Extract from stockopedia14 Feb 2019 10:28
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Short and Distort: Bear Market Stock Manipulation
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BY RICK WAYMAN Updated Jul 22, 2018
A less publicized and more sinister version of short selling can take place on Wall Street. It's called "short and distort" (S&D).
Nothing is inherently wrong with short selling, which is permissible under the regulations of the Securities and Exchange Commission (SEC). However, the short-and-distort type of short seller uses misinformation and a bear market to manipulate stocks. S&D is illegal, as is its counterpart, the pump and dump, which is mainly used in a bull market.
It is important for investors to be aware of the dangers of S&D and to know how to protect themselves.
The Difference Between Short Selling and Short and Distort
Short selling is the practice of selling borrowed stock in the hope that the stock price will soon fall, allowing the short seller to buy it back for a profit. The SEC has made it a legal activity for several good reasons. First, it provides the markets with more information. Shorters often undertake extensive and legitimate due diligence to discover facts and flaws that support their suspicion that the target company is overvalued. Short selling also provides investors who own the stock (i.e., have long positions) with the ability to generate extra income by lending their shares to the shorts. (For background reading, see the Short Selling tutorial.)
Short-and-Distort Traders Manipulate With Smears
S&D traders, on the other hand, manipulate stock prices in a bear market by taking short positions and then using a smear campaign to drive down the price of the targeted stock. This is the inverse of the pump-and-dump tactic, whereby an investor buy stocks (take a long position) and issues false information that causes the target stock's price to increase.
Generally, it is easier to manipulate stocks to go down in a bear market and up in a bull market. The pump-and-dump is perhaps better known than the short-and-distort because of the long bull market and the media. For example, the stock market had been in a general uptrend in the early to mid-1980s, which provided ample fodder for "pumpers." Movies like "Wall Street" (1987) and "Boiler Room" (2000) helped educate investors about the risk of this type of stock manipulation. (To read more about stock market movies, see Financial Careers According To Hollywood.)
Short-and-distorters try to profit by stimulating fear, but this only works if they have credibility. Therefore, they will often use screen names and email addresses that imply they are associated with the SEC or the Financial Industry Regulatory Authority (FINRA). Their goal is to convince investors that every proponent of the stock has ties to the company and that the SEC is watching and will halt the stock. S&Ds also intimate that they are looking out for investors' interests.
Short-and-distort players clutter message boards, so optimistic info
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