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

43 Pages Posted: 29 Nov 2001 Last revised: 25 Oct 2010

Robert C. Apfel

Bondholder Communications Group

John E. Parsons

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

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: December 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 securites 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.

Suggested Citation

Apfel, Robert C. and Parsons, John E. and Schwert, G. William and Stewart, Geoffrey S., Short Sales, Damages and Class Certification in 10b-5 Actions (December 2001). NBER Working Paper No. w8618. Available at SSRN: https://ssrn.com/abstract=292517

Robert C. Apfel

Bondholder Communications Group

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

John E. Parsons

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/

G. William Schwert (Contact Author)

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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