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Short and Distort Schemes: An In-Depth Examination of Manipulation Risks for Microcap Firms

Alongside "pump and dump" manipulations, "short and distort" schemes also pose substantial risks in microcap stocks. These illegal schemes aim to profit by taking short positions and then spreading false or misleading negative claims about a target company to drive down its share price artificially.

Understanding Short and Distort Manipulation Tactics

A "short and distort" scheme refers to an illegal practice in which an individual, group, or entity takes a substantial short position betting on a decline in the stock price of a target company. The manipulator then engages in some effort or campaign to actually cause the price to drop through spreading false, misleading, or otherwise distorted negative claims or assertions about the target company.

If the short seller's distortions succeed in causing the target company's stock price to materially decline, the manipulator can then cover their short position and lock in potentially massive trading profits as a result of the artificial downward price movement they created through deception. At the same time, the target company and its genuine investors often suffer substantial losses due to the illegal manipulation artificially driving down its stock price.

Short and distort schemes employ a wide range of tactics to create negative sentiment and perceptions surrounding the target company:

• - Publishing false allegations of criminal conduct, regulatory violations, or civil lawsuits related to the target company or its management to create an appearance of wrongdoing
• - Fabricating negative stories or narrative about the company's products, operations, management integrity, or financial stability
• - Flooding Internet message boards and social media platforms with an excessive volume of negative posts or commentary about the company
• - Using multiple anonymous aliases to write and spread false, negative articles, blog posts, emails or other materials about the company
• - Paying stock bashers or promoters to make false negative claims or statements about the company across websites, message boards, and platforms

The sole aim of all these distorting actions is to foster fear, uncertainty, and doubt causing ordinary investors to panic sell shares, thus creating a wave of selling pressure that drives down the stock price. With their substantial short positions already placed betting on such a decline, the manipulators then cover and realize substantial illicit profits from the distortion scheme.

Legal Remedies and Relief Available Against Short and Distort Schemes

Government authorities treat short and distort stock manipulation activity as an illegal and fraudulent form of securities market manipulation when it is detected. However, affected companies themselves can also pursue potential civil law remedies by filing lawsuits against participants in short and distort schemes to recover monetary damages for reputational harm and unrealized gains.

Initial legal relief often comes in the form of a detailed demand letter from an experienced securities litigation attorney explaining the outright illegal nature of the distorting conduct. This frequently compels manipulators to immediately cease and desist spreading further distorting claims for fear of the significant civil liability and regulatory consequences their misconduct exposes them to.

Depending on case circumstances and the severity of the damage inflicted, counsel may advise pursuing further private civil action against participants in the manipulation conspiracy. Experienced securities litigators also aid clients in reporting details to regulatory and criminal authorities for investigation of market manipulation and fraud charges against responsible parties.

With microcap short sale positions continuing to surge to record highs in recent years, companies must watch vigilantly for any indications of illegal short and distort schemes targeting their enterprise. At the very first red flag something is amiss, executives should engage experienced securities litigation counsel to swiftly pursue remedy before severe harm is inflicted.

The attorneys at Lucosky Brookman have extensive experience helping microcap firms and small issuers respond to and defeat short and distort schemes and other illegal price manipulations when they surface. We deploy hard-hitting demand letters and leverage litigation tools aggressively to protect client interests. Contact us if you suspect a distorting attack on your company to discuss strategy for defeating the scheme and pursuing justice. We are ready to help mitigate the damage and recover losses inflicted on your enterprise.