Short Selling and the New Market Manipulation
John C. Coffee, Jr. and Joshua Mitts, 18 March 2019
Stock market manipulation has been around since shortly after stock markets were invented. Everyone is familiar with the methodology in the standard “pump and dump” scheme: False rumors are circulated, the stock is bid up by the manipulators, supply might be constrained, and, once the public’s appetite is aroused, the stock is dumped by the manipulators.
But the internet has changed all that. No need exists today for the boiler shop or its battery of phones or even carefully assembled lists of suckers. All that one needs today is to put one’s message (written under a pseudonym) on a blog that features hot news about individual stocks. Of these sites, the best known and most watched is Seeking Alpha, whose “Short Ideas” column contains numerous posts recommending that specific stocks be shorted. Reversing the old pattern, the focus is no longer on touting stocks for an immediate rise, but rather on suggesting a dark downside. Once the professional media may have played a gatekeeper role, refusing to publish wild and unsubstantiated reports. But on the blogs, it is the Wild West today.
Some sense of the scale of these contemporary efforts comes from one of the few cases that the SEC has recently prosecuted: SEC v. Lidingo Holdings.[1] There, the SEC charged a stock promotion firm with commissioning hundreds of ghostwritten articles, written under pseudonyms and posted on Seeking Alpha and other blogs. Because these payments to the ghostwriters for their columns clearly violated Section 17(b) of the Securities Act, the SEC was able to sue. Otherwise, the SEC seems to have been constrained by fear of encroaching on the First Amendment (which provides considerable protection for anonymous speech, at least in the political setting).
