Taking a short position in an equity can produce considerable gains for individual traders and large brokerages. In many instances, it can be far easier and more profitable to predict a sharp drop of a company’s share price than its gradual rise upwards. Short-sellers have a very compelling incentive to investigate and publicize allegations of frauds.
An article in virtually any trade journal can significantly lower the value of a share price, even though the author must typically disclose his or her short position in the equity. Rapid devaluation has repeatedly led to class-action lawsuits with individuals or brokerages who experienced a loss in their shares’ value. Within the past year, reports of fraud have had serious ramifications for high profile companies.
Misrepresenting the status of pipeline project
The electric vehicle maker, Nikola, was riding high as a leader among an emerging industry amid 2020’s volatile market condition. When short-seller, Hindenberg Research, revealed that the company’s promotional videos depicted non-working vehicles. The company’s share price fell steeply, the CEO resigned, and General motors walked away from a collaboration.
Share price manipulation
Luckin’ Coffee, a Chinese company, saw dramatic devaluation after a short-seller alleged that the company was fabricating sales to alter the share price. The company had to replace several executives, and it had to pay approximately $180 million dollars to settle a claim by the U.S. Securities and Exchange Commission.
Ultimately, both publicly traded companies and investors alike need to be wary of short-sellers’ investigative activities. Even when allegations are inaccurate, the consequences can be costly.