Short and distort

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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.[1].

"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 information (creating artifical selling motivation) is disseminated 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 effective in a post-bubble market. Investment advisers say the scam is particularly effective on "tech stocks". "The psychological biases that are strong [after stock market bubbles] would help these scams," said John Nofsinger, a finance professor at Washington State University. Nofsinger said investors in a post-bubble and scandal plagued market expect whatever happened in the recent past to repeat itself. Because they've lost money recently on bubble stocks and accounting scandals, investors are more receptive to believing there's more bad news ahead. Short-and-distort tactics work best with smaller companies whose stock prices are more volatile. Companies hit by this scam say it's difficult to fight back, given the speed at which rumors can be disseminated online.[2]

One infamous short and distort scam was the Emulex hoax of 2000. In that scam, a college student sent out a phony negative press release that caused shares of the high-flying technology stock Emulex (EMLX) to tumble, costing investors nearly $110 million.^[1]

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."^[2] 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.^[3] Cramer said this practice, although illegal, is easy to do "because the SEC doesn't understand it."^[4]