What is a 'Bear Raid'

A bear raid is the illegal practice of ganging up to push a stock's price lower through concerted short selling and spreading adverse rumors about the targeted company. A bear raid is sometimes resorted to by unscrupulous short sellers who want to make a quick buck from their short positions. A bear-raid target is generally a company that is going through a challenging period, since its vulnerable position makes it easy fodder for short sellers. While short selling per se is perfectly legal, coordinated short selling is viewed as market manipulation by the Securities and Exchange Commission (SEC), while spreading false rumors is tantamount to fraudulent activity.

BREAKING DOWN 'Bear Raid'

The objective of a bear raid is usually to make windfall profits in a brief time period through short sales. If the bear raid works and the target stock plunges, short sellers can buy the shares cheaply on the open market. These shares would be used to replace the ones that were borrowed earlier and sold at a much higher price, with the short sellers pocketing the difference as their profit.

In a typical bear raid, short sellers may collude beforehand to establish massive short positions in the target stock. Since the huge short interest in the stock increases the risk of a short squeeze that can inflict substantial losses on the "shorts," these short sellers cannot afford to wait patiently for months until their short strategy works out. So they embark on the next step in the bear raid, which is akin to a smear campaign, with whispers and rumors about the company spread by unknown sources. These rumors can be anything that portrays the target company in a negative light – allegations about accounting fraud, an SEC investigation, an earnings miss, financial difficulties and so on. The rumors may cause nervous investors to exit the stock in droves, driving it down further and giving the short sellers profits on a platter.

The repeal of the uptick rule in July 2007 is regarded by some experts as having made it easier for short sellers to embark on bear raids. In fact, the collapse or near-collapse of a number of leading financial institutions in 2008 is attributed in some circles to bear raids.

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