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Other Voices: A new SEC focus on short activism? Activist hedge fund Lemelson Capital charged with unlawful short attack

Friday, October 12, 2018

By: Lawrence S. Elbaum, Clifford Thau, Patrick Gadson and Sarah C.C. Tishler

On September 12, 2018, the Securities and Exchange Commission charged hedge fund, Lemelson Capital and its adviser, Gregory Lemelson, with perpetrating an unlawful short attack on Ligand Pharmaceuticals. The SEC's complaint alleges that Lemelson built a short position in Ligand and then made a series of demonstrably false and misleading statements to destabilize the company's shareholder base and cause a drastic drop in stock price. The SEC alleges that as a result of this scheme, Lemelson reaped more than $1.3 million as investors sold their positions in Ligand after losing confidence in the stock.

Short Attack Activism in a Nutshell

A short attack is a coordinated campaign where an activist investor, oftentimes a hedge fund, takes a large short position in a company, and simultaneously releases negative information about that company in attempt to drive down the share price. In general, short sellers borrow shares from their brokers, sell them, and bet they can repay the brokerage with shares bought later at a lower price. Activist investors make money from their short attacks when they drive the price of a stock down, thereby reaping a profit by paying back the brokerage with lower-priced shares.

The 2018 Activist Investing Annual Review reports that, in 2017, there were 137 short activism campaigns in the United States, with 185 reported for 2016 and 186 reported for 2015. T......................

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