U.S. criminal authorities are gathering information on contacts between dozens of short selling hedge funds and research organizations as they investigate possible commercial abuses, according to a company that knows firsthand about the investigation.
The Ministry of Justice sent summonses requesting information for a list of more than two dozen companies to a smaller group of market participants. Among other things, they want calendar information and communications.
The list of names includes some of the most famous companies that publish negative research and funds that seek to win when stock prices fall. These include Muddy Waters, Melvin Capital, Hindenburg Research and Citron Research. Company spokesmen either declined to comment or did not answer phone calls.
The Ministry of Justice and the Securities and Exchange Commission, which are prosecuting civil market manipulation cases, seem to be looking at whether companies are coordinating or acting in a way that violates securities laws. The Ministry of Justice and the SEC declined to comment.
The investigation is still at an early stage and may never lead to any action, legal experts said. The summonses came out in the fall, but many of the funds and research organizations on the list said they had not contacted the authorities and had no reason to believe they were at the center of an investigation.
Short sales are deeply unpopular with some retailers who criticize companies that publish negative surveys and investors who bet that stock prices will fall. Lawmakers in Congress held hearings on the subject last year amid a madhouse over shares of memes such as GameStop.
Professional market participants defend the practice, saying it ensures that shares are valued fairly. They note that allegations made in some negative research reports have sometimes been followed by official observers in criminal cases against target companies.
Electric truck maker CEO Nicola is awaiting trial on charges brought first by Hindenburg’s short sellers. Trevor Milton pleaded not guilty to false allegations about the company’s vehicles.
The study, first reported by Bloomberg, has raised concerns in the industry, which has grown around short sales. Participants fear that the authorities have targeted the entire sector. “Everyone has small bits of things they’ve heard or scratched their heads about, damn it,” said one market participant.
Investigations into market abuse usually begin with relatively broad requests for information. Those who lead to accusations eventually face more specific accusations involving a smaller group of targets.
Additional reports from Stephanie Palma in Washington, DC, Harriet Agnew in London and Joe Rennison in New York