Short Sales, Damages and Class Certification in 10b-5 Actions

34 Pages Posted: 2 Oct 2001  

John E. Parsons

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Robert C. Apfel

Bondholder Communications Group

G. William Schwert

University of Rochester - Simon Business School; National Bureau of Economic Research (NBER)

Geoffrey S. Stewart

Jones Day - Washington, D.C. Office

Multiple version iconThere are 2 versions of this paper

Date Written: July 2001

Abstract

In a short sale, an investor sells a share of stock he does not own and profits when the price of the stock declines. A peculiar feature of short sales is the apparent increase in the number of shares of stock beneficially held by investors over and above the actual number of shares issued by the corporation. It has previously been noted that this may create problems in the execution of proxy votes. In this paper, we illustrate a related problem in the prosecution of claims of securities fraud. We examine this problem using the recent case of Computer Learning Centers, Inc. (CLC), in which the number of short sales was extremely large.

Plaintiffs in the Computer Learning Centers case proposed a class including all those who purchased CLC common stock from April 30, 1997, to April 6, 1998. Defendants opposed certification of the class, focusing on the large number of short sales and the resulting difficulty in establishing which members of the class actually had standing to sue. The court denied the motion for class certification. Although the court gave plaintiffs leave to amend the class, the case was settled before a new class was identified.

Keywords: Short Sales, Securities Fraud, Class Certification, 10b-5

JEL Classification: K22

Suggested Citation

Parsons, John E. and Apfel, Robert C. and Schwert, G. William and Stewart, Geoffrey S., Short Sales, Damages and Class Certification in 10b-5 Actions (July 2001). Simon School of Business Working Paper No. FR 01-19. Available at SSRN: https://ssrn.com/abstract=285768 or http://dx.doi.org/10.2139/ssrn.285768

John E. Parsons (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

HOME PAGE: http://www.mit.edu/~jparsons/

Robert C. Apfel

Bondholder Communications Group

30 Broad Street - 46th Floor
New York, NY 10004
212-809-2663 (Phone)
212-422-0790 (Fax)

G. William Schwert

University of Rochester - Simon Business School ( email )

Carol Simon Hall 3-110L
Rochester, NY 14627
United States
585-275-2470 (Phone)
585-461-5475 (Fax)

HOME PAGE: http://schwert.ssb.rochester.edu

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Geoffrey S. Stewart

Jones Day - Washington, D.C. Office

51 Louisiana Avenue, N.W.
Washington, DC 20001-2113
United States
202-879-5499 (Phone)
202-626-1700 (Fax)

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