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| A "Short and Distort" scam involves ] a stock while smearing a company with rumors to drive the stock's price down.. | |||
| '''Legal Shorting''' | |||
| "Short and Distort" is the opposite of another stock scam known as "." In "Pump and Dump," untrue or exaggerated promotion (creating artificial demand) is done in order to sell stock, previously purchased cheaply, at the inflated price. In "Short and Distort," a stock is sold short, then untrue or exaggerated negative (creating artifical selling motivation) is done in order to cover a stock, previously sold short at a higher price, at a lower price. | |||
| 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. | |||
| In the wake of the late 1990s bubble, rampant "pump and dump" scams, and several huge corporate scandals (], ], etc), con artists found that the "short and distort" scam was more effective in a post-bubble market. Investment advisers say the technique is particularly effective for "tech stocks". | |||
| 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 ]. | |||
| "The psychological biases that are strong would help these scams," said John Nofsinger, a finance professor at Washington State University. Nofsinger says a consistent bias among investors is to expect whatever happened in the recent past to repeat itself. Because they've lost money recently on tech stocks and firms caught in accounting scandals, investors naturally believe there's more bad news ahead. Short-and-distort tactics work best with smaller companies whose stock prices are more volatile. Companies hit by short and distort scams say it's difficult to fight back, given the speed at which rumors can be disseminated online. | |||
| 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 ]. | |||
| 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. | |||
| 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 shill 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. | |||
| == References == | == References == | ||
Revision as of 05:43, 27 March 2007
A "Short and Distort" scam involves short selling a stock while smearing a company with rumors to drive the stock's price down..
"Short and Distort" is the opposite of another stock scam known as "." In "Pump and Dump," untrue or exaggerated promotion (creating artificial demand) is done in order to sell stock, previously purchased cheaply, at the inflated price. In "Short and Distort," a stock is sold short, then untrue or exaggerated negative (creating artifical selling motivation) is done in order to cover a stock, previously sold short at a higher price, at a lower price.
In the wake of the late 1990s bubble, rampant "pump and dump" scams, and several huge corporate scandals (Enron, WorldCom, etc), con artists found that the "short and distort" scam was more effective in a post-bubble market. Investment advisers say the technique is particularly effective for "tech stocks".
"The psychological biases that are strong would help these scams," said John Nofsinger, a finance professor at Washington State University. Nofsinger says a consistent bias among investors is to expect whatever happened in the recent past to repeat itself. Because they've lost money recently on tech stocks and firms caught in accounting scandals, investors naturally believe there's more bad news ahead. Short-and-distort tactics work best with smaller companies whose stock prices are more volatile. Companies hit by short and distort scams say it's difficult to fight back, given the speed at which rumors can be disseminated online.
References
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External links
- The Short and Distort on Investopedia
- Short and Distort on Fraudguides
- New Market Trend: Short, Distort, Joanna Glasner, Wired, June 3, 2002