"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
In finance, being short in an asset means investing in such a way that the investor will profit if the Market value, value of the asset falls. This is the opposite of a more conventional "Long (finance), long" Position (finance), position, wh ...
a
stock
In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...
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 deliv ...
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
The Bear Stearns Companies, Inc. was a New York-based global investment bank, securities trading and brokerage firm that failed in 2008 as part of the global financial crisis and recession, and was subsequently sold to JPMorgan Chase. The comp ...
by
J.P. Morgan Chase
JPMorgan Chase & Co. is an American multinational investment bank and financial services holding company headquartered in New York City and incorporated in Delaware. As of 2022, JPMorgan Chase is the largest bank in the United States, th ...
in March 2008, reports swirled that short sellers were spreading rumors to drive down Bear Stearns' share price.
Democratic
Democrat, Democrats, or Democratic may refer to:
Politics
*A proponent of democracy, or democratic government; a form of government involving rule by the people.
*A member of a Democratic Party:
**Democratic Party (United States) (D)
**Democratic ...
Senator
A senate is a deliberative assembly, often the upper house or chamber of a bicameral legislature. The name comes from the ancient Roman Senate (Latin: ''Senatus''), so-called as an assembly of the senior (Latin: ''senex'' meaning "the e ...
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 histo ...
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
''TheStreet'' is a financial news and financial literacy website. It is a subsidiary of The Arena Group. The company provides both free content and subscription services such as Action Alerts Plus a stock recommendation portfolio co-managed by Bo ...
'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
Robert V. Pisani (born 1956) is a correspondent for CNBC.
Career
Pisani has worked for CNBC since 1990. Until 1997, Pisani largely covered the real estate industry and corporate management. Since then, he has reported live from the floor of the ...
. "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.
See also
*
Bear raid
A bear raid is a type of stock market strategy, where a trader (or group of traders) attempts to force down the price of a stock to cover a short position. The name is derived from the common use of
''bear'' or ''bearish'' in the language of ma ...
*
Emulex hoax
The Emulex hoax, an instance of securities fraud, was perpetrated by 23-year-old Mark Jakob on August 24, 2000.
Jakob, a former employee of the press release distribution service Internet Wire, was facing a loss of almost $100,000 as a result o ...
*
Pump and dump
Pump and dump (P&D) is a form of securities fraud that involves artificially inflating the price of an owned stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price. Once the opera ...
References
{{reflist
External links
New Market Trend: Short, Distort Joanna Glasner, ''Wired'', June 3, 2002
Short selling
Financial regulation
Finance fraud