FBI agents raided the homes of prominent short sellers last year. Now, criminal charges may be imminent.

From a new report in Bloomberg:

Anxiety over the Justice Department’s investigation intensified several weeks ago when the head of its market integrity and major frauds unit predicted at a legal conference that the public will start seeing results within a few months. He didn’t elaborate. Since then, short sellers have buzzed over who among them might be in the crosshairs.

The Meme Stock Bear

Andrew Left, a hedge fund manager famous for shorting meme stocks, was one of the short sellers whose home was raided. As I predicted at the time, his investors have pulled out.

Again from Bloomberg:

Two years after FBI agents showed up at his California home to seize computers and phones, the short seller who terrorized more than 100 companies and riled an army of meme-stock traders is describing what it’s like to feel hunted. His pioneering firm, Citron Research, no longer has investors. He’s all but stopped pitching ideas publicly. He even wiped his once-feared Twitter account.

The Justice Department has not made any specific allegations against Left. No one has proven he’s guilty of anything.

But Left’s short positions have already cost him dearly. He took massive losses shorting GameStop Corp in 2021 and finds himself ostracized in the industry and personally.

What Is the Government Looking For?

Short sellers typically short a stock, publish a negative research report, then profit when the shares fall. While the Justice Department has not said what exact wrongdoing they’re looking for, they may be digging into those reports.

Short sellers can make false claims about a company, then quickly cover their position. This way, they make money when the stock drops.

Whether the allegations are true doesn’t matter.

Short sellers may also engage in “spoofing,” or rapidly placing and canceling orders. This can drive a stock’s price down right as the research report hits.

If prosecutors can prove that hedge funds knowingly published false research in order to profit, or manipulated markets with spoofed trades, they could be in serious trouble.

How it Ends

I find it hard to believe the government will spend years investigating an industry and not charge anyone. After all, taking down a big hedge fund manager will make a prosecutor’s career.

What’s more, short sellers might be the least sympathetic group of people imaginable. If politicians think jobs in their districts are at risk due to a short seller raid, they will act.

I expect to see criminal charges filed against some or all of the subjects of this probe within the next few months. The government takes its time but when it hits, it hits hard.

What do you think the future holds for short sellers? Leave a comment and let us know!

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Photo: Andrew Left