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{{Short description|Securities fraud using negative rumors}}
Short-and-distort is illegal stock market manipulation, intended to drive the price of a particular stock down.
"'''Short and distort'''" is a type of ] in which investors ] a ] and then spread negative rumors about the company in an attempt to drive down stock prices.<ref>, ]</ref><ref>{{cite news| url = https://www.wired.com/techbiz/media/news/2002/06/52785| last = Glasner| first = Joanna| title = New Market Trend: Short, Distort| work = Wired| publisher = Condé Nast Digital| archiveurl = https://web.archive.org/web/20090510054046/http://www.wired.com/techbiz/media/news/2002/06/52785| archivedate = May 10, 2009| accessdate = February 11, 2010| date = 3 June 2002| url-status = dead}}</ref><ref>{{cite book|last1=Levine|first1=Timothy R.|title=Encyclopedia of Deception|date=2014|publisher=SAGE Publications|page=541|url=https://books.google.com/books?id=iRJzAwAAQBAJ&dq=short+and+distort+scheme+phone&pg=PA541|accessdate=August 6, 2015|isbn=9781483306896}}</ref>


It is often performed as a form of ] in which stock is sold without being borrowed and without any intent to borrow.<ref>] State ] ], cited in - Liz Moyer, ] 25 September 2006</ref><ref> - Directorship Boardroom Intelligence, 18 July 2008</ref> 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 ] by ] in March 2008, reports swirled that short sellers were spreading rumors to drive down Bear Stearns' share price.<ref> - Directorship Boardroom Intelligence, 2 April 2008</ref> ] ] ] felt this was more than ]s and said, "This is about ]."<ref> ''New York Times'' 30 April 2008</ref> Chase was victimized by a similar "short and distort" scheme six years earlier when rumors arose about its purported relationship with ].<ref>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 ( '']'' 12 August 2002)</ref>
'''Legal Shorting'''


In a December 2006 interview from ]'s "Wall Street Confidential" webcast, ] 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."<ref>{{cite web
Short-selling is a legal and legitimate stock market transaction. The short-seller believes a particular stock is overvalued, and bets that its price will go down. To do this, the short-seller ] from their broker and immediately sells them on the open market.
|url=http://www.marketwatch.com/news/story/jim-cramers-big-mouth-reveals/story.aspx?guid=%7BEFABFEB9%2D4FC7%2D45A8%2DA14A%2D6318372C33E2%7D
|title=Jim Cramer's big mouth: His revelations only confirm what dupes average investors are
|author=Thomas Kostigen, MarketWatch.com
|date=March 23, 2007}}</ref> Cramer said this practice, although illegal, is easy to do "because the SEC doesn't understand it."<ref>{{cite web |url=http://www.usatoday.com/money/markets/2007-03-23-cramer-usat_N.htm
|title=CNBC's Cramer boasts of manipulating markets
|author=Matt Krantz, USA Today
|website=]
|date=March 24, 2007}}</ref>


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 ]. "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.<ref>{{cite web
Later, if the share price does in fact decline, the short-seller goes onto the open market, re-purchases the shares owed to the broker and returns them, pocketing the difference in the two sales. This is called ].
|url=http://www.nypost.com/seven/03212007/business/cramers_big_mouth_business_roddy_boyd.htm
|title=Cramer's Big Mouth: Clip Could Run Afoul of CNBC
|author=Roddy Boyd, ''The New York Post''
|date=March 21, 2007}}</ref>


==See also==
If the price instead goes up, the short-seller may have to scramble to purchase shares to return them to the broker before getting hit by a ]. When a bunch of short-sellers are caught up in a scramble to cover their shares at once, they can add further momentum to a rising stock price. This is called a ].
* ]
* ]
* ]


==References==
Just as buying a stock and holding it long is a legitimate way to invest, conversely so is borrowing a stock and hoping its value goes down. There are several reasons for this. For one, investors whose shares are borrowed can earn some extra interest income when their brokers lend their shares to the short-sellers.
{{reflist}}

Secondly and more importantly, short-sellers who habitually trade short for a living provide the markets with more transparency and information. They will do extensive and legitimate research and ] on companies and industries, acting as a counter-balance to the often rosy or unrealistic predictions made by the companies themselves, or a media and a public caught up in a speculative frenzy such as the ]. Short-sellers were the first to expose to raise questions about Enron, for example.<ref>{{cite web|title=Anyone Could Have Seen Enron Coming|url=http://www.pbs.org/wsw/opinion/chanostestimony.html|author=James Chanos|publisher=PBS Wall Street Week|date=]|accessdate=2006-11-21}}</ref>


'''Short-and-distort'''

However just as ] schemes that artificially inflate the price of a stock through fraudulent and false information are illegal, so short-and-distort campaigns that release fraudulent or illegal information in an attempt to drive the price of a stock down are equally prohibited.

Examples of this could include releasing false press releases purporting to come from the company that announce disastrous results, posing as an SEC investigator on a message board, and planting multiple negative messages about a particular company under numerous aliases, attempting to create the illusions of a consensus of selling and fear.

Because short-and-distort campaigns play on fear and negativity, they are far more effective in a bear market or general stock market panic than in more normal market conditions. For this reason, short and distort campaigns are rarer than pump and dump schemes. For example, you will almost never see a spam e-mail or penny stock newsletter shilll demanding you sell or get out of a particular stock. However they can be found on Internet message boards, where the shorts whispering campaigns can find its natural audience, those holding long shares.

It should not be confused with ], which is a different if related subject.


== External links == == External links ==
* on Investopedia *, Joanna Glasner, ''Wired'', June 3, 2002
* on Fraudguides


] ]
]
]

Latest revision as of 19:23, 7 February 2024

Securities fraud using negative rumors

"Short and distort" is a type of securities fraud 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 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 in March 2008, reports swirled that short sellers were spreading rumors to drive down Bear Stearns' share price. Democratic Senator Christopher Dodd felt this was more than rumors and said, "This is about collusion." Chase was victimized by a similar "short and distort" scheme six years earlier when rumors arose about its purported relationship with Enron.

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

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 May 10, 2009. Retrieved February 11, 2010.
  3. Levine, Timothy R. (2014). Encyclopedia of Deception. SAGE Publications. p. 541. ISBN 9781483306896. 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)
  9. Thomas Kostigen, MarketWatch.com (March 23, 2007). "Jim Cramer's big mouth: His revelations only confirm what dupes average investors are".
  10. Matt Krantz, USA Today (March 24, 2007). "CNBC's Cramer boasts of manipulating markets". USA Today.
  11. Roddy Boyd, The New York Post (March 21, 2007). "Cramer's Big Mouth: Clip Could Run Afoul of CNBC".

External links

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