US justice investigates hedge funds for short sales

The Justice Department of U.S opened an extensive criminal investigation into the short selling of hedge funds and research companies, in which he will examine their symbiotic relationships and look for signs that they improperly coordinated transactions or violated other laws for profit, according to people familiar with the matter.

The investigation, carried out by the department’s fraud section with Los Angeles federal prosecutors, investigates the way in which hedge funds take advantage of the studies and establish their bets, especially in the run-up to the publication of reports that move the actions.

Authorities are analyzing financial relationships between hedge funds of research companies, looking for signs that money managers tried to cause surprising stock falls or were involved in other wrongdoing, such as insider trading, two said. of the people, who asked not to be identified because the investigations are confidential.

In a sign of the magnitude of the investigation, federal investigators are examining the trading of at least several dozen stocks, including well-known short targets such as Luckin Coffee Inc., Banc of California Inc., Mallinckrodt Plc and GSX. Techedu Inc. They are also analyzing the participation of a dozen or more companies, although it is not clear which – if any – could appear as targets of the investigation. Toronto-based Anson Funds and anonymous research firm Marcus Aurelius Value are among the companies involved in the investigation, the people said. Other notable companies that have released equity studies that are being investigated include Carson Block’s Muddy Waters Capital and Andrew Left’s Citron Research.

The US investigation opens another front in an already treacherous time for those trying to profit from falling stocks. Some bearish funds gave up when government stimulus boosted prices during the pandemic. That pressure intensified when retail investors staged counterattacks against popular short targets, bidding on the shares to cause hedge fund losses this year. In late January, Citron promised to drop the short selling investigation and focus on betting long.

Meanwhile, companies criticized by short sellers have grown bolder and bolder to fight back, sometimes launching legal battles even when faced with government investigations that ultimately support the short sellers’ thesis. . Several company executives hoped that the US authorities would help focus even more on investor tactics.

Still, successfully filing charges against short sellers could be challenging, given that betting against companies and publishing studies deemed accurate is legal and even beneficial to the markets. So far, no one has been charged with a crime, and authorities may eventually decide not to press charges.

Government attorneys are trying to determine whether the short sellers were involved in any form of wrongdoing, for example, misleading the public about their funding of what appears to be an independent investigation, violating confidentiality agreements with the authors, or organizing the Stocks tumble to scare shareholders and exacerbate sales.

Spokespersons for the Justice Department and Muddy Waters declined to comment and there was no response to messages sent to Anson Funds and Aurelius.

A lawyer for Citron said he is aware of an industry investigation, but that it is common for US investigators to open and close cases. He expressed doubts that his theories are confirmed.

“Citron Capital and Mr. Left are successful because they conduct quality research and keep their reports secret from other short sellers until published,” said attorney James Spertus. “The theory that short sellers coordinate with each other before publishing reports is simply not true, at least as regards the Citron Capital and Andrew Left publications. I am hopeful that whoever is investigating this situation will reach that conclusion as soon as possible. “

Hedge funds are known for closing a wide variety of deals with researchers, sometimes paying hefty subscription fees to gain new insights into potential corporate problems, or even becoming an author’s primary source of funding. In one example, prominent financial investigator Harry Markopolos, who typically makes money from whistleblower awards, said he partnered with a hedge fund to share the profits when he published a report on General Electric Co.

Some hedge funds have been known to suggest targets to investigators, who then deliver scathing reports.