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. But Justice Department officials have been looking into whether some of these activist investors, known as short sellers, may be taking their tactics too far.
Prominent short sellers including Carson Block and Andrew Left have received search warrants as part of an ongoing investigation into possible manipulation of stock prices, according to two people familiar with the investigation. Details of the investigation were reported earlier by Bloomberg News and The Wall Street Journal.
Mr. Block, the founder of Muddy Waters Research, was served with a search warrant in the fall, according to one 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 the condition of anonymity because the details of the investigation were not public.
Subpoenas issued to several investors as part of the inquiry have asked about the sharing of information between activists betting against companies, according to two people familiar with the matter.
Subpoenas can be routine requests for information, but search warrants are a sign of a deeper inquiry. They are more specific and frequently involve the seizure of documents and equipment.
Mr. Left declined to comment on Wednesday. He told Bloomberg this month that he was cooperating and had “full faith in the system.” Lawyers for Mr. Block’s firm had no immediate comment.
A spokesman for the U.S. attorney’s office in Los Angeles, which is leading the investigation, declined to comment. A Securities and Exchange Commission spokesman also declined to comment.
Short selling involves betting that a company’s share price will fall: Investors borrow shares of a company and sell them with the plan to repurchase shares later at a lower price and return them to the lender. Then they pocket the difference.
It is a fairly common practice on Wall Street, and some short sellers will also publish research critical of a company’s operations as part of their bets. Reports distributed by short sellers have prompted regulators to look into companies including the electric-vehicle manufacturers Nikola and Lordstown Motors and the sports betting site DraftKings. William A. Ackman, the billionaire behind Pershing Square Capital Management, famously squared off against two other billionaires — Daniel S. Loeb and Carl C. Icahn — over the dietary supplement maker Herbalife a decade ago.
But short selling can also be risky. Last year, investors who had bet against shares of the video-game retailer GameStop were caught in a so-called short squeeze when a large number of retail investors bought shares of the company, pushing up its stock price. The squeeze left short sellers with heavy losses; one hedge fund, Melvin Capital, needed a $2 billion infusion from investors after its bet imploded.
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February 17, 2022 at 05:44AM
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Regulators Investigate Short Sellers Over Influence on Stock Prices - The New York Times
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