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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 "Pump and Dump." 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

External links

• The Short and Distort on Investopedia
• Short and Distort on Fraudguides
• New Market Trend: Short, Distort, Joanna Glasner, Wired, June 3, 2002

• Stock market