Last week, media outlets reported that the Department of Justice has launched “an expansive criminal investigation into short selling by hedge funds and research firms.” Among other things, the government is studying the relationships between hedge funds and the sources that publish reports that affect how a company’s stock price is performing. In other words, the government is scrutinizing whether firms that publish negative reports on certain companies are colluding with hedge funds that are shorting those companies’ stocks, and investigators are also looking into potential insider trading and other abuses.
The investigation is being run by the DOJ’s office in Los Angeles, and subpoenas have already been sent out. Some firms have already been identified as potential targets, including Anson Funds, Marcus Aurelius Value, Luckin Coffee, GSX Techedu, and others. The investigation comes after SEC officials announced they were considering additional regulations requiring investors to disclose more information regarding short selling and after the short squeeze involving Gamestop in January 2021. Already, some firms have stopped or reduced their practices of publishing reports that recommend shorting stocks in certain companies.
It remains to be seen whether the DOJ’s aggressive posture will result in indictments and criminal prosecutions.