A GREAT EXAMPLE OF NAKED SHORT SELLING
(If you can comprehend this in its entirety you can understand Naked Shorting and MMM)In the
United States Court of Appeals
For the Seventh Circuit
No. 94-2015
SULLIVAN & LONG, INCORPORATED, et al.,
Plaintiffs-Appellants,
v.
SCATTERED CORPORATION,
Defendant-Appellee.
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
Nos. 93 C 4069, 93 C 5346,
93 C 5447, 93 C 5740--Harry D. Leinenweber, Judge.
ARGUED NOVEMBER 1, 1994--DECIDED FEBRUARY 8, 1995
Before POSNER, Chief Judge, and COFFEY and MANION,
Circuit Judges.
POSNER, Chief Judge. This is an appeal from the dis-
missal, for failure to state a claim, of a suit that charges
violations of the securities laws growing out of a notori-
ous, or at least newsworthy, episode of short selling of
common stock of LTV Corporation. In re Scattered Cor-
poration Securities Litigation, 844 F. Supp. 416 (N.D. Ill.
1994); see, e.g., Kurt Eichenwald, "Stock Strategy under
Scrutiny," N.Y. Times, Aug. 26, 1993, p. D1; Alexandra
Peers & Jeffrey Taylor, "Chicago Broker Faces Inquiry
over LTV Short Sales," Wall St. J., Aug. 27, 1993, p.
C1. The plaintiffs allege a "market manipulation" on an
awesome scale that jeopardized the solvency of the Chi-
cago (formerly Midwest) Stock Exchange. But like the dis-
trict judge we have difficulty understanding what right
of the plaintiffs the "manipulation" violated or how they
were harmed.
LTV, a large steel producer, entered bankruptcy in 1986.
In February of 1993 it announced a proposed plan of re-
organization under which existing stock in the company
would be replaced by new stock most of which would be
issued to the bondholders and other creditors of LTV. Ex-
isting stockholders would receive warrants entitling them
to purchase some of the new stock. The plan contained
an estimate that the new shares would be worth only 3
or 4 cents. When the plan was announced, the old shares
were trading for more than 30 cents. There were 122 mil-
lion old shares outstanding.
The plan was confirmed by the bankruptcy court on
May 27, 1993, and the court fixed June 29 as the last day
on which the old shares would be tradable. Beginning be-
fore the confirmation date, but greatly accelerating on that
date, the principal defendant, a Chicago Stock Exchange
market maker (a dealer willing both to buy and sell a par-
ticular stock or other security for his account on a regular
basis, 15 U.S.C. sec. 78c(a)(38)) with the alarming name of
Scattered Corporation, sold short huge quantities of the
old LTV shares. It sold short, in fact, tens of millions of
such shares a week, for a total, when trading ended on
June 29, of 170 million shares, far more than the 122 mil-
lion old LTV shares outstanding. The excess of shares sold
short over total shares outstanding is the focus of the
plaintiffs' complaint.
A short sale is a sale at a price fixed now for delivery
later. A trader sells stock short when he thinks the price
of the stock is going to fall, so that when the time for
delivery arrives he can buy it at a lower price and pocket
the difference. If, for example, he sells the stock short
at 50 cents a share, and the price falls to 40 cents before
he delivers the stock, he can buy the stock for 40 cents
a share, deliver it to the buyer, and have made a profit
of 10 cents. Under the rules of the Chicago Stock Ex-
change, the buyer in a short-sale situation is entitled to
delivery within five working days of the sale. If the seller
fails to make delivery (maybe he doesn't have the stock),
the rules entitle the buyer to "buy in" the stock, that
is, to go out and purchase it on the open market and
charge the price to the short seller. See United States
v. Naftalin, 441 U.S. 768, 771 n. 2 (1979). If in our ex-
ample the price had risen by the end of five working days
to 65 cents and the seller did not deliver, the buyer would
go into the market, buy the stock at 65 cents, and charge
the price back to the short seller. After the completion
of the transaction, the buyer would have stock worth 65
cents that he had obtained at a net cost of 50 cents (50 cents +
65 cents minus 65 cents). Notice that a short seller's potential
loss is unlimited, since it is simply the difference between the
sale price and the market price--which could be anything.
