Short selling is a common technique used by investors to reap a profit when they anticipate that the price of a given stock is going to drop. The short seller enters into contracts to sell large number of shares in the targeted corporation. And, when the price of the shares drop, the short seller fulfills its obligation to sell with shares that have been purchased at a price far below the sale price. This thus provides the short seller with a windfall profit. Richard Pearson, a well-known short-seller in New York City, was recently sued for libel by the target of a short sale that Pearson was pushing.
The plaintiff, Cemtrex, Inc., a global diversified industrial and manufacturing company, filed a lawsuit in the United States District Court for the Eastern District for New York alleging that Pearson engaged in trade disparagement and tortious interference with contract when he disseminated false and negative information on Cemtrex on his website. The complaint alleges that Pearson acquired a short position in Cemtrex shares and then circulated negative information that was intended to drive down the price of the company's shares. The defendant Pearson has been accused of using similar tactics in connection with other short sales in which he was involved.
Cemtrex provided details of its claims in its Form 8-K that was concurrently submitted to the Securities and Exchange Commission. Cemtrex alleges that Pearson falsely stated that the auditing firm used by Cemtrex in its 2014 was defunct and made false and defamatory statements about its current auditing firm. Cemtrex is seeking $170 million, including punitive damages, general damages and interest.
The outcome of this case and Pearson's short sale campaign will not be known for months. Anyone who is caught up in a similar case involving similar actions or other business torts may wish to consult an experienced business lawyer for advice on potential liability and legal strategies that can contribute to a successful outcome.
Source: Street Insider, "Cemtrex (CETX) Files $170M Libel Lawsuit Against Short Seller Richard Pearson," March 6, 2017