Short and distort

"Short and distort" is a type of securities fraud in which Internet investors short sell a stock and then spread negative rumors about the company in an attempt to drive down stock prices.[1][2]

One way of shorting and distorting involves the sale of a security that is not even owned by the seller, but is either rented or borrowed, with the specific purpose of selling it to another person, then spreading untruthful, negative information to tank its stock price.[3]

It is often performed as a form of naked short selling in which stock is sold without being borrowed and without any intent to borrow.[4][5] Once the stock price has declined, the investor uses the proceeds of the initial sale to buy a larger number of the company's shares than sold originally. Some of the newly purchased stock is used to fulfill the short-selling contract; the remaining shares are then offered for sale, which causes an additional decline in the company's share price.

During the takeover of The Bear Stearns Companies by J.P. Morgan Chase in March 2008, reports swirled that short sellers were spreading rumors to drive down Bear Stearns' share price.[6] Democratic Senator Christopher Dodd felt this was more than rumors and said, "This is about collusion."[7] Chase was victimized by a similar "short and distort" scheme six years earlier when rumors arose about its purported relationship with Enron.[8]

See also

References

  1. ↑ Investopedia entry of "short and distort", Investopedia
  2. ↑ Glasner, Joanna (3 June 2002). "New Market Trend: Short, Distort". Wired. Condé Nast Digital. Archived from the original on February 11, 2010. Retrieved February 11, 2010.
  3. ↑ Levine, Timothy R. (2014). Encyclopedia of Deception. SAGE Publications. p. 541. Retrieved August 6, 2015.
  4. ↑ Connecticut State Attorney General Richard Blumenthal, cited in Wall Street Disses Regs - Liz Moyer, Forbes.com 25 September 2006
  5. ↑ ‘Market Cop’ Cox Urges Restraint - Directorship Boardroom Intelligence, 18 July 2008
  6. ↑ ‘Short and Distort’ Conduct Scrutinized - Directorship Boardroom Intelligence, 2 April 2008
  7. ↑ "A New Wave of Vilifying Short Sellers" New York Times 30 April 2008
  8. ↑ In a 22 July 2001 hearing of a Senate subcommittee, questions were raised about a "maze of financial transactions that . . . makes Rube Goldberg look like a slacker" to which Chase was one of several banks was a party. Rumors flowed about Chase starting the day after the hearing; on 23 July 2001, Chase's stock prices dropped to a six year low (James Surowiecki, "Short and Distort" The New Yorker 12 August 2002)
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