Short and distort
Encyclopedia
"Short and distort" is a type of securities fraud
in which Internet investors short sell
a stock
and then spread negative rumors about the company in an attempt to drive down stock prices. Cell phones and text-based messaging are the primary tools for the people committing "short and distort" as they tend to hide the source of the information.
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. United States
Senator Christopher Dodd
said this was more than rumor
s 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
.
Securities fraud
Securities fraud, also known as stock fraud and investment fraud, is a practice that induces investors to make purchase or sale decisions on the basis of false information, frequently resulting in losses, in violation of the securities laws....
in which Internet investors short sell
Short selling
In finance, short selling is the practice of selling assets, usually securities, that have been borrowed from a third party with the intention of buying identical assets back at a later date to return to that third party...
a stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
and then spread negative rumors about the company in an attempt to drive down stock prices. Cell phones and text-based messaging are the primary tools for the people committing "short and distort" as they tend to hide the source of the information.
It is often performed as a form of naked short selling
Naked short selling
Naked short selling, or naked shorting, is the practice of short-selling a financial instrument without first borrowing the security or ensuring that the security can be borrowed, as is conventionally done in a short sale. When the seller does not obtain the shares within the required time frame,...
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. United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
Senator Christopher Dodd
Christopher Dodd
Christopher John "Chris" Dodd is an American lawyer, lobbyist, and Democratic Party politician who served as a United States Senator from Connecticut for a thirty-year period ending with the 111th United States Congress....
said this was more than rumor
Rumor
A rumor or rumour is often viewed as "an unverified account or explanation of events circulating from person to person and pertaining to an object, event, or issue in public concern" However, a review of the research on rumor conducted by Pendleton in 1998 found that research across sociology,...
s and said, "This is about collusion
Collusion
Collusion is an agreement between two or more persons, sometimes illegal and therefore secretive, to limit open competition by deceiving, misleading, or defrauding others of their legal rights, or to obtain an objective forbidden by law typically by defrauding or gaining an unfair advantage...
." Chase was victimized by a similar "short and distort" scheme six years earlier when rumors arose about its purported relationship with Enron
Enron
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. Before its bankruptcy on December 2, 2001, Enron employed approximately 22,000 staff and was one of the world's leading electricity, natural gas, communications, and pulp and paper companies, with...
.