DoJ Crackdown On Activist Short-Sellers Has Expanded To Target More Than 30 Firms

Bloomberg and others in the financial press reported late last year (supposedly coming from the DoJ) that the DoJ was plotting a massive crackdown on “activist” short-sellers who had apparently broken all kinds of securities market rules. Months later, it’s still not clear exactly what they did (something involving colluding to make prices move in their favor?), but the investigation has expanded to cover more than 30 firms, some of which aren’t even activist hedge funds.

Now, in what looks like an effort by the DoJ to try and “spin” their effort to cow short-sellers into obescience, Bloomberg has just published what appears to be the first deep dive into the investigation, which has sprawled well beyond Germany’s Wirecard-era order to ban short-selling and is now resembles something closer to China’s crackdown on short-sellers during the market ructions of 2015, when the CCP blamed them for a crash in domestic markets.

Shanghai Stock Exchange says to suspend short selling in CSI 500 ETF after outstanding securities borrowed by investors for selling reached a cap of 75% of the total ETF

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DoJ insists that the probe was inspired by a “growing number” of complaints asking that the government look into ‘cabals’ of short sellers, but from where we’re standing, it’s pretty obvious that the ones who complain about short-sellers are the same whose firms and investments are being targeted by them.

Meanwhile, the short-sellers – who all insist they haven’t done anything wrong – don’t exactly appreciate having their names dragged through the mud in the financial press – especially when many are claiming that they haven’t heard anything from the government.

Many on that roster — a veritable who’s-who of the activist short-selling realm — said they haven’t been contacted directly by the government, leaving some exasperated about being left in the dark. Reached for comment, Left also said he’s frustrated. “It’s very tough to defend yourself when you haven’t been accused of anything,” Left said.“I’m cooperating and I have full faith in the system and the First Amendment,” he added, referencing protections on free speech.

The problem is that the government has been asking to interview a large number of potential witnesses, which is apparently how the names of the firms got out:

Melvin Capital Management and founder Gabe Plotkin; Orso Partners and Nate Koppikar; Sophos Capital Management and Jim Carruthers; as well as Kerrisdale Capital Management. The list also includes well-known researchers such as Nate Anderson and his Hindenburg Research, as well as Fraser Perring and his Viceroy Research. Representatives for most of those firms – Melvin, Orso, Sophos and Hindenburg – declined to comment or didn’t respond to messages seeking comment.

“We haven’t been contacted by DOJ, SEC or any governmental authorities about any investigations,” Kerrisdale’s chief investment officer, Sahm Adrangi, wrote in an email. “We literally haven’t spoken to anyone at the government in many years.” Vicero

The list also allegedly includes the following:

Bloomberg had noted in December that Anson Funds, Marcus Aurelius Value, Muddy Waters Capital and Citron are part of the probe.

Other firms mentioned in requests include Atom Investors, Bonitas Research, Connective Capital Management, Falcon Research, GeoInvesting, Gotham City Research, GrizzlyRock Capital, J Capital Research, Oasis Management, Park West Asset Management, QKM, Sabrepoint Capital Management, Silverado Capital, Spruce Point Capital Management, Valiant Capital Management and White Diamond Research.

Representatives for many of those firms — among them Falcon, GrizzlyRock, J Capital, Oasis, Valiant and White Diamond — said they hadn’t been contacted by investigators. “It’s hard for us to comment on something we don’t know anything about,” said Taylor Hall, a representative for Oasis.

Many of the firms on this list above aren’t even activist funds.

And while representatives from the firms (the ones who opted to comment, at least) swore up and down that they don’t do anything illegal or untoward, it’s pretty clear that the DoJ hopes to make this a marquee investigation. But the government has a problem here, and it’s this: how is it going to look when the government goes after firms that have been lionized in the business press as white knights dedicated to rooting out fraud and corruption among publicly-traded firms?