Short Sellers, Short Squeezes, and Securities Fraud

47 Journal of Corporation Law (Forthcoming)

BYU Law Research Paper No. 21-05

62 Pages Posted: 20 Feb 2021 Last revised: 22 Mar 2021

See all articles by Christine Hurt

Christine Hurt

Brigham Young University - J. Reuben Clark Law School

Paul J. Stancil

Brigham Young University, J. Reuben Clark Law School

Date Written: February 19, 2021

Abstract

The modern securities fraud class action lawsuit rests on a legal fiction. Plaintiffs are able to bring claims together and avoid proving individual reliance because over thirty years ago, the Supreme Court assumed that almost all investors purchase and sell securities based on their belief that the market price is accurate. In today's world of short sellers, options traders, algorithmic traders, and institutional investors with more valuation tools than the issuers themselves, that assumption cannot hold. These atypical traders, particularly short sellers, are becoming more and more visible in class actions as lead plaintiffs and lead plaintiff candidates, and sometimes as defendants. Courts have not decided exactly what to do with short sellers in securities fraud cases, and this Article is one of the first to create a theoretical and normative framework for atypical investors in the securities fraud paradigm. Building on a dataset of all 10b-5 cases filed in federal court in 2017, this Article explores the questions of when and whether short sellers and other atypical traders should benefit from the securities fraud class action structure.

Keywords: securities fraud, class action, short sellers, options traders, atypical traders, lead plaintiffs, algorithmic traders, institutional investors

Suggested Citation

Hurt, Christine and Stancil, Paul J., Short Sellers, Short Squeezes, and Securities Fraud (February 19, 2021). 47 Journal of Corporation Law (Forthcoming), BYU Law Research Paper No. 21-05, Available at SSRN: https://ssrn.com/abstract=3789156 or http://dx.doi.org/10.2139/ssrn.3789156

Christine Hurt (Contact Author)

Brigham Young University - J. Reuben Clark Law School ( email )

430 JRCB
Brigham Young University
Provo, UT 84602
United States
80144225354 (Phone)

Paul J. Stancil

Brigham Young University, J. Reuben Clark Law School ( email )

430 JRCB
Brigham Young University
Provo, UT 84602
United States

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