## Facts

- LTV Corp. entered Chapter 11 bankruptcy, and its reorganization plan indicated that old common shares would be exchanged for new shares with only minimal value per old share.
- Despite the publicly available valuation information, old LTV shares traded at higher market prices after the plan became public.
- Scattered Corp. formed the view that the old shares were overvalued and entered extremely large short positions in old LTV stock, at times exceeding the number of shares outstanding due to short-sale mechanics.
- Sullivan & Long, Inc. and other buyers purchased LTV shares in transactions where Scattered was the short seller and later incurred losses when the price declined.
- The buyers sued under the Securities Exchange Act of 1934, alleging Scattered’s concentrated short selling unlawfully manipulated the market by artificially depressing the stock price.
- The district court dismissed the complaint under Rule 12(b)(6) for failure to state a claim, and the buyers appealed.

## Issues

1. Whether large-volume short selling, based on publicly available information and without false statements or sham transactions, can constitute “market manipulation” under the Securities Exchange Act of 1934.
2. Whether a trading strategy is actionable manipulation solely because it predictably drives the market price down and causes losses to counterparties.

## Decision

- The Seventh Circuit affirmed the Rule 12(b)(6) dismissal.
- The court held that heavy short selling—even if intended to move price downward—is not actionable manipulation absent deceptive conduct, such as false statements, concealment, or sham trades creating a false appearance of market activity.
- The complaint failed because it alleged aggressive trading on public information rather than deception or prohibited trading devices.

## Legal Principles

- “Market manipulation” under the federal securities laws is a term of art focused on deceptive practices that mislead investors by creating a false appearance of supply, demand, or market activity.
- Ordinary market transactions that reflect a trader’s genuine view of value, even if large and price-moving, are not “artificial” merely because they affect price through supply and demand.
- Trading on publicly available negative information, without misrepresentation, nondisclosure of a duty-bound fact, or sham trading, does not state a manipulation claim under the Exchange Act.
- Securities laws do not insure investors against losses from adverse price movements caused by lawful trading.

## Conclusion

Because the buyers alleged only massive short selling grounded in public information and did not plead deception or sham market activity, the Seventh Circuit held the conduct was not actionable market manipulation and affirmed dismissal for failure to state a claim.


Sullivan & Long, Inc. v. Scattered Corp., 47 F.3d 857 (7th Cir. 1995)