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Investment Fraud Lawyers Representing Victims of Abusive Short Selling
Short selling is similar to many other market practices in that, while not inherently unlawful, it can be abused to the detriment of retail investors. Abusive short selling often leaves retail investors facing substantial losses, and, in many cases, these investors will have grounds to take legal action.
At Zamansky LLC, we represent investors who are victims of abusive short selling nationwide. If you have suffered investment losses due to an abusive short selling scheme, an investment fraud lawyer at our firm can help you understand your legal options and make informed decisions about your next steps. If you have grounds to take legal action, we can pursue recovery of your fraudulent investment losses on your behalf, and we will represent you on a contingency-fee basis.
What Qualifies as “Abusive Short Selling?”
When can (and should) you talk to an investment fraud lawyer about taking legal action for abusive short selling? One type of abusive short selling involves violating Regulation M. As the U.S. Securities and Exchange Commission (SEC) explains:
“Rule 105 [of Regulation M] makes it unlawful for a person to purchase securities in a firm commitment equity offering from an underwriter or broker-dealer participating in the offering if that person sold short the security that is the subject of the offering during the Rule 105 restricted period, absent an available exception.”
Essentially, this form of abusive short selling involves attempting to profit from a short selling scheme at the expense of other investors. When bad actors work with underwriters and investment brokers to take advantage of opportunities to manipulate the market price of a security—and when they are successful in doing so—investors who suffer losses as a result are entitled to seek damages through securities litigation or FINRA arbitration.
Another form above abusive short selling, also referred to as naked abusive short selling (or just naked short selling), involves short selling a security without consummating the underlying borrowing transaction. This can be done through various means, and it can be done on an extremely large scale. Past cases of naked short selling have involved hedge funds, investment banks, and securities issuers accused of intentionally misrepresenting the validity of short sale transactions in order to manipulate share prices on the open market.
A third form of abusive short selling involves fraudulently driving down the price of a shorted stock. This is the opposite of a pump-and-dump scheme—and is commonly referred to as “short and distort.”
In a short-and-distort scheme, the bad actors involved first short the security targeted in the scheme. Then, they spread false negative information about the security or its issuer in an effort to drive the share price down. If their efforts are successful, they then buy back the security at a discount, profiting at the expense of the investors they defrauded.
SEC Enforcement Actions Don’t Result in Full Financial Recoveries for Investors
The SEC has been focused on abusive short selling for well over a decade. From adding new restrictions to Regulation M to publicizing abusive short selling enforcement actions, the SEC has made clear that targeting abusive short selling is a priority.
For example, a recent SEC Press Release touts the Commission’s efforts to bring charges against an investment advisor accused of executing multiple abusive short selling schemes over several years. The Press Release discusses the case in detail, and it is a worthwhile read for investors who have concerns about possible naked short selling. It also quotes the Associate Director of the SEC’s Division of Enforcement as stating, “When someone uses naked shorts or other manipulative practices to cheat the market and investors, the SEC will ensure that they are held accountable.”
Importantly, however, while SEC enforcement actions often result in some accountability, they do not result in full financial recoveries for investors. As a result, to fully recover their fraudulent losses, investors must separately take legal action on their own. In cases involving investment advisors and brokers, this generally means pursuing FINRA arbitration. In cases involving securities issuers and other parties, it generally means going to federal court.
Documenting Your Abusive Short Selling Case
Whether you are eligible to file for FINRA arbitration or you need to seek redress in court, you will need thorough documentation of your abusive short selling claim. While our investment fraud lawyers can investigate and use the discovery process to gather much of the evidence we need, we will need to rely on you to provide some important documentation as well. With this in mind, if possible, you should gather the following to have available during your free initial consultation:
- Your brokerage or online investment account statements showing the price you paid for the security (or securities) at issue.
- Your account statements showing the investment losses you suffered when you sold the security (or securities) at issue.
- Any documentation you have of the abusive practices that led to your losses (i.e., website screenshots, social media posts, press releases, direct communications, financial disclosures, or prospectuses).
These are just examples. If you have any other documentation that you believe may be relevant to your investment fraud claim, you should collect it and keep it in a safe place. Our lawyers will review everything you have to determine if we can use it in your case. We can advise you regarding any additional documentation that is needed as well, and, if necessary, we can take legal action on your behalf immediately to help maximize your chances of securing a financial recovery.
Request a Free Initial Consultation with an Investment Fraud Lawyer at Zamansky LLC
If you suffered investment losses in what you believe was (or may have been) an abusive short selling scheme, we invite you to contact us for more information. Our lawyers have decades of experience helping investors recover fraudulent losses through securities litigation and FINRA arbitration. To request a free initial consultation with an investment fraud lawyer at Zamansky LLC, call us at 212-742-1414 or tell us how we can help online today.