Short sellers are like Dr. Jekyll and Mr. Hyde: Some exist ethically to uncover business fraud, while many are the fraud, targeting publicly traded companies to tank their stocks for personal gain. In either case, short-selling schemes demand greater scrutiny that chief compliance officers and in-house counsel can no longer afford to ignore.
In the United States, short selling—the practice of investors betting on a company’s stock price falling—is not, per se, illegal. A legal short sale works like this: An investor borrows shares—from a financial institution, for example—at the current market share price to then immediately sell. If the stock price falls, the investor buys back shares on the open market to return the borrowed shares to the lender and profits the difference.
