Short and distort

{{Short description|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.[http://www.investopedia.com/terms/s/shortanddistort.asp Investopedia entry of "short and distort"], Investopedia{{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}}{{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}}

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.Connecticut State Attorney General Richard Blumenthal, cited in [https://www.forbes.com/2006/09/25/naked-shorts-sia-regs-biz-cx_0925naked.html Wall Street Disses Regs] - Liz Moyer, Forbes.com 25 September 2006[http://www.directorship.com/market-cop-cox-urges-restraint/ ‘Market Cop’ Cox Urges Restraint] - Directorship Boardroom Intelligence, 18 July 2008 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.[http://www.directorship.com/short-and-distort-conduct-scrutinized/ ‘Short and Distort’ Conduct Scrutinized] - Directorship Boardroom Intelligence, 2 April 2008 Democratic Senator Christopher Dodd felt this was more than rumors and said, "This is about collusion."[https://www.nytimes.com/2008/04/30/business/30shorts.html "A New Wave of Vilifying Short Sellers"] New York Times 30 April 2008 Chase was victimized by a similar "short and distort" scheme six years earlier when rumors arose about its purported relationship with Enron.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 ([http://www.newyorker.com/archive/2002/08/12/020812ta_talk_surowiecki James Surowiecki, "Short and Distort"] The New Yorker 12 August 2002)

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."{{cite web

|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}} Cramer said this practice, although illegal, is easy to do "because the SEC doesn't understand it."{{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=USA Today

|date=March 24, 2007}}

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.{{cite web

|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}}