Short Selling Abuse Defense

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Brian Kuester
Attorney Brian Kuester
Short Selling Abuse Defense Team Lead
Former US Attorney
Former District Attorney
Ellen Comley
Attorney Ellen Comley
Short Selling Abuse Defense Team Lead
Senior Counsel
Roger Bach
Roger Bach
Short Selling Abuse Defense Team Consultant
Former Special Agent (OIG)

The defense lawyers at The Criminal Defense Firm advise and advocate for individuals and corporate clients who are facing complex cases of short selling abuse. With our experience in defending white collar offenses, we are equipped to effectively represent individuals and both small and large corporations, developing strategic and tactical defense strategies to combat unfair charges of short selling abuse. By retaining a defense attorney from The Criminal Defense Firm, you can get a personalized defense approach that suits your needs and interests and that fights for your liberty and reputation at every stage of the investigation and defense process.

Understanding Short Selling

Short selling involves speculating on the drop of a stock’s price or the price of another security. While this speculation carries risks that can lead to significant losses, if it works it can yield substantial profits from the target company’s financial suffering.

You execute a short sale when you borrow shares of a stock from an entity, typically a bank or a broker, sell these borrowed shares, and later repurchase them. If the repurchase price is lower than what you initially sold it for, the difference is your profit.

Short selling is a legal practice that the U.S. Securities and Exchange Commission (SEC) recognizes as contributing to market liquidity and providing investors with more options for their investments. Bans on short selling usually occur during financial crises to prevent aggressive selling that could cause sudden price declines. For example, the SEC banned short selling in 2008 when the U.S. went into a deep recession in an attempt to stabilize the markets and prevent a massive selloff.

However, short selling can be abused if the markets are manipulated to make the targeted company’s stocks fall.

Examples of Short Selling Abuse

Short selling abuse can manifest through various methods, though the most common are:

  • Short and Distort: This abusive strategy involves spreading false rumors about a stock or company in order to drive down the price. If the short seller succeeds, the panicked selling of the stock makes its price plummet, increasing the short seller’s profits when it comes time to repurchase and return the borrowed securities.
  • Naked Short Selling: Often used alongside short and distort strategies, naked short selling involves short selling a security without first borrowing it. In other words, the trader sells shares they do not possess.

Short and distort practices are illegal, while naked short selling was made illegal after the 2008 financial crisis. Consequently, efforts to increase investigations have been undertaken, particularly when markets become unstable and there is a risk of a financial crisis.

If you find yourself under investigation for short selling abuse or charged for one of these types of stock fraud or securities fraud, you should strongly consider taking immediate action to protect your interests. Although short selling individuals and companies operate in a largely unregulated environment, recent efforts by the SEC have aimed to increase the prosecution of short selling abuse, particularly as inflation has risen and spooked the financial markets in America.

The mere allegation of short selling abuse can have detrimental effects on your firm’s profitability, business operations, and reputation among customers. It can also lead to severe criminal penalties and potential jail time if not quashed immediately.

The criminal securities fraud attorneys at The Criminal Defense Firm are committed to safeguarding your company from the pitfalls of a costly and protracted federal investigation and criminal allegation. Our attorneys can take proactive measures to eliminate or mitigate the threats posed by an investigation.

How Short Selling Abuse Investigations Unfold

A short selling abuse investigation generally starts when the SEC observes suspicious trading patterns or gets a tip from a whistleblower. The agency then initiates an inquiry into the company or individuals that are suspected of engaging in these abuses.

The SEC often looks for risk factors and signs that indicate a company’s involvement in short selling abuse. Some indicators include sudden stock value declines and negative claims about the issuer in reports, newspapers, or social media.

The SEC may then file a complaint against the suspect, alleging that the company participated in a fraudulent scheme to manipulate stock prices and profit from its short selling position. The complaint might include details that certain individuals took affirmative action to spread false information in order to drive down the stock price and induce panic selling.

