First sell short, then sue

by Walter Olson on May 5, 2005

“There is some evidence that plaintiffs and their attorneys are profitably short-selling the stock of the companies they intend to sue,” writes Moin Yahya of the University of Alberta law faculty in a new paper called “The Legal Status of ‘Dump & Sue'” (SSRN, Mar. 9). Strategic litigants or their attorneys thus stand to capture two distinct strands of revenue: one from the eventual settlement of the suit, the other from the profits they capture after their adversary’s stock declines on the announcement of the suit. (Alternatively, some lawsuits might be rendered profitable by the gains from short-selling even though they never win settlements at all.) Does insider-trading law as it currently stands prohibit such goings-on? Not necessarily, since litigants and their lawyers don’t ordinarily count as “insiders” in conventional terms. But given securities regulators’ goal of upholding what they call market integrity, it’s hard to see why they would not want to prohibit the sleazy practice. For a dissenting view, see Larry Ribstein (Apr. 11).

{ 5 comments }

1 Ideoblog 05.05.05 at 10:02 am

Dumping and suing revisited

A few weeks ago I wrote about “dumping and suing” – the practice of plaintiffs and their attorneys short-selling the stock of the companies they intend to sue. Overlawyered comments that “given securities regulators’ goal of upholding what they…

2 The Slithery D 05.05.05 at 1:12 pm

Relative equities

Overlawyered points to a study claiming some plaintiff’s attorneys are selling companies short before they sue them.

3 Financial Rounds 05.05.05 at 1:19 pm

First sell short, then sue (from Overlawered)

My question is why the lawyers short-sell when they could buy a high-delta (delta is the change in option price from a unit cahnge in the price of the underlying stock) put option, since taking that tack would have higher expected profits. The obviou…

4 Different River 05.05.05 at 7:30 pm

Get rich quick, for real!

Here’s a great way to get rich — but it only works if you’re a trial lawyer, preferably a well-known one.

Here’s the idea: Short-sell a company’s stock. (For the financially unitiated: this means sell stock you don’t own in the hope that it…

5 PointOfLaw Forum 02.06.06 at 10:54 am

Yahya, “Dumping and Suing”

The week before last, on Jan. 24, University of Alberta lawprof Moin Yahya addressed a Manhattan Institute lunch crowd in New York to discuss his paper diagnosing a problem with securities class litigation — namely, cozy relations between class lawyer…

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