Posted in Finance, Accounting and Economics Terms, Total Reads: 229
Definition: Short and Distort
Short and distort(S&D) is a form of unethical, illegal stock manipulation/securities fraud, where a trader drives down the price of stock through misinformation(smear) campaigns. Usually perpetrators generally invest online to short sell a stock and then spread unsubstantiated and unverified rumours about the targeted stock driving down stock prices. The short-and-distort type of short seller exploits a bear market along with a campaign of misinformation to manipulate stocks. This method of manipulations of stock prices is based on spreading false rumors and misleading information through channels like message boards, chat rooms, newsgroups, newsletters, etc.
Short and Distort scams involve garnering profit by short selling a stock while maligning the company with rumors to drive the stock’s price down.
Once negatively impacted, the scammers can short sell that stock at a gain. Investors in securities are extremely sensitive to market risk. Publishing misleading information for own illegitimate interests is a hallmark of S&D.
A less popular version of short selling, is called short and distort (S&D). Short & distort, used in bearish markets is an investment scam that is the reverse of another illegal practice known as pump & dump stock manipulation. In a pump and dump scam, people usually insiders disseminate false information to build hype regarding the stock. This information is meant to pump up the perceived value of the company and make its stock look very attractive for purchase. Once there is a price drive up, there is a sell off, earning neat profits.
In the short and distort, instead of first buying the stock, and then artificially inflating prices before selling, the S&D trader first short-sells the stock, and then artificially lowers the price, by using criticism or publishing negative reports/predictions. The position is covered when he buys back the stock at a lower price. This misinformation is spread using email, mailers, etc.. Once enough investors are tricked and the stock price has declined, the investor buys a larger number of the company's shares than originally sold.
The effect of this manipulation and distortion is that stockholders will sell based on misinformation. The result is that when the short and distort tactic is successful, retail investors who at first bought high, now sell low because of their perception that the stock is of no value due to the negative distortion campaign. Simultaneously, the S&Ds close their positions at low prices and capitalize their gains.
Another reason why S&D traders are motivated to proceed with their illegal activities is that market makers, hedge funds and others start by selling stock they do not own. Once the S&D traders have a substantial position after selling a desired amount of shares, they start a smear campaign against the company, management, and maybe even the industry. Consequently, legitimate short traders offer stock below the lowest quoted offer which is known as the ‘low offering’. This chain continues, and this is designed for maximum panic effect.
The short and distort player will initially look for stocks that might be overpriced or fair-valued. The plan is to entice investors to dump their stock with the prime objective of driving the price down and stimulating fear. When the price is falling, the manipulator will buy stock to cover his position. Buying the stock at a discount and thereby making a profit. At the same time, the S&Ds square off at low prices and lock in their gains.
TIPS FOR AVOIDING SHORT & DISTORT SCHEMES
• Investment information providers or advice must fully explain the nature of the relationship between advisor and the company in the form of a disclaimer.
• Potential profit must not be exaggerated. Assumptions upon which the earnings is based should be clearly stated.
• If the author’s name & contact information is on the report, is not given, it is a bad sign.
• Do not believe everything you read - verify the facts and Do your own research
• Do your own due diligence and consult investment advisors/brokers.
• Hypothecate your stock
• Carry out own due diligence and be wary of news from unverified sources.
• Verify facts
• Spend quality time on your due diligence and engage your brokers