Melvin shorts Coca-Cola. Before the position has to be covered, Melvin finds a rat in a 20 oz bottle of Diet Coke, and sues Coca-Cola for emotional and punitive damages, initially in the court of public opinion. Melvin claims the events of the first sentence and the events of the second sentence are unrelated and that claiming any causal chain is tantamount to defaming his good name.
Does the SEC smell a rat?
Does the court hearing Melvin’s civil suit smell a rat? Can Coca-Cola’s attorneys make reference to Melvin’s short position on Coca-Cola stock not long before everything came up ratty?
Good question. I doubt there is a GQ answer to this.
My guess is who has the better attorneys and how many people did you piss off? We had banks that crashed the global economy. The guy who got busted (and was ignored despite someone pointing out the problem all along) was Bernie Madoff. Why him? He ripped off the wrong people (i.e. he stole from other rich and powerful people).
I’ll ask at work tomorrow (I work at the Chicago Board of Trade which, while not a stock exchange, is loaded with people who know this stuff) and report back.
I doubt one product liability suit will affect the share price of Coke. People are trying these scams on big organisations all the time. It takes a fair bit to get traction in the media for this sort of thing. And if Coke found out about it, they most certainly would use it in their defence of the product liability action. And your response would be exactly as I have outlined above - I couln’t have done it becaue it manifestly wouldn’t work. And their response to your response would be that just because you are an incompetent stock manipulator doesn’t mean you weren’t trying to do it.
As attempts at stock manipulation go, it’s pretty lame. Would someone prosecute it? The inference of fraud drawn from the coincidence of the shorting and the product liability claim alone is not strong, but investigators dig around in the detail. There’s always more to it than just that - you are artificially constricting the facts that would emerge in any real world scenario to make any general conclusions about sufficiency of evidence impossible.
First of all, they would probably look at the guy’s trading patterns. Does he regularly short companies like this? Is he shorting a lot more shares than he usually does?
Another thing, and this is probably important if it comes to trial, is that I’m not sure that finding a rat in a bottle constitutes receiving “insider” knowledge that would lead to a “legal” insider trading violation. Since the bottle in question was presumably sold through ordinary public channels, anyone could have bought the bottle and come upon the rat, and so no breaches of confidentiality were committed.
Also, I would also agree with the fact that one rat may not be sufficient to materially affect the stock price. Imagine you owned a lot of Ford stock, and you found out that someone in Memphis bought a new Ford and the clutch was bad. Would you dump all your Ford stock just for that?
However, the Coke lawyers would argue “look at the pattern, what are the ods someone found damaging evidence against Coke just after betting the stock price would go down?”
A jury would hear all the arguments (hence the “who has best lawyers” comment) and decide. Unless the forensic evidence proves he faked a dead rat (I.e. hasn’t been in bottle long enough to have been done at bottling plant, he bought identical rat from pet store 2 weeks prior, etc.) there’s not “beyond reasonable doubt” to convict for fraud but odds are the jury in the civil suit would ind the odds and timing too coincidentaly (IMHO).
I agree with the remark about insider trading. Usually that’s about the activity of the company. If someone in complaints read the letter and ran out and shorted stock, maybe; its something they learned from their job. But the finder? Not likely.
DOn’t forget the OJ defense technique - the government may not convict you, but you’ll go broke paying for the lawyers to defend yourself.
Very interesting responses, everyone. I guess there’s a fair chance Melvin wouldn’t have a good belly laugh all the way to the bank because of his scheme, even if there’s no obvious reason it’s illegal. (Usually when I post one of these hypotheticals, I’ve missed some obvious point of law and even the restricted fact pattern I present in the OP is enough to make it a clear case of something-or-other.)
Actually, I’m marking this one ‘asked and answered’ unless someone comes up with a new point of law the previous posters missed: No, it wouldn’t necessarily be fraudulent, and there’s no obvious reason it would be stopped by the SEC or be fatal to his civil suit.
If Melvin only shorted 100 shares of Cola, that would be peanuts and meaningless. If he shorted 10,000 shares of Cola stock, that would suggest he placed the rat in the bottle.
PS. Melvin should get an award for finding a way to squeeze a rat in a bottle. He should have used a mouse.
I have no idea whether a cause-and-effect would be suspected or found by the SEC or a civil court, but I do know that “dead animal in a beverage container” cases have been handled by courts before.
Note that neither of the following dealt with the stock market effect, but they are factually on point otherwise. And while neither is American, I’d guess that the same basic issues and principles would be in play in the United States: what duty of care does the producer of a consumable owe to the consumer? How liable could the producer be for the effect upon the consumer? And so on. Anyway, for those who might be interested in how courts have decided such matters in the past, though not with the stock market angle, here they are:
