So-called “short sellers” often target public companies with unfounded accusations. They publicly trash a company’s financial results or future prospects—even suggesting the possibility of fraud—with the goal of driving down a company’s stock price. When the price declines, the short seller profits.
The stock price decline from a short seller’s attack is, however, only the beginning of a company’s problems.
The plaintiffs’ securities bar, which specializes in bringing securities fraud class actions, often uses short seller allegations to file complaints, alleging the seller’s allegations revealed the falsity of the company’s prior statements and investors were harmed when the “truth” caused the company’s stock price to decline.
These speculative and often inaccurate short-seller reports can give birth to costly litigation, potentially ensnaring a company and its executives for years.
What can companies do to fight back against short sellers? Will courts consider the financial motives of short sellers when assessing their claims?
Some companies have chosen to sue short sellers for defamation, but with mixed results.
Courts may require a company to prove the short seller acted with actual malice. To meet this standard, the company must show the statements at issue were made with knowledge of or in reckless disregard of their falsity.
The short seller may also claim the statements at issue are non-actionable because they are statements of opinion protected by the First Amendment. Courts have, however, declined to dismiss claims when, despite the presence of some “opinion” language, a reasonable reader would interpret at least some statements as statements of objective fact, capable of verification.
Short sellers’ profit motives can also help a company show actual malice. In Farmland Partners Inc. v. Rota Fortunae, “[Financial] motives, while not conclusive on the issue of actual malice, provide some support for a finding that [the short seller] may not have acted in good faith and acted in reckless disregard for the truth or falsity of the statements.”
In securities class actions based on short seller allegations, some courts have refused to discount allegations based solely on the short seller’s financial motive to drive down the stock price.
The plaintiffs may also argue to the court that any attack by the defendants on the accuracy of the short seller’s claims is a factual dispute that can’t be resolved on a motion to dismiss. Some courts have, however, dismissed complaints based on short seller allegations when they found the short seller’s claims lack the minimum indicia of reliability, for example, if the short seller is an anonymous blogger.
If plaintiffs wish to rely on an anonymous source, they must plead sufficient facts to show that the source is credible, i.e., that the anonymous source was in a position to know what they purport to know, which can be a challenge when a short seller’s identity is a mystery. And, even if the identity of the short seller is known, the short seller may in turn be relying on anonymous sources, which raises the same issues of reliability.
The plaintiffs also face other challenges if their complaint relies on a short seller-induced stock price decline.
To plead “loss causation,” plaintiffs must allege facts to show the price decline at issue was caused by the revelation of the falsity of the defendants’ prior misstatements.
When a company has failed to issue any announcement confirming the accuracy of any short seller claims, the plaintiffs may need to rely on the short seller’s report as the sole “corrective disclosure.” This poses problems when, often, the short seller affirmatively disclaims reliance on any non-public facts.
A court could find that the short seller repackaged information that was already public and dismiss the complaint because no new facts were disclosed that could be “corrective.” This outcome is likely when the plaintiff cannot plausibly suggest complex information was revealed or the short seller drew upon specialized research skills beyond what a typical market participant possesses.
Finally, when some opinions offered by the short seller prove to be misguided—e.g., the doom and gloom they predict doesn’t happen—this undermines plaintiffs’ ability to argue that the price decline reflected the “truth” being revealed.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Susan Hurd is a partner at Alston & Bird, representing companies and their executives in securities class actions, derivative cases, merger litigation, and SEC investigations.
Madeleine Juszynski is an associate at Alston & Bird, where she helps her clients navigate complex securities litigation matters.
Joe Tully is a partner at Alston & Bird, with a focus on civil and criminal securities litigation, often representing clients before state and federal investigative agencies.
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