DOJ Short-Selling Probe Eyes Bets on Amazon, Microsoft and JPMorgan
Matt Robinson and Tom Schoenberg
Mon, September 12, 2022
(Bloomberg) -- Federal investigators searching for collusion among short sellers have posed a surprising question in recent months:
US prosecutors have sent subpoenas that ask about transactions in a variety of blue-chip stocks to some of the same short sellers who previously responded to inquiries about a long list of lesser-known companies, according to people familiar with the matter. Those prior demands were part of a look at how bearish investors gather and publish research about companies with the aim of profiting when stocks drop.
The demands make clear that authorities are continuing to amass vast tracts of data. In earlier requests that emerged publicly in December, investigators gathered information on dozens of investment firms and researchers, as well as transactions involving more than 50 stocks. People with knowledge of those inquiries have said authorities are looking for evidence activist firms sought to exacerbate stock drops or otherwise manipulate markets, potentially through a variety of strategies.
But activist short sellers don’t typically target the world’s most valuable companies -- which makes the latest requests all the more puzzling.
Giants like retailer Amazon, software powerhouse Microsoft and JPMorgan, the largest US bank, are closely scrutinized. Their share prices are anchored by legions of index-tracking funds that have to own them, as well as institutional buyers such as pensions with long investment horizons. This leaves little room for short sellers proffering bearish forecasts to move stock prices more than, say, the underlying economy does.
Smaller companies, on the other hand, don’t attract as much attention from market professionals or index funds and are thinly traded, leaving them vulnerable when short sellers present evidence of malfeasance that scares off individual investors.
The look at megacap securities suggests investigators found something among the reams of data culled from the first round of subpoenas issued to individuals and firms last year, said James Cox, a professor at Duke University School of Law.
“It doesn’t surprise me that they’ve come back with another round of subpoenas,” Cox said. “There’s a learning curve for the government when it comes to market-manipulation cases.”
Spokespeople for the Justice Department and Securities and Exchange Commission, which is running a parallel investigation, declined to comment. Representatives for Amazon, Microsoft and JPMorgan also had no comment.
Since subpoenas went out a few months ago, word has percolated through the gossipy world of short sellers, and so too has conjecture about what theories the feds might be exploring on the hunt for illegal collusion. Of note, the latest subpoenas were issued under prosecutors who took over after colleagues left the department for private practice.
While it’s unclear what kind of trading patterns investigators may be zeroing in on, potentially abusive short-selling practices can include spoofing, in which traders rapidly submit and cancel orders to mislead the market, and matched trading, which usually involves a few parties working together, arranging trades designed to set prices or inflate volume and create the appearance of interest in a stock.
“It certainly suggests that they’re still working and that they’re following the path that the documents and the information from witness statements may be providing to them,” said Ken Joseph, a former SEC enforcement official who’s now a managing director at Kroll LLC.
The subpoenas aren’t the only movement in the case. The SEC is on the hunt for possible cooperators. The regulator recently sought assistance from a researcher regarding several short-selling and research firms under scrutiny, according to two people who asked not to be named in order to protect the confidentiality of that query. The SEC didn’t respond to messages seeking comment.
As Bloomberg previously reported, the Federal Bureau of Investigation seized computers from the home of prominent short seller Andrew Left, the founder of Citron Research, in early 2021. In October, Carson Block of Muddy Waters and two of his associates had their phones taken while also receiving a subpoena and search warrant. Around that time, the Justice Department subpoenaed other market participants seeking communications, calendars and other records relating to almost 30 investment and research firms, as well as three dozen individuals associated with them.
No one has been accused of wrongdoing. The opening of an investigation doesn’t necessarily mean that any claims will be brought.
The demands make clear that authorities are continuing to amass vast tracts of data. In earlier requests that emerged publicly in December, investigators gathered information on dozens of investment firms and researchers, as well as transactions involving more than 50 stocks. People with knowledge of those inquiries have said authorities are looking for evidence activist firms sought to exacerbate stock drops or otherwise manipulate markets, potentially through a variety of strategies.
But activist short sellers don’t typically target the world’s most valuable companies -- which makes the latest requests all the more puzzling.
Giants like retailer Amazon, software powerhouse Microsoft and JPMorgan, the largest US bank, are closely scrutinized. Their share prices are anchored by legions of index-tracking funds that have to own them, as well as institutional buyers such as pensions with long investment horizons. This leaves little room for short sellers proffering bearish forecasts to move stock prices more than, say, the underlying economy does.
Smaller companies, on the other hand, don’t attract as much attention from market professionals or index funds and are thinly traded, leaving them vulnerable when short sellers present evidence of malfeasance that scares off individual investors.
The look at megacap securities suggests investigators found something among the reams of data culled from the first round of subpoenas issued to individuals and firms last year, said James Cox, a professor at Duke University School of Law.
“It doesn’t surprise me that they’ve come back with another round of subpoenas,” Cox said. “There’s a learning curve for the government when it comes to market-manipulation cases.”
Spokespeople for the Justice Department and Securities and Exchange Commission, which is running a parallel investigation, declined to comment. Representatives for Amazon, Microsoft and JPMorgan also had no comment.
Since subpoenas went out a few months ago, word has percolated through the gossipy world of short sellers, and so too has conjecture about what theories the feds might be exploring on the hunt for illegal collusion. Of note, the latest subpoenas were issued under prosecutors who took over after colleagues left the department for private practice.
While it’s unclear what kind of trading patterns investigators may be zeroing in on, potentially abusive short-selling practices can include spoofing, in which traders rapidly submit and cancel orders to mislead the market, and matched trading, which usually involves a few parties working together, arranging trades designed to set prices or inflate volume and create the appearance of interest in a stock.
“It certainly suggests that they’re still working and that they’re following the path that the documents and the information from witness statements may be providing to them,” said Ken Joseph, a former SEC enforcement official who’s now a managing director at Kroll LLC.
The subpoenas aren’t the only movement in the case. The SEC is on the hunt for possible cooperators. The regulator recently sought assistance from a researcher regarding several short-selling and research firms under scrutiny, according to two people who asked not to be named in order to protect the confidentiality of that query. The SEC didn’t respond to messages seeking comment.
As Bloomberg previously reported, the Federal Bureau of Investigation seized computers from the home of prominent short seller Andrew Left, the founder of Citron Research, in early 2021. In October, Carson Block of Muddy Waters and two of his associates had their phones taken while also receiving a subpoena and search warrant. Around that time, the Justice Department subpoenaed other market participants seeking communications, calendars and other records relating to almost 30 investment and research firms, as well as three dozen individuals associated with them.
No one has been accused of wrongdoing. The opening of an investigation doesn’t necessarily mean that any claims will be brought.
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