May 14 (Reuters) - Australia's corporate regulator sued top investment bank Macquarie Group alleging it misreported up to 1.5 billion short sales over a decade and a half, misleading the market and violating rules in place since the financial crisis.

The lawsuit is a major escalation of conflict between Macquarie, Australia's 10th-biggest listed company, and the Australian Securities and Investments Commission (ASIC), which has already hit the company with three enforcement actions in the past year.

Macquarie Securities Australia, the brokerage arm of the bank, both omitted and overstated information about its short-sale trades since 2009 by failing to fix software problems, ASIC said.

After the financial crisis, Australia made it compulsory for fund managers to report short-selling trades - where an investor makes a profit when a stock price falls - to improve transparency, and "Macquarie's failures may have led to the financial services industry relying on misleading and false information for over 14 years", ASIC chair Joe Longo said in a statement.

Macquarie's "repeated systemic failure to detect and resolve these issues indicated serious neglect of its systems and disregard for operational controls and technological governance", he added.

The trades at the centre of the lawsuit were placed by Macquarie Securities on behalf of both clients and Macquarie itself, according to court filings published by the regulator.

The misreporting related to at least 321 unique securities. Macquarie's reports inflated or cut the overall published volume of short sales by an average 12%, and in several instances affected the published volume by more than 50%, ASIC said.

Market participants rely on short sale data to assess sentiment and risks associated with a stock, and ASIC's lawsuit was "timely given significant recent global market volatility", said Longo.

In the court filings, ASIC said Macquarie picked up inaccuracies in its automated short sale reports to the exchange operators in 2022 then discovered the software was producing several types of inaccuracies dating back to 2009. The inaccuracies continued until 2024, the filing said.

Macquarie said in a statement that it had fixed the software problems since reporting them to ASIC and that it was reviewing the regulator's claim. The bank "takes its compliance obligations very seriously and continues to invest in programs to further improve systems and controls across the Group," it added.

The lawsuit continues a broader probe by Australian regulators of the country's banks since a 2019 royal commission accused industry watchdogs of being too cooperative with the sector.

ASIC actions against Macquarie in the past year have so far brought a total A$15 million in fines. The regulator said in its civil lawsuit on Wednesday that it was seeking fines although it did not specify how much.

No.2 lender Westpac was fined a record A$1.3 billion in 2020 for violating anti-money laundering laws in facilitating millions of transactions.

Shares of Macquarie dropped 1.6% on Wednesday, against a flat overall market. The stock is down 4.4% since the start of the year, compared to a 1.5% gain on the main index.

($1 = 1.5449 Australian dollars)