"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."
"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:"
Short-seller reports frequently make sensational allegations that companies misstated financials, overstated prospects, or engaged in improper practices to depress stock prices for the short-seller's profit. Stockholder plaintiffs' firms often rely on such reports as alleged corrective disclosures to plead loss causation under Section 10(b) and Rule 10b-5. Courts generally view short-seller reports with skepticism but will permit claims to proceed when reports disclose new, credible information. Recent case law, including In re BofI Holding, shows courts may reject certain short-seller publications as corrective disclosures because of the publisher's financial interest or disclaimers, while recognizing that credible revelations can qualify.
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