Few events can disrupt a public company’s trajectory as suddenly as the publication of a short-seller report. Often sensational in tone and light on substance, these reports typically allege that a company has misstated its financial condition, overstated business prospects, or engaged in improper practices. The motive is rarely hidden: drive the stock price down for the short-seller’s own financial gain.
The impact, however, extends far beyond short-term market volatility. In today’s litigation landscape, stockholder plaintiffs’ firms routinely seize upon short-seller reports as the “emergence of the truth” necessary to allege loss causation under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The interplay between activist short-sellers, securities plaintiffs’ lawyers, and courts presents challenges, legal issues, and business decisions that corporate leaders must anticipate.
A brief history of short-seller reports in securities litigation
Short-sellers have long been part of the U.S. capital markets, but the practice of publishing aggressive investigative-style reports designed to move markets with questionable accusations is a relatively recent phenomenon. Courts generally view these reports with skepticism but will allow allegations relying on the reports to move past the pleading stage under certain circumstances. As a result, reliance on these reports for securities claims does not appear to be dissipating. Recent decisions highlight the evolving legal treatment:
- In re BofI Holding, Inc. Sec. Litig., 977 F.3d 781 (9th Cir. 2020): The Ninth Circuit held that short-seller blog posts did not constitute a corrective disclosure because the short-seller had a financial interest to convince others to sell and disclaimed representations to accuracy or completeness, but qualified its analysis by stating that the short reports can qualify as corrective disclosures if they reveal new, credible information, regardless of the publisher’s bias.
- In re Ideanomics, Inc., Sec. Litig., 2022 WL 784812 (S.D.N.Y. Mar. 15, 2022): The Southern District of New York found that two short reports were not corrective disclosures because neither revealed a fact previously undisclosed in the alleged misleading statements.
- Saskatchewan Healthcare Emp.’s Pension Plan v. KE Holdings Inc., 718 F. Supp. 3d 344 (S.D.N.Y. 2024): The court explained that while short-seller reports must be viewed with caution, the short-seller report at issue had “sufficient indicia of reliability” to survive the pleading stage and the “truth” of the report was a factual question not appropriate on a motion to dismiss. This decision highlights the precise reasons securities plaintiffs will continue to rely on these reports to allege corrective disclosures and loss causation.
- In re Genius Brands Int’l, Inc. Sec. Litig., 763 F. Supp. 3d 1027 (C.D. Cal. 2025): The Central District of California found that a short-seller report did not support allegations of corrective disclosure and loss causation because the information simply repackaged readily available and digestible market information.
- Defeo v. IonQ, Inc., 134 F.4th 153 (4th Cir. 2025): Following the Ninth Circuit’s reasoning in BofI, the Fourth Circuit recently affirmed a motion to dismiss stating that the stockholder failed to “clear the high bar of showing that the [short-seller report] revealed the truth” because the report relied on anonymous sources for its non-public information and included extensive disclaimers about the accuracy of the opinions.
Taken together, these cases confirm that courts focus on substance: Was genuinely new, credible information revealed? Or was the report merely compiling existing information and disclaiming accuracy of its opinions?
Seven things every company should consider
For companies, short-seller reports pose a multi-dimensional threat:
- Market: Stock prices may plummet following the report, eroding shareholder value and destabilizing investor relations.
- Litigation: Plaintiffs’ firms rely on these reports to allege loss causation and “evidence” of the emergence of the truth of the fraud.
- Reputation: The narrative of misconduct can linger, regardless of merit.
Failure to strategically assess the appropriate response (if any) can compound these risks. Implementing the following steps are critical to successfully navigating short reports.
1. Annotate the Short Report Under Privilege
The first step is to dissect the report line by line. Each allegation should be annotated to:
- Identify what is factually incorrect or misleading.
- Cross-reference the company’s prior public disclosures.
- Flag statements that may require clarification in future filings.
This process should be conducted under attorney direction to preserve attorney-client privilege and work product protection. A disciplined, annotated version of the report becomes an indispensable tool to guide internal response, consider offensive litigation strategies, and to prepare for potential securities litigation.
2. Evaluate Public Response and Offensive Options
Reflexive denials can backfire. Responses must be vetted through legal and investor relations teams. Offensive actions may include:
- Press release refuting allegations in the short report.
- Preparing cease and desist letters to the publisher or to platforms hosting the report.
- Evaluating defamation claims where the report contains demonstrably false factual assertions.
- Engaging with regulators (e.g., SEC, FINRA, stock exchanges) when the report appears to manipulate the market through misleading statements.
Some companies have strategically deployed offensive tactics and obtained immediate results including short-sellers deleting a report and/or issuing a retraction. However, offensive action is not always advisable. Press releases regarding the short report and litigation against short-sellers often amplifies their platform. Each situation requires judgment.
3. Monitor the Stock Price and Trading Activity
The impact on stock price is not just an investor relations issue—it directly shapes litigation exposure. Courts often look to market reactions as evidence of loss causation. Companies should: (i) track intraday stock movements in the hours and days following publication; (ii) monitor trading volumes and identify abnormal patterns; (iii) evaluate recent news or events to assess whether alternative market factors may have impacted the stock movement rather than the short report itself; and (iv) assess whether there is any recent stockholder acquiring significant shares that may have interests to further disrupt corporate governance.
A careful record of market reaction can help defeat inflated causation theories.
4. Monitor Short Interest and Derivatives Activity
Shortsellers often operate through opaque structures, including swaps and options. Companies should track short interest levels and derivative trading around the time of the short report. Elevated short activity can signal coordinated campaigns.
Some companies engage specialized analytics firms to monitor unusual patterns. This intelligence can support defensive strategies, investor communications, and, where appropriate, referrals to regulators.
5. Engage Specialized Counsel with Short-seller Defense Expertise Early
Defending against short-seller campaigns is not standard securities litigation. It requires counsel with:
- Activism defense experience to anticipate market-based tactics.
- Securities litigation expertise to frame loss causation and materiality arguments.
- Crisis management judgment to balance disclosure obligations with reputational risks.
Engaging counsel early allows the company to coordinate market response, disclosure strategy, and litigation posture in real time.
6. Promptly Engage the Board of Directors
Short-seller reports are significant governance events. Boards should be briefed promptly, and directors should exercise oversight, which should be reflected in the minutes. These practical processes are critical to protect the company’s and its stockholder’s interests. It is not unusual, in fact it is expected, that any securities litigation will include derivative litigation brought by different stockholders. The company’s directors must be informed and exercise their oversight function.
7. Consider Whether to Engage with Long Term Strategic Investors and Sell-Side Analysts
It is typically prudent to proactively inform long-term strategic or major investors. Direct communication from the company—rather than through media spin—can help preserve confidence and reduce reputational harm. A company should also leverage relationships with sell-side analysts in an effort to rebut the short-seller’s thesis.
Conclusion
The proliferation of short-seller reports will continue. Those business leaders that implement these practical action items in response will have the upper hand in the fight to restore order and maintain the company’s trajectory.
The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
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