The persons behind the reports benefit from the price slump by reclosing their short position(s) through the purchase of now "cheaper" shares. Occasionally, the reports even expressly indicate that the author or persons associated with them hold net short positions in the respective financial instrument and are therefore consciously counting on prices falling.

Advice for investors

Investors are very unsettled by the information, which is usually spread aggressively and in a coordinated manner over several channels of communication – such as news agencies, social media and websites created by the disseminators expressly for this purpose.

At the same time, the turbulence on the market – triggered directly in particular by masses of sell orders from investors – is also caused by the fact that investors find it difficult to assess whether or not the information in the reports is correct in the first place. This is especially the case immediately after the first dissemination of such reports, which are also often written in English and very extensive.

Before selling or purchasing financial instruments, BaFin therefore advises investors to examine very carefully how reliable the information contained in the reports actually is. Before making an investment decision, they should inform themselves on the financial instruments concerned using other, reliable, sources.

Particular caution is required if the authors of the reports are persons or research houses previously unheard of. Investors should also be sceptical if the appearance or scope of the disseminated information allows one to conclude that it is the authors' objective to make it difficult to immediately examine the veracity of the information.

Issuers the target of short sellers

For issuers, it holds true that maximum transparency and good capital market communication reduce the risk of falling prey to such attacks.

If issuers are affected by a short attack, however, they should not lose any time in re-establishing lost market confidence, by publishing a correction, for example. Since information on issuers spreads very quickly on the market, quick action is required in order to distance oneself from the rumours and to avoid long-term damage to one's reputation.

This applies not only to negative reports but to positive ones too. Incorrect positive information harms the issuer as well, as it damages confidence in information relating to the issuer in general.

BaFin's warnings

BaFin published a warning for consumers in relation to short attacks on 9 May 2016 (only available in German). Since then, other similar reports have been published, which have triggered considerable price drops in the affected financial instruments. BaFin therefore reiterated its investor warning (again, only available in German) on 6 April this year, advising investors to check whether the information contained in research reports is correct before executing any transactions.

Despite increasing sensitisation of investors and issuers, it cannot be ruled out that some persons will continue to aggressively spread negative reports in order to exploit for their own benefit the uncertainty that will emerge immediately afterwards on the market.

In addition to the aforementioned short attacks, where the dissemination of negative information on issuers is the main problem, BaFin also regularly warns on its website against positive reports or stock tips. These often relate to largely unknown issuers and are frequently spread by way of cold calling or through e-mail spam. As a result, investors become aware of these issuers for the first time and make their investment decision solely on the basis of the information disseminated with the report.

Prohibited market manipulation

Where reports on financial instruments are disseminated, this may constitute market manipulation. This is prohibited – irrespective of whether the report is negative or positive in nature.

However, it is not the taking of short or other positions in financial instruments and the dissemination of the reports in itself that is problematic. This applies at least if, in the case of short positions for instance, the statutory notification obligation for net short positions is complied with.

The previous taking of positions can, however, constitute a conflict of interest. Market manipulation exists if specific conflicts of interest are not clearly pointed out to the investors when the report is published. A general note that conflicts of interest may exist on the basis of (short) positions entered into previously is not enough.

In addition, indications of market manipulation may exist if the publications are incorrect or misleading. In the latter case, the information may be correct in terms of its content but may be presented in such a way that it creates a false impression in the mind of the recipient with regard to the situation described.

Filing charges

If there are indications of a criminal offence in relation to the dissemination of reports on financial instruments, BaFin will file charges without delay with the relevant public prosecutor's office. In particular with regard to the dissemination of positive reports, BaFin has already carried out a number of investigations on the basis of suspected market manipulation and filed charges when these suspicions have been substantiated.

Numerous convictions – such as that of former TV stock exchange expert Markus Frick – show that the creation and dissemination of reports aimed at manipulating the market are in no way considered to be trivial offences. Just a few months ago, the range of possible sentences was expanded with the adoption of the First Act Amending Financial Markets Regulations (see expert article "Sanctions: First Act Amending Financial Markets Regulations - the new provisions of the German Securities Trading Act"). In the case of market manipulation perpetrated on a commercial scale, for example, sentences now range from one to ten years.