How to Sue Short Sellers: by Citadel’s law firm, Quinn Emanuel:
“That Is Not An Opinion”: How to Sue Short Sellers JUNE 25, 2021 FIRM MEMORANDA
Short sellers capitalizing on illegal “short and distort” schemes can, and do, wreak havoc on a company’s stock price, reputation, and the reputation of senior officers and directors. All too often, with just a single tweet. When this happens, companies find themselves playing defense—i.e., responding to a sudden drop in market capitalization, as well as (i) regulatory investigations, (ii) securities class actions, and (iii) derivative lawsuits that often follow a “short attack”.
Many companies are sick of playing defense. Increasingly, clients want to stop “short and distort” schemes before they find themselves the victims of unfair, repeat attacks that can act as a drag on share price for years—even if the attacks are baseless. Common law claims such as defamation, unfair competition, and intentional interference with contracts, as well as claims for market manipulation, RICO violations, and securities fraud under federal and state securities laws all sound like appealing avenues for relief. But in practice, few companies decide to bring claims against offending short sellers.
One reason companies shy away from bringing claims against short sellers is because, frankly, the claims often fail. The short sellers’ modus operandi is to publish negative statements about companies they hold short positions in (be it through short reports, social media, podcasts, etc.) while describing their statements as “opinions.” Because opinions are protected by anti-SLAPP (strategic lawsuit against public participation) statutes and the First Amendment, some companies believe that short sellers seem to operate as if they are untouchable. But they are not: companies can and have succeeded on offense.
HOW TO SUE A SHORT First, carefully vet short sellers’ statements to identify all actionable statements. The First Amendment and anti-SLAPP statutes do not give short sellers cart blanche to knowingly or recklessly publish false information about a company. To that end, step one in preparing claims against a short seller is to painstakingly review and vet all of their public statements and identify those that cross the line from opinion to fact and which can be disproved. This may require reviewing social media posts, interviews, podcasts, and short reports – all of which are common mediums of short sellers. It may be that the only good news for a company being attacked on all fronts by short sellers is that the more statements the short sellers make, the more likely it is that some of them will be actionable.
The importance of identifying actionable statements is demonstrated through the recently-announced settlement agreement in Farmland Partners, Inc. v. Rota Fortunae. In Farmland Partners, FPI, a publicly traded real estate investment trust, sued a research firm and its owner, Quintin Mathews, as well as the hedge fund that backed the research, after Mathews published an article online that caused FPI’s stock to fall 39 percent in one day. At the motion to dismiss stage, the Court rejected Mathews’ argument that his publication as a whole was a non-actionable opinion, explaining that the use of disclaimers throughout the article such as “I think” and “I believe” “does not lend to automatic protection under the First Amendment.”[1] The Court held that statements such as FPI was “artificially increasing revenues by making loans to related-party tenants” and “neglected to disclose that over 70% of its mortgages have been made to members of the management team” were objectively verifiable and thus not opinions.[2]
On June 20, 2021, Mathews tweeted a settlement press release—a mea culpa wherein he admitted to reporting a litany of “inaccuracies and false allegations based on those inaccuracies.”[3] The press release states that the inaccuracies were made apparent through “the benefit of evidence from years of litigation, including deposition testimony and documents, and also as evidenced by the recovery of FPI’s share price despite the persistence of expensive shareholder litigation against FPI resulting from my article.” Mathews, who held a short position in FPI, agreed to pay FPI “a multiple” of the profits he earned from his short position.[4] FPI’s claims against the hedge fund defendant are still pending.
In Amira Nature Foods, Ltd. v. Prescience Point LLC, Amira, brought claims in the Southern District of New York against short seller Prescience Point stemming from Prescience Point’s short reports stating that Amira’s financial statements were false.[5] As expected, Prescience Point moved to dismiss the complaint, raising the scepter of the First Amendment as a defense. The Court analyzed that defense under New York’s three-factor test, which considers “[one,] whether the specific language in issue has a precise meaning which is readily understood; two, whether the statements are capable of being proven true or false; and, three, whether either the full context of the communication in which the statement appears or the broader social context and surrounding circumstances are such as to signal readers or listeners that what is being read or heard is likely to be opinion not fact.”[6] The Court went on to explain that “[t]his examination does not parse the individual words or statements but instead considers the publication as a whole, asking whether a reasonable listener is likely to have understood the statements as conveying verifiable facts about the plaintiff.” . . . .
HOW QUINN EMANUEL CAN HELP Quinn Emanuel is one of the few firms that have successfully sued malicious short sellers, and we are not afraid to do so. We frequently advise clients in navigating the muddy waters of short attacks, and we work with the best investigators and economists in the industry in applying the above playbook.
No firm is better suited to guide companies dealing with short attacks than us.
Quinn Emanuel was ranked #1 in the BTI Consulting Fearsome Foursome for 2021, earning the title of “Most Feared” law firm in the world for the second year in a row. Quinn Emanuel was also included in the list of “Top 20 Trial Law Firms” by Benchmark Litigation USA 2021 and received a global ranking of Tier 1 for securities. The Wall Street Journal called us “a Global Force in business litigation”, and The American Lawyer says we are “Better. Faster. Tougher. Scarier.” *** If you have any questions about the issues addressed in this Client Alert, or if you would like a copy of any of the materials we reference, please do not hesitate to contact us.
“Most feared law firm in the world” huh? Yes, we’ve all seen their bullying tactics. But you know who’s NOT afraid? Laura Posner et al. at Cohen Milstein. They’re clearly well prepared to stand toe-to-toe with the mighty Quinn Emanuel, but I doubt it ever gets to that. I think “the most feared law firm in the world” will attempt to delay for as long as possible, and then try to settle. The short sellers certainly don’t want anyone digging in their books, nor do they want Northwest Bio to receive any settlement funds while they are in need of capital.
