Public companies are under attack by manipulative short sellers. In prior work, I’ve shown how pseudonymous attackers drive down stock prices by buying put options prior to posting hit pieces on blogs and social media. Victim firms are often unaware of how to identify manipulative patterns in trading data, instead bringing defamation lawsuits that fail on First Amendment grounds. Too often, boards of directors are caught flat-footed, lacking the tools to monitor derivatives markets and demonstrate to investors the manipulative nature of a short attack.

This essay makes four claims. First, a short-and-distort attack using derivatives like put options often constitutes illegal market manipulation. Second, trading ahead of the publication of whistleblower allegations can be illegal insider trading under Dirks and Martoma II. Third, manipulative options trading undermines loss causation in a shareholder lawsuit against the firm over the price decline. Finally, management and the board of directors should monitor derivatives trading and be ready with a rapid response to restore investor confidence after a short-and-distort attack.

‘Farmland Partners‘ and the “Death Spiral” of Options Trading