DOJ investigates Wall Street short sellers

DOJ+Short+Sellers+%E2%80%94+Credit_

M.V. Jantzen | flickr.com

Hailey Chin

The Department of Justice launched an investigation on Dec. 10 looking into allegedly influenced stock prices using illegal methods cause by short sellers.

Short sellers borrow company shares to sell on the open market in hopes that they will be able to purchase it for a lower price. As explained by The New York Times, “some Wall Street investors have made a profession out of exposing companies with shoddy or even fraudulent operations while betting that their share prices will fall.”

It comes as no surprise that short sellers are not favored by other market participants, nor the executives of companies whose stocks have been subjected to their practices.

“We are happy that the Justice Department is looking into this, as we have said for a long time our shareholders were the victims of an orchestrated ‘short-and-distort’ attack,” said Paul Pittman, the CEO of Farmland, a company whose shares fell 39% after a short seller accused the company of financial misdeeds, to The Wall Street Journal.

Short sellers can make profit in different ways, such as selling their insights and advice for a percentage of their gains. Whether short sellers have been taking this too far is the question that the DOJ seeks to answer through its investigation.

Short selling negatively impacts not only market participants but the short sellers themselves, due to the possibility of suffering a loss if the stock price were to rise.

Remember, short sellers bet on stock prices to drop, and money rides on this expectation. Failures can lead to drastic losses costing upwards of billions of dollars.

Recent examples include investors at the hedge fund Melvin Capital Management. They suffered a loss of $19 billion after a large number of investors purchased shares of GameStop Corp. and effectively drove up the price of stocks.

Short selling can be a risky game, but as is commonly said on the trading floor, “the higher the risk, the higher the return.” The short sellers behavior has crossed the minds of investigators.

The DOJ is specifically investigating whether short sellers conspired together to drive down prices by releasing reports ahead of time.

Prominent short sellers that the DOJ is investigating are Andrew Left and Carson Block, who both have received search warrants.

Left, an activist and founder of the online investment newsletter Citron Research, began short selling at 24. He publishes reports on stocks that he believes are either undervalued or fraudulent.

“It’s very tough to defend yourself when you haven’t been accused of anything,” Left told Bloomberg after his laptop was seized by the FBI. “I’m cooperating and I have full faith in the system and the First Amendment.”

Block, an investor and the founder of the investment firm Muddy Waters Research, became famous after accusing publicly traded Chinese companies of fraud. He has declined to comment on the investigation.

This investigation has marked an uncertain period for Wall Street. Depending on the results of the investigation, restrictions may be placed on short sellers, which will bring joy to small investors and large companies whose work and stocks have been impacted the most.