The plaintiffs in this case were buyers on the other side
of Scattered's short sales. They thought the price of the
old shares would rise before plunging to 3 or 4 cents by
June 29. (An old share would be worth that, rather than,
as one might imagine, zero, because the holder of 100
shares was entitled to turn his shares in and receive 1.08
warrants to buy new shares at the rate of one warrant per
share. The warrants, being worth approximately 100 times
the old shares, were selling for between $3.125 and $4.125.)
Why they thought this is a puzzle. Since on May 27 it
was certain, or virtually so (nothing is really certain), that
shares of common stock in LTV would be worth no more
than 4 cents in just a month, it is unclear why the stock
did not plunge immediately to that level. In fact it re-
mained in the two-digit range for quite some time, and
on the very last day of trading was trading at 7.8 cents
even though it was within hours of plunging to half that.
Scattered's counsel told us that the only reason the
stock did not plunge immediately is that many brokers
and investors do not read a plan of reorganization care-
fully--it is a long, complex, and jargon-ridden document--
and hence many of them did not at first, or perhaps even
at last, realize that the old stock in LTV would indeed
be worth only 3 or 4 cents after the reorganization was
completed. The problem may be endemic with reorgan-
izations. Eichenwald's article suggests that many investors
misunderstand the significance of news that a company
is reorganizing. They see that the price of the stock is
"low," and think that they are getting in on the ground
floor rather than climbing aboard a sinking ship. See also
Kurt Eichenwald "Being Nearly Worthless, Wang Shares,
Of Course, Sell Briskly," N.Y. Times, Sept. 16, 1993,
p. D8. Maybe the stock exchanges or the SEC should do
something about these gullibles, since competition, which
usually protects the uninformed purchaser, seems not to
be working. Scattered, however, disclaims any legal re-
sponsibility for educating its buyers, and indeed has none,
not being a fiduciary of the people it trades with. Chia-
rella v. United States, 445 U.S. 222, 233 (1980). Its counsel
acknowledged that his client hoped to take advantage of
these people by selling them stock short. That is what short
sellers do: they bet on a declining market, trusting that
they have better information or better instincts than other
traders, those who will buy from them. There is nothing
unlawful about trading on an information advantage, pro-
vided that it is not based on inside information, id. at 233,
235; Dirks v. SEC, 463 U.S. 646, 654-55 (1983); Barker
v. Henderson, Franklin, Starnes & Holt, 797 F.2d 490,
495-96 (7th Cir. 1986), which is not alleged. Scattered
merely had a better understanding of the information
about the reorganization than the investors with whom
it traded. It was not even a matter of its having non-
public information, though the cases we have just cited
make clear that trading on nonpublic information is lawful
unless it is inside information. It was a matter of a su-
perior interpretation of public information, the informa-
tion contained in the plan of reorganization.
The effect of trading on an information advantage is to
dispel, by penalizing, ignorance and to bring market values
into closer, quicker conformity with economic reality. The
profit that such trading brings at the expense of less
knowledgeable traders provides the incentive for a pri-
vate, for-profit firm, such as Scattered, to provide this
economic service.
Darwinian this process may appear to be, and yet how
many (if any) of the plaintiffs resemble the proverbial
widow and orphan, or other harmless prey? Sullivan &
Long is the first-listed plaintiff. According to a magazine
article that the plaintiffs cited in their complaint, "Mr.
Sullivan, who is a member of the CSE's [Chicago Stock
Exchange's] board of governors and is an owner of CSE
member firm Sullivan & Long Inc., tried to use an arbi-
tration strategy similar to Scattered's to profit from the
difference in price between LTV's stock and warrants.
