“Citron Capital and Mr. Left are successful because they do quality research and keep their reports secret from other short sellers until publication,” said the lawyer, James Spertus. “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.”
Funding Research
Hedge funds are known to strike a wide variety of deals with researchers, sometimes paying handsome subscription fees for fresh insights into possible corporate trouble, or even becoming an author’s primary source of funding. In one example, prominent financial investigator Harry Markopolos, who normally makes money from whistle-blower awards, said he partnered with a hedge fund to share profits when he released a report on General Electric Co.
Some hedge funds have been known to suggest targets to researchers, who then deliver scathing reports.
One cautionary tale emerged in court after Dallas-based Sabrepoint Capital agreed to pay a short-selling researcher a monthly retainer of $9,500 in 2018. Sabrepoint encouraged him to dig into real estate company Farmland Partners Inc. The researcher, who also wrote publicly under a pseudonym, later published an article on Seeking Alpha, setting off a 39% drop in Farmland’s share price. The company sued and used a judge’s order to force him to reveal his identity: Quinton Mathews.
Mathews later said in a statement that he subsequently learned his article “contained inaccuracies and false allegations” and retracted it. He and Farmland reached a settlement. Sabrepoint has said it didn’t know about the Seeking Alpha article.
Farmland also is on the list of stocks that the Justice Department is examining. Lawyers for Sabrepoint and Mathews declined to comment.
The Justice Department unit handling the inquiry already has a formidable reputation on Wall Street. It recently brought several cases against global banks and traders for illegal spoofing of precious metals and Treasury futures. As part of that probe, JPMorgan Chase & Co. paid more than $900 million in penalties after its traders placed and canceled orders for commodities to benefit positions held by the bank or prized hedge fund clients. Those cases were brought by analyzing trading data for suspicious patterns and then attributing it to individual traders.
While prosecutors in the short-selling investigation issued subpoenas as recently as October, the effort has been underway much longer, the people said.
The inquiry gained momentum after U.S. lawmakers called for more scrutiny of short sellers following the so-called meme-stock trading frenzy that erupted in January. In a single week that month, retail investors sent the price of GameStop Corp. soaring more than 700% before brokerages began limiting bets. Some organizers of the buying spree claimed hedge funds had been unfairly using their market clout to drive down stocks.
Lawmakers have since held multiple hearings on the fracas, at times discussing whether to force short sellers to boost disclosures.