Underscoring the inquiry's sweep, federal investigators are examining trading in at least several dozen stocks, including well-known short targets such as Luckin Coffee, Banc of California, Mallinckrodt and GSX Techedu. And they're scrutinizing the involvement of about a dozen or more firms — though it's not clear which ones, if any, may emerge as targets of the probe.
Toronto-based Anson Funds and anonymous researcher Marcus Aurelius Value are among firms involved in the inquiry, the people said. Other prominent firms that circulated research on stocks under scrutiny include Carson Block's Muddy Waters Capital and Andrew Left's Citron Research.
The probe opens another front in an already treacherous era for those who try to profit on stock drops. Some bearish funds threw in the towel as government stimulus buoyed prices during the COVID-19 pandemic. That pressure intensified as retail investors organized counterattacks on popular short targets, bidding up shares to inflict losses on hedge funds this year. By late January, Citron vowed to give up short-selling research and focus on long bets.
Meanwhile, companies criticized by short sellers have become bold in firing back, sometimes launching legal battles even as they face government probes that ultimately support short sellers' theses. A number of corporate executives have been hoping U.S. authorities might help to further shift the focus to investors' tactics.
Still, successfully bringing charges against short sellers could be challenging, given that betting against companies and publishing research believed to be accurate is lawful and even beneficial for markets. So far, nobody has been accused of wrongdoing, and authorities may ultimately decide not to pursue charges.
Government attorneys are trying to determine whether short sellers engaged in some form of deception — for example, by misleading the public about their financing of what appears to be independent research, violating confidentiality agreements with authors, or orchestrating stock plunges to panic shareholders and exacerbate selling.
Spokespeople for the Justice Department and Muddy Waters declined to comment. There was no response to messages sent to Anson Funds and Aurelius.
An attorney for Citron said he's aware of an industry probe but that it's routine for U.S. investigators to open and close cases. He expressed doubt that their theories would be borne out.
"Citron Capital and Mr. Left are successful because they do quality research and keep their reports secret from other short sellers until publication," James Spertus said. "There is simply no truth behind any theory that short sellers coordinate amongst themselves before publishing reports, at least in regard to publications by Citron Capital and Andrew Left. I am hopeful that anyone investigating the issue will reach that conclusion as soon as possible."