipulation, including a ‘short squeeze’ or collusive bidding,” the statement said. “Furthermore, we have no reason to believe that we are the target of any government investigation.”

Morgan is one of the 39 primary dealers who buy the bulk of U.S. Treasury securities auctioned by the government. The dealers then resell the securities to investors.

The $2-trillion market for the securities has been rocked during the past month by admissions by Salomon Bros. that it improperly bid at the auctions and ended up buying far more securities than allowed under U.S. rules.

It also made bogus bids on behalf of customers that did not request the securities.

The improper purchases resulted in a market “squeeze,” sending the price of the securities up because Salomon controlled the vast majority of the available issue.

Salomon’s top executives were forced to resign because they failed to inform federal authorities for months after they found out about improper bidding.

Brokerage stocks have been very sensitive to rumors since Salomon admitted to wrongdoing in the auctions.

One industry analyst speculated that the rumor might have been started by investors holding a short position in the company’s shares. Investors with short positions sell borrowed shares, hoping the stock will decline in price before they have to pay the loans back.