The 3rd U.S. Circuit Court of Appeals recently clarified the issue of what elements constitute the claim of “market manipulation” under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. In GFL Advantage Fund, Ltd. v. Colkitt, 272 F.3d 189 (3d Cir. 2001), the court recognized that although many courts have condemned the act of market manipulation, few have squarely discussed its elements.
The court addressed the issue in the context of the trading practice of short selling stock. In doing so, the court concluded that a claim for market manipulation based on short selling requires more than mere evidence that the short seller’s conduct affected the price of the securities traded. It also requires evidence that the short seller was able to do so by creating artificial market conditions through the injection of false information into the marketplace.
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