But in late June, Mr. Sullivan, who was effectively bet-
ting that LTV's stock price would decline, became con-
cerned that the price might rise when he discovered how
large a short position Scattered had. He bought LTV
shares to cover his own short position, and his firm in-
curred modest losses. In July, Sullivan & Long filed suit
against Scattered . . . ." Peter J.W. Elstrom, "Stock Probe
Target Fights Back," Crain's Chicago Business, Aug. 30,
1993, pp. 3, 25. The article notes an allegation that Sul-
livan learned of Scattered's short position in his capacity
as a governor of the Chicago Stock Exchange.
Scattered had no intention of delivering any of the LTV
stock that it sold short. The last thing in the world that
it wanted to do was to acquire and hold a stock that it
believed certain to lose most of its value within weeks.
Since it had no intention of buying any of the stock, it
had no compunctions about selling short more LTV stock
than existed. It ran the risk that the people on the other
side of the short-sale transactions were right in betting
that the price would rise before its terminal plunge, that
those people would go into the market and buy stock when
the price rose during the five-day period for delivery, and
that they would force Scattered to reimburse them for
these purchases, as in our hypothetical example of the
stock sold short at 50 cents that rises to 65 cents. This
risk--the risk that, if the Crain's article can be believed,
Mr. Sullivan flinched at--did not materialize, because the
price maintained its downward course. There were few
buy-ins, and Scattered ended up making more than $25
million from its campaign of short selling. The plain-
tiffs claim that Scattered ignored such buy-in demands
as were made upon it, but this is imprecise. Scattered
refused to deliver old stock in response to such demands,
but did offer warrants on new stock. The amount of old
stock that it had sold short represented fewer than 2 mil-
lion shares of new stock. This was only a small part of
the total equity capitalization of the reorganized firm. The
vast majority of the new stock was to go to the debt-
holders of the old firm. It would not have been infeasible
for Scattered to buy enough warrants to satisfy all poten-
tial buy-in demands with new stock. It would have been
infeasible for it to obtain enough old stock to satisfy all
such demands in old stock.
We can understand, therefore, Sullivan's flinching. The
risk was enormous, precisely because Scattered had sold
short more old LTV stock than existed. If all the buyers
decided to buy in, and if Scattered were deemed not en-
titled to pay these buyers with warrants rather than with
old stock, the price of the old stock would skyrocket--
unless Scattered sopped up all this demand by continu-
ing to sell short to these buyers. But at some point the
buyers would worry about Scattered's ability to make
good on all its promises to redeem its short sales. They
would demand stock, not further promises to pay a high
price if the stock rose in value. When this happened--
this balking by the buyers--the plaintiffs would, until Scat-
tered did go broke, be able to make money buying in the
stock that Scattered had sold short to them. They say
that Scattered prevented the price from rising (and there-
by discouraged buy-ins by making them unprofitable) by
selling short more and more stock. This is just to say that
Scattered, like a bluffer in a poker game, kept redoubling
its bet until the other players lost heart. But so what?
Scattered's principals may be reckless gamblers, sharpies,
wise guys, exploiters of loopholes, even violators of the
letter or spirit of the rules of the Chicago Stock Exchange.
Cf. United States v. Naftalin, supra, 441 U.S. at 776-77.
We take no position on these questions, except to note
that the Chicago Stock Exchange has forbidden the prac-
tice in which Scattered engaged--that is, selling short
without having borrowed the stock being sold short or
having equivalent guarantees of delivery. But it did this
after the short-sale spree that is the basis of this suit,
and anyway not every stock exchange rule confers a pri-
vate right to sue. Spicer v. Chicago Board of Options Ex-
change, Inc., 977 F.2d 255, 262-66 (7th Cir. 1992).
