"Short and distort" is a type of

securities fraud Securities fraud, also known as stock fraud and investment fraud, is a deceptive practice in the stock or commodities markets that induces investors to make purchase or sale decisions on the basis of false information, frequently resulting in lo ...

in which investors short sell a stock and then spread negative rumors about the company in an attempt to drive down stock prices. It is often performed as a form of

naked short selling Naked short selling, or naked shorting, is the practice of short-selling a tradable asset of any kind without first borrowing the asset from someone else or ensuring that it can be borrowed. When the seller does not obtain the asset and deli ...

in which stock is sold without being borrowed and without any intent to borrow. 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 JPMorgan Chase & Co. is an American Multinational corporation, multinational Investment banking, investment bank and financial services holding company headquartered in City of New York, New York City and Delaware General Corporation Law, inco ...

in March 2008, reports swirled that short sellers were spreading rumors to drive down Bear Stearns' share price. Democratic Senator

Christopher Dodd Christopher John Dodd (born May 27, 1944) is an American lobbyist, lawyer, and Democratic Party politician who served as a United States senator from Connecticut from 1981 to 2011. Dodd is the longest-serving senator in Connecticut's histor ...

felt this was more than

rumor A rumor (American English), or rumour (British English; see spelling differences; derived from Latin:rumorem - noise), is "a tall tale of explanations of events circulating from person to person and pertaining to an object, event, or issue in p ...

s and said, "This is about

collusion Collusion is a deceitful agreement or secret cooperation between two or more parties to limit open competition by deceiving, misleading or defrauding others of their legal right. Collusion is not always considered illegal. It can be used to att ...

." Chase was victimized by a similar "short and distort" scheme six years earlier when rumors arose about its purported relationship with

Enron Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. It was founded by Kenneth Lay in 1985 as a merger between Lay's Houston Natural Gas and InterNorth, both relatively small regional compani ...

. In a December 2006 interview from TheStreet.com's "Wall Street Confidential" webcast,

Jim Cramer James Joseph Cramer (born February 10, 1955) is an American television personality and author. He is the host of ''Mad Money'' on CNBC and an anchor on ''Squawk on the Street''. A former hedge fund manager, founder, and senior partner of Cramer ...

stated that some hedge fund managers spread false rumors about companies to the media and trading desks to drive a stock down: " ...it's important to create a new truth, to develop a fiction." Cramer said this practice, although illegal, is easy to do "because the SEC doesn't understand it." Cramer said one strategy to keep a stock price down is to spread negative rumors to reporters he described as "the Pisanis of the world" in reference to CNBC's Bob Pisani. "You have to use these guys," said Cramer. He also discussed getting "the bozo reporter from The Wall Street Journal" to publish a negative article.

References

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External links

New Market Trend: Short, Distort
Joanna Glasner, ''Wired'', June 3, 2002 Short selling Financial regulation Finance fraud

See also

References

External links