What are Bear Raids?

A bear raid happens when a group of investors try to force the price of a company’s stock down to make money. They try to “raid” the stock price like angry bears attacking. This is done by telling lots of bad news or spreading wrong rumors about the company. Bear raids are against the law if fake rumors are used.

How Bear Raids Work

Investors who do bear raids are usually big, rich hedge funds or groups of traders. They have lots of money to buy and sell stocks. Here’s how they raid a stock price:

1. Pick a stock: The bear raiders choose a company stock they think they can push down. It’s often a smaller company stock that doesn’t trade a lot.
2. Short the stock: The bear raiders “short sell” the stock. “Shorting” means they borrow the stock from someone else and sell it. They hope to buy it back later at a lower price.
3. Spread bad news: The bear raiders start saying very bad things about the company. They tell people the company is losing money, the CEO is bad, or products are failing. Some of it may be true but they exaggerate it a lot.
4. Create fear: The goal is make other investors very afraid so they sell the stock too. As more people sell, the stock price keeps going down.
5. Close the shorts: After the stock falls a lot, the bear raiders buy back the shares they shorted. Since they shorted at a high price and bought back at a low price, they make a big profit.

Why Bear Raids are Bad

Bear raids are seen as a big problem in the stock market. Here’s why:

They Hurt Companies

Bear raids can really hurt good companies. The companies didn’t do anything wrong, but their stock prices get crushed anyway. This is very unfair to the company and its employees.

They Trick Regular Investors

The false rumors and fear from bear raids often trick regular investors. These smaller investors believe the bad news, sell the stock, and lose money. Meanwhile, the big bear raiders get rich. It’s not right.

They are Illegal if Lies are Spread

It’s 100% against the law for bear raiders to knowingly spread false info to drive a stock down. That’s clear manipulation. But legal bear raids happen too if only true bad news is shared. Those are still viewed as shady and unfair by many.

Defenses Against Bear Raids

The stock exchanges have put some rules in place to try to prevent damaging bear raids. The key rules are:

Uptick Rule

The Uptick Rule says you can only short a stock when its last price move was up, not down. This prevents raiders from piling on and shorting more and more as the price is crashing straight down.

Zero Plus Tick Rule

This rule is similar. It says you can only short if the stock’s most recent trade was at a price equal to or higher than the previous trade. No shorting allowed on minus ticks.

These rules slow down bear raids a bit but don’t stop them entirely. The best defense is for the target company to loudly deny the false rumors. They need to get their truth out there to calm investors. But it’s hard to quiet the fear once a raid has started.

Real Examples of Bear Raids

There have been many famous bear raids over the years. Some key examples:

Enron and ExxonMobil

In 2001, short-sellers attacked energy company Enron by exposing its sketchy accounting. Enron collapsed into bankruptcy. The raiders, including Jim Chanos, made fortunes. But Enron workers lost jobs and savings. ExxonMobil faced raids too but fought them off.

Lehman Brothers

During the 2008 financial crisis, short-sellers targeted overleveraged banks like Lehman Brothers. Raids helped trigger Lehman’s failure, the largest bankruptcy ever. Smaller banks like Bear Stearns collapsed too under raider pressure.