SEC issues warning to analysts profiting from “short and distort” schemes, opens the door for civil claims

Abstract

Purpose

To analyze the evolution of market manipulation and fraud by short-sellers and online bloggers and mechanisms available for addressing and remediating the damage caused by such fraud, including recent activity by the US Securities and Exchange Commission (the “SEC” or “Commission”).

Design/methodology/approach

This article discusses the development of a modern market manipulation and fraud scheme – the “short and distort” – including a review of potential claims by the targeted companies and anticipated impediments to asserting such claims.It further examines the need for regulation and the possibility that the SEC has opened the door for civil claims for this type of fraud.

Findings

Companies wrongfully targeted by illegitimate short-sellers may pursue claims for securities violations, defamation, business interference, securities fraud and extortion, among other claims.However, each of these claims has had, and still has, both business and legal challenges, as the short-seller’s initial defense tends to be to attempt to prove the truth of their statements to the market or establish those statements as legitimate opinion.The SEC has made the pursuit easier but there is still a long way to go.

Originality/value

This article contains valuable information about recent SEC enforcement activity and practical guidance from experienced securities lawyers.

Citation

Weiner, P.M., Totino, E.D. and Goodman, A. (2019), "SEC issues warning to analysts profiting from “short and distort” schemes, opens the door for civil claims", Journal of Investment Compliance, Vol. 20 No. 2, pp. 34-38. https://doi.org/10.1108/JOIC-02-2019-0017