Valiant “has a long-standing policy of cooperating with any inquiries it receives from regulators and other government bodies,” but is not aware of being involved in the short-selling probe, chief compliance officer Michaela Beckman said in an email. “Compliance with securities regulations has always been a point of significant emphasis at the firm since inception and we have not been subject to any regulatory action regarding insider trading or short-selling in our 13-year history.”
“Ethics are a key part of my work, and I wouldn’t do anything unethical or untruthful,” said White Diamond’s Adam Gefvert. “I may write negative things about a company but I wouldn’t embellish anything. Everything is backed by proof.”
Not all of the firms enter into public battles with companies. Atom invests in short-selling hedge funds. And GrizzlyRock isn’t an activist short seller, founder Kyle Mowery noted, adding that he’s glad the Justice Department is looking into that space.
Representatives for the rest declined to comment or didn’t respond to messages.
Pressure On DOJ
Short selling often involves borrowing and selling shares, in a bet that they can be bought back cheaper later to lock in a profit. Investors may also use derivatives such as put contracts.
The Justice Department and financial regulators have faced a growing number of calls in recent years to dig into short sellers and their research partners. Corporate executives including the world’s richest person, Tesla Inc.’s Elon Musk, have decried short sellers, accusing them of maligning businesses for profit.
The Justice Department’s probe is being run by the fraud section with federal prosecutors in Los Angeles and there’s no public signal that authorities have drawn any conclusions. As Bloomberg previously reported, they’ve been examining trading in dozens of stocks, as well as relationships between funds and researchers, looking for signs that they manipulated markets or broke other laws to profit.
Tough Times For Shorts
The U.S. probe adds to a