What troubles us most about this suit is the plaintiffs'
failure to identify any harm to the objectives of the secu-
rities laws under which they have sued; for that matter
they have failed to identify a rule that Scattered violated.
The central objective, we take it, is to prevent practices
that impair the function of stock markets in enabling peo-
ple to buy and sell securities at prices that reflect un-
distorted (though not necessarily accurate) estimates of
the underlying economic value of the securities traded.
An efficient stock market is one in which stock prices re-
flect all potentially available information that is relevant
to the economic value of the stocks. Eugene Fama, "Ef-
ficient Capital Markets: A Review of Theory and Empiri-
cal Work," 25 J. Finance 383 (1970). Not every practice
that might reduce the efficiency of a stock market is pro-
hibited; the securities laws compose a patchwork of rules
rather than a seamless standard. But we would think twice
before concluding that these laws prohibit "schemes" that
accelerate rather than retard the convergence between
the price of a stock and its underlying economic value and
therefore promote rather than impair the ultimate goals
of public regulation of the securities markets. Objective-
ly, from May 27 on old shares of LTV stock were worth
only 3 or 4 cents, and the defendant's campaign of short
selling helped move the market price toward that true
value. Had the plaintiffs succeeded in their scheme of re-
selling for, say, 50 cents stock that they had bought for
40 cents but that was worth only 4 cents, they would have
been contributing to an irrational gyration in stock prices.
The plaintiffs call what Scattered did "market manipula-
tion," a term that refers to tactics by which traders, like
monopolists, create artificially high or low prices, prices
that do not reflect the underlying conditions of supply and
demand. Ernst & Ernst v. Hochfelder, supra, 425 U.S.
at 199. The only artificial prices, however, were the prices
at which LTV stock sold between the confirmation of the
plan and the expiration of the old stock. They were ar-
tificially high because they so greatly exceeded the stock's
true value, which was only 3 to 4 cents. Far from launch-
ing a balloon, Scattered's short sales punctured a balloon,
bringing prices down to earth where they belonged.
The name for what Scattered did is not market manipula-
tion, but arbitrage. Arbitrageurs are traders who identify
and eliminate disparities between price and value, or as in
this case between today's price and tomorrow's price where
the difference cannot be attributed to any prospective change
in value. See Falco v. Donner Foundation, Inc., 208 F.2d
600 (2d Cir. 1953). By doing this, arbitrageurs promote the
convergence of market and economic values that we suggested was
the central objective of securities regulation. Con-
sider a case in which the identical stock is selling for differ-
ent prices on two exchanges at the same time. Since the
value is the same, the prices should be the same. By buy-
ing stock on the exchange where the price is lower and
reselling it on the other exchange, the arbitrageur brings
about a convergence of price with value. This case is only
a little subtler. The old LTV stock and the new stock that
was to be issued when the plan of reorganization was im-
plemented were not identical, but they were nearly so.
The old stock was the stock until June 29, the new stock
the stock thereafter. The two stocks were so far identi-
cal (putting aside the irrelevant difference in the roughly
100 to 1 rate at which old shares were convertible into
new) that any difference in price between them was more
likely to reflect a failure of the stock market to work
properly than a difference in underlying conditions of de-
mand and supply. Scattered played the arbitrageur's role
in trying to equate the prices of these two nearly iden-
tical goods. Arbitrage is not market manipulation. The op-
posite of a practice that creates artificial prices, it elimi-
nates artificial price differences.
