In the law discussion equivalent of a high-caliber wrestling match, law professors Moin Yahya and Larry Ribstein square off in this Point of Law discussion over a subject addressed in this earlier post — the increasingly common practice of short-sellers and class action securities fraud plaintiffs’ attorneys banding together to drive the price of a company’s stock down, and then — after profiting from the short sale of the company’s stock — cashing in again on a class action lawsuit against the company.
Professor Yahya:

Plaintiffs are now given a double incentive to bring lawsuits ñ and God knows this is the last thing we need to be giving them. If this practice is legal, then plaintiffs and their lawyers can now profit by simply announcing a lawsuit. In the extreme, a lawyer can simply announce a suit, profit from the drop in price, and then withdraw the suit. Despite recent federal legislation aimed at managing class actions, many lawsuits can still be brought in state court, and in many states, the standards for what constitutes a frivolous suit are fairly low.

Professor Ribstein:

The better attack on dumping and suing is based, not on false assumptions or on incorrect statements of the law, but on the specific harms that we can show it causes. For example, one way to enhance the effect of the filing of a suit is to accompany it with false statements about the stock. This is already actionable under the federal securities laws. Also, a plaintiff who sells short the stock held by other class members is probably not an adequate class representative ñ his interests in prosecuting the suit are not aligned with the interests of the other class members.