Short selling abuses can violate the Exchange Act’s antifraud provision, Section 10(b) (15 U.S.C. § 78j(b)), and its attendant SEC regulation, Rule 10b-5 (17 C.F.R. § 240.10b-5). These short selling abuses can lead to a host of legal claims against the short seller, including:

Additionally, short selling abuses by regulated securities professionals may violate Section 206(4) of the Investment Advisers Act (15 U.S.C. § 80b-6(4)) and SEC Rule 206(4)-8 (17 C.F.R. § 275.206(4)-8). Rule 206(4)-8 prohibits investment advisers from making false or misleading statements to investors or to prospective investors in a managed pooled investment vehicle.

In addition to federal statutes and regulatory provisions, short selling abuses may also violate state securities laws, state consumer protection statutes, and constitute common law corporate crimes like insider trading.

Responding to Charges or Arrests Related to Short Selling Abuse

Although short selling is a legitimate practice, the SEC closely scrutinizes companies and individuals who are suspected of engaging in abusive activities. An investigation into your company can present numerous challenges, including potential jail time, criminal penalties, and loss of shareholder value. It is vital to safeguard your license, liberty, and right to work.

Do not wait for an investigation to proceed before taking action to protect your rights and reputation. Divulging any information to a federal investigator without consulting your attorney first can quickly make your case much worse. Your attorney should be present during all communications with federal law enforcement authorities to ensure no missteps are made.

At The Criminal Defense Firm, our defense attorneys possess the necessary skills to handle complex and high-profile cases involving charges or investigations related to short selling abuses.

Frequently Asked Questions About Short Selling Abuse and The Criminal Defense Firm

Is Short Selling Abuse a Crime or Just a Civil Offense?

Short selling abuse is very frequently a criminal offense. However, if law enforcement is not able to find evidence that you behaved with the specific intent of defrauding someone then it can be pursued as a civil offense, instead.

This is important to understand, because it means that relying solely on your lack of intent to commit fraud will not protect you from civil liability for the short selling scheme. That civil liability, while it will not carry prison time or tarnish your criminal record, will come with extremely steep financial penalties that can cripple even the most successful of brokerage firms.

With that said, though, short selling abuse is unlike most other forms of securities fraud in that the prohibited conduct very frequently comes with strong indications that it was intentional.

What are the Penalties of a Criminal Conviction or a Civil Verdict?

If charged as a crime, a conviction for short selling abuse comes with a variety of sanctions, up to and including a prison sentence that could last for over a decade. Additionally, defendants generally have to disgorge the profits made from the short selling scheme, pay victim restitution and a criminal fine, and spend time on probation after being released from prison. If they worked in the securities industry, they are extremely unlikely to be able to return to their former profession, as the conviction will likely lead to a lifetime ban from the industry that makes them ineligible to trade in securities.

If charged as a civil violation, defendants can face all of the same sanctions except for the prison time and the effects of having a criminal conviction on their background.

Why Should I Consider Hiring The Criminal Defense Firm?

The Criminal Defense Firm has several elements to it that make it different from other law firms that handle short selling abuse cases. The most important one, though, is the fact that we only employ senior attorneys. This does not just mean that your lawyer will be someone with numerous years of experience handling cases just like your own. It also means that all of the work that gets done on your case is performed by that senior lawyer, not by a paralegal or junior associate who just graduated from law school.

Why Doesn't The Criminal Defense Firm Call Itself the Best White Collar Defense Law Firm in the Nation?

This is the sort of thing that we prefer to let our prior clients say about our firm, instead. Read their testimonials here.

Contact The Criminal Defense Firm for Skilled Short Selling Abuse Defense

The Criminal Defense Firm is comprised of former agents from the Federal Bureau of Investigation (FBI), former U.S. attorneys at the Department of Justice (DOJ), and former prosecutors, and brings diverse perspectives and a wealth of knowledge to your defense. With our meticulous attention to detail and unwavering dedication, we will advocate on your behalf throughout your case.

Given the high stakes involved, contact The Criminal Defense Firm right away to protect your liberty and reputation. Trust our highly experienced team to stand by your side. Call us at (866) 603-4540 or contact us online to get started on your case.

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