US criminal authorities are gathering information on contacts among dozens of short selling hedge funds and research outfits as they investigate possible trading abuses, according to a firm with first-hand knowledge of the probe.
The Department of Justice has sent subpoenas asking for information about a list of more than two dozen firms to a smaller group of market participants. Among other things, they are asking for calendar information and communications.
The list of names includes some of the best-known firms that publish negative research and funds that seek to profit when individual share prices fall. Among them are Muddy Waters, Melvin Capital, Hindenburg Research and Citron Research. Spokespeople for the firms either declined to comment or did not return phone calls.
The DoJ and the Securities and Exchange Commission, which brings civil market manipulation cases, appear to be looking at whether the firms are co-ordinating or acting in a way that violates securities laws. The DoJ and SEC declined to comment.
The investigation is still in its early stages and may never lead to any action, legal experts said. Subpoenas went out in the autumn but many of the funds and research outfits on the list said they have not been contacted by authorities and have no reason to believe they are the focus of any investigation.
Short selling is deeply unpopular with some retail traders, who excoriate firms that publish negative research and investors who bet share prices will fall. Lawmakers in Congress held hearings on the subject last year amid the frenzy over meme stocks such as GameStop.
Professional market participants defend the practice, saying it ensures that stocks are priced fairly. They note that the allegations raised in some negative research reports have sometimes been followed up by official watchdogs with criminal cases against the target companies.
The chief executive of electric truckmaker Nikola is awaiting trial on allegations first raised by short sellers Hindenburg. Trevor Milton has pleaded not guilty to making false claims about the company’s vehicles.
The probe, which was first reported by Bloomberg, has led to disquiet in an industry that has grown up around short selling. Participants fear authorities have targeted the entire sector. “Everyone has little titbits of things they’ve heard, or is scratching their heads about what on earth it is about,” said one market participant.
Market abuse investigations typically start with relatively broad brush information requests. Those that lead to charges eventually home in on more specific allegations involving a smaller group of targets.
Additional reporting by Stefania Palma in Washington, Harriet Agnew in London and Joe Rennison in New York