The plaintiffs complain that the defendant prevented
them from profiting from their purchases by flooding the
market with successive waves of short sales, thus keep-
ing the market price from fluctuating upward from time
to time ("capping the price," they call it). Such upturns
would have enabled them either to buy in at a higher
price than the short-sale price and thus make a profit,
if they had bought from Scattered, or to sell at a profit
stock that they already owned. But "flooding" a market
with short sales is not a rational formula for keeping price
falling. On the other side of each such sale is a buyer who
thinks the market price will rise. If he is right, the short
seller will lose money, and the more shares he has sold
short, the more money he will lose. As we have already
intimated, the short seller could sell so many shares short
that his solvency was jeopardized. Suppose price rose and
everyone who bought the shares sold short by Scattered
tried to buy in. Since there would be more stock demanded
than there was stock capable of being supplied, the price
would soar and Scattered, which we are told was capitalized
at only $1.5 million when the short selling began, would,
unless it could redeem with warrants, soon go broke. But
the plaintiffs are not complaining that if Scattered guessed
wrong about the direction of the market, the price of the
stock would rise faster than if Scattered had sold short
fewer shares, for if that had happened the plaintiffs might
have made money. And the threat of insolvency is one rea-
son that buyers would have stopped accepting Scattered's
offers to sell short, would instead have insisted on delivery
or would have bought in and sought reimbursement from
Scattered.
The plaintiffs analogize Scattered's plan to the scam in
the movie The Producers. The "defendants" in that movie
sold shares in a play to investors. They sold more than
100 percent of the shares, confident that the play--"Spring-
time for Hitler"--would be a flop, so that the investors
would not ask for their share of the profits (there would be
no profits). The play was a success, so the scam was exposed
and they were sent to jail. Where the analogy fails is that
while investors reasonably believe that the promoter will
not sell more shares than exist, since he would then be
defrauding the investors, a buyer of stock does not have
a basis for equal confidence that the number of shares
of a stock that is being sold short does not exceed the
total number of shares in existence, since the seller is not
trying to raise money for a venture. If even one share
of a stock is sold short, there will be more shares actual-
ly or potentially for sale than there are shares in exis-
tence--since by definition the short seller does not own
the share or shares that he is selling short--unless the
short seller has borrowed stock in order to be able to
make delivery if the buyer wants delivery. Scattered was
not the only short seller of LTV stock. Apparently the
first-listed plaintiff in this case also sold LTV stock short.
If Scattered had sold only 85 million shares short, and
other arbitrageurs had sold in the aggregate another 85
million, the imbalance between shares for sale and shares
in existence would have been identical, unless the arbi-
trageurs borrowed the stock they sold short.
Granted, it is customary for a short seller to borrow
the stock that he sells short; if he did not, the buyers
would lack confidence that he could deliver, and might
worry that if they tried to buy in, the short seller would
not have the money to reimburse them. But the plaintiffs
do not point us to, and we have not been able on our
own to find, a law that requires arbitrageurs or other
short sellers to borrow the stock that they are selling
short. So the plaintiffs could not count on the volume of
short sales being capped at the total number of shares
outstanding. They were on notice that the sort of thing
that did happen might happen, if there were any trader
as audacious as Scattered. Being on notice, they were not
deceived.
It is true that in 1994--a year after the short selling
of LTV's old shares--the Chicago Stock Exchange adopted
a rule requiring a short seller to borrow the stock sold
short or provide equivalent guarantees of being able to
deliver. Self-Regulatory Organizations: Chicago Stock Ex-
change, Inc., 59 Fed. Reg. 42082 (Aug. 16, 1994). But that
is too late to help these plaintiffs. A further complication
is that, as we have mentioned, Scattered did have, so far
as appears, enough warrants to deliver new stock to cover
any demands for old stock, though we do not know whether
responding to such demands in this way would have sat-
isfied the short-sales rules of the Chicago Stock Exchange
or for that matter the contracts of short sale. Since there
is not as yet any requirement of public disclosure of short
sales (hence the allegation that Mr. Sullivan abused his
position as a governor of the Chicago Stock Exchange),
see Large Trader Reporting System, 59 Fed. Reg. 7917
(Feb. 17, 1994); Self-Regulatory Organizations: Notice of
Filing of Proposed Rule Change by New York Stock Ex-
change, Inc., 60 Fed. Reg. 518 (Jan. 4, 1995), Scattered
itself could not know the precise contribution that its short
selling was making to the imbalance of which the plain-
tiffs complain.
