Few events can disrupt a public company’s trajectory as suddenly as the publication of a short-seller report. Often sensational in tone and light on substance, these reports typically allege that a company has misstated its financial condition, overstated business prospects, or engaged in improper practices. The motive is rarely hidden: drive the stock price down for the short-seller’s own financial gain.
The impact, however, extends far beyond short-term market volatility. In today’s litigation landscape, stockholder plaintiffs’ firms routinely seize upon short-seller reports as the “emergence of the truth” necessary to allege loss causation under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The interplay between activist short-sellers, securities plaintiffs’ lawyers, and courts presents challenges, legal issues, and business decisions that corporate leaders must anticipate.
A brief history of short-seller reports in securities litigation
Short-sellers have long been part of the U.S. capital markets, but the practice of publishing aggressive investigative-style reports designed to move markets with questionable accusations is a relatively recent phenomenon. Courts generally view these reports with skepticism but will allow allegations relying on the reports to move past the pleading stage under certain circumstances. As a result, reliance on these reports for securities claims does not appear to be dissipating. Recent decisions highlight the evolving legal treatment:
