Some Wall Street investors have successfully exposed companies with shoddy or even fraudulent practices while betting that their stock prices will fall. But Justice Department officials have been looking into whether some of these activist investors, called a short sellermay have taken their tactics too far.
Two prominent short sellers including Carson Block and Andrew Left have received search warrants as part of an ongoing investigation into possible stock price manipulation, according to two people familiar with the investigation. Details of the investigation were previously reported by Bloomberg News and The Wall Street Journal.
Mr. Block, founder of Muddy Waters Research, was served with a search warrant in the fall, according to a person familiar with the investigation. A second person familiar with the investigation said Mr Left, who runs Citron Research, also had records seized under a search warrant early last year. The people spoke on condition of anonymity because the details of the investigation were not made public.
According to two people familiar with the matter, subpoenas were issued to a number of investors who inquired about information sharing among activists betting against the companies.
A subpoena can be a common request for information, but a search warrant is a sign of a deeper investigation. They are more specific and often involve the seizure of documents and equipment.
Mr Left declined to comment on Wednesday. He told Bloomberg this month that he is cooperating and has “complete confidence in the system.” Lawyers for Mr. Block’s firm were not immediately available for comment.
A spokesman for the US attorney’s office in Los Angeles, which is leading the investigation, declined to comment. A spokeswoman for the Securities and Exchange Commission also declined to comment.
Short selling involves betting that a company’s stock price will fall: Investors borrow shares of a company and sell them with a plan to buy back the shares later at a lower price and return them to lender. They then pocket the difference.
It’s a fairly common practice on Wall Street, and some short sellers will also publish important research into a company’s performance as part of their bets. Reports distributed by short sellers prompted regulators to take a look at companies including electric vehicle makers Nikola and Lordstown Motors and sports betting site DraftKings. William A. Ackman, the billionaire behind Pershing Square Capital Management, famously competes against two other billionaires – Daniel S. Loeb and Carl C. Icahn – on the manufacturer of dietary supplements. Herbalife a decade ago.
But short selling can also be risky. Last year, investors betting on the shares of video game retailer GameStop were caught in a so-called short sale when large numbers of retail investors bought the company’s stock, pushing up the price. The company’s stock went up. The squeeze causes short sellers to suffer heavy losses; a hedge fund, Melvin Capital, needed $2 billion from investors after its bet broke.
https://www.nytimes.com/2022/02/16/business/short-selling-stock-prices.html Regulators investigate short sellers for influence on stock prices