Selling short, then suing

At Point of Law’s “Featured Discussion”, Moin Yahya and Larry Ribstein are debating whether the government can or should do anything about the practice of lawyers’ (or their clients’ or confederates’) selling short the stocks of companies they plan to sue, then cashing in on the resulting drop in the stock price. See May 5, 2005; PoL Feb. 6.


  • That sounds like insider trading to me.

  • It sounds a lot like insider trading, and I don’t think it would be too hard to make the charge stick.

    The definition of “inside information” is only that it be material and nonpublic. “Material” means that the typical investor would want to know the information before making an investment decision. So a big lawsuit almost certainly counts.

    But it is NOT necessary for the “inside information” to be known by the company itself.

    An analogous situation would be if Company X was about to make a hostile takeover offer for company Y. If you worked at Company X you could not legally buy stock in Company Y in order to profit from the announcement.

  • Gaming the system

    There is no regulatory scheme so airtight that no one can figure out a way to game it.

  • Short ’em, then sue ’em

    A reminder that our Featured Discussion between Moin Yahya and Larry Ribstein has been proceeding through the week. Their topic: what if anything should be done about the phenomenon of lawyers’ or their confederates’ selling short the stocks of target…