We have thus far assumed that the short seller is not
trying to deceive the market about what he is doing. The
plaintiffs charge deception. They charge first of all that
Scattered did not disclose that it had no intention of de-
livering any of the stock that it sold short. But if it was
selling more shares than were outstanding, it could not
deliver them--the requisite number of shares did not ex-
ist--so the plaintiffs' real complaint must be that Scat-
tered did not disclose how many shares it was selling.
But it was not required to disclose the number and the
plaintiffs were not entitled to assume that Scattered would
not sell more shares than were outstanding. Beginning
on May 27, Scattered bought warrants so that it could
deliver new shares to anyone who demanded delivery. The
plaintiffs argue and we may assume for purposes of our
decision that anyone who demanded delivery before June
29 would have been entitled to old shares. That individ-
ual's remedy, when Scattered refused to deliver old shares,
would have been to buy them in. Apparently no one both-
ered to do that. No one who bought from Scattered is
complaining that it was not able to buy in old shares, so
that the Brennan case on which the plaintiffs rely is in-
apposite. Brennan v. Midwestern United Life Ins. Co.,
286 F. Supp. 702 (N.D. Ind. 1968), aff'd, 417 F.2d 147 (7th
Cir. 1969). No matter how many tens or for that matter
hundreds of millions of shares Scattered sold short, it
could not extinguish any of the outstanding shares and
thus it could not defeat the right of the buyers, including
the plaintiffs in this case, to buy in the old shares and
if the price was higher than the price of the short sales
to charge the price to Scattered and pocket the difference.
And this is on the assumption that rule or contract re-
quired Scattered to deliver old shares, rather than war-
rants for new shares. If the latter form of compliance with
the short-sale contract was permissible, the plaintiffs' case
evaporates completely, since Scattered no longer would
have been selling short more shares than existed.
The plaintiffs also complain that Scattered falsely marked
its trading tickets "short exempt," meaning that Scattered
was authorized to sell on down ticks in the market. (This
means authorized to sell at a price equal to or below the
last sale price, even if that price was equal to or below
the next preceding sale price.) If Scattered was not ex-
empt, it may have to answer to the Chicago Stock Ex-
change or the SEC, see SEC Rule 10a-1, but we do not
see how its claim of exempt status could have deceived
anyone in any respect that bears on this case. Exempt
or not, a short sale is a short sale. If anything, the claim
of exemption would lead investors to believe that Scat-
tered was going to do more short selling than if it were
not exempt, since exemption would free it from restric-
tions on short selling. And the plaintiffs' whole complaint
is that they were fooled by the magnitude of the short
selling that Scattered did.
Our analysis has shown that nothing alleged in the com-
plaint is the kind of conduct that the securities laws are
aimed at combatting. It is therefore not surprising that
none of the plaintiffs' specific legal contentions has merit.
They contend first and foremost that "by unprecedented
massive short selling and by disguising the nature of their
trades, the defendants controlled the price of LTV," in vio-
lation of section 9(a)(2) of the Securities Exchange Act of
1934. This section forbids "a series of transactions in any
security registered on a national securities exchange cre-
ating actual or apparent active trading in such security
or raising or depressing the price of such security, for
the purpose of inducing the purchase or sale of such se-
curity by others." 15 U.S.C. sec. 78i(a)(2). As the plaintiffs
themselves point out, the essence of the offense is creating
"a false impression of supply or demand," for example
through wash sales, where parties fictitiously trade the
same shares back and forth at higher and higher prices
to fool the market into thinking that there is a lot of buy-
ing interest in the stock. Santa Fe Industries, Inc. v.
Green, 430 U.S. 462, 476 (1977). There was nothing like
that here. On the other side of all of Scattered's transac-
tions were real buyers, betting against Scattered, however
foolishly, that the price of LTV stock would rise. And
Scattered made no representations, true or false, actual
or implicit, concerning the number of shares that it would
sell short. Maybe the plaintiffs' theory is that every short
seller implicitly warrants that it won't sell short in such
quantity as to jeopardize its financial solvency. This is an
argument against short selling, or perhaps against short
selling without borrowing the shares to be sold short--
or perhaps against arbitrage. But other than in tender-
offer situations, where short selling is prohibited, SEC
Rule 14e-4 (formerly 10b-4; cf. Merrill Lynch, Pierce, Fen-
ner & Smith, Inc. v. Bobker, 808 F.2d 930, 934 (2d Cir.
1986)), there is as yet no rule barring persons with a pro-
nounced taste for risk from trading on stock exchanges.
Since there was no deception--no relevant deception, for
as we have said Scattered's claim to be exempt could only
magnify the impression that it was selling short far more
shares than it could deliver, and thus tend to dispel the de-
ception of which the plaintiffs complain--there is also no basis
for a claim under Rule 10b-5, which requires proof of either
deception or manipulation. Central Bank of Denver, N.A.
v. First Interstate Bank of Denver, N.A., 114 S. Ct. 1439,
1448 (1994); Basic, Inc. v. Levinson, 485 U.S. 224, 239 n.
17 (1988); Chiarella v. United States, supra, 445 U.S. at
232; Ernst & Ernst v. Hochfelder, supra, 425 U.S. at 199.
Deception there was not; and most forms of "manipula-
tion" involve deception in one form or another. Santa Fe
Industries, Inc. v. Green, supra, 430 U.S. at 476-77. We
have explained why no nondeceptive practice in which
Scattered engaged was manipulative in the sense--the
only possibly relevant legal sense--of bringing about ar-
tificial prices for LTV stock.
As for the claim that Scattered violated section 12(1)
of the Securities Act of 1933, 15 U.S.C. sec. 77l, by becom-
ing an issuer of LTV stock without registering the offer
or sale as required by that Act, this is quite fantastic.
Only LTV could issue LTV stock, although persons con-
trolling LTV, as well as (conventional) underwriters, could
also be liable for selling unregistered stock, see 15 U.S.C.
secs. 77b(11), 77d(1), 77e, 77l(1)--but Scattered was none of
these. The remaining claims--violation of RICO, unjust
enrichment, and violation of an Illinois consumer protec-
tion statute--are either makeweights or depend on con-
tentions that we have already rejected. The complaint fails
to state a claim and the suit was therefore properly dis-
missed.
It was properly dismissed for another reason as well.
The plaintiffs could not prove injury with the degree of
certainty, low that it is, necessary to obtain an award of
damages in a securities case. Blue Chip Stamps v. Manor
Drug Stores, 421 U.S. 723 (1975); Pelletier v. Stuart-James
Co., 863 F.2d 1550, 1557-58 (11th Cir. 1989). (They do not
seek any other form of relief.) They bought stock that
was selling for many times its actual value, hoping against
hope that there were enough foolish investors to push the
price up despite the imminence of its certain plunge. It
is entirely speculative that but for Scattered's short sell-
ing, the plaintiffs would have sold at a profit or at a
reduced loss before the price plunged to its value in
the reorganization. The plaintiffs do not suggest that
short selling in the stock of a firm undergoing reorganiza-
tion is forbidden. Other traders might have seen the op-
portunity Scattered did, and their short selling might have
driven the price sufficiently low to thwart any profit by
these plaintiffs. It was not necessary that short selling
drive the price all the way down to 7.8 cents (where it
was when the music stopped), only that it drive the price
below what it would have been had Scattered not sold
short in such massive quantities. But to recapitulate the
essential point of this opinion, since the conduct in which
Scattered engaged appears to have served rather than dis-
served the fundamental objectives of the securities laws,
we are not inclined to strain to find a violation of a spe-
cific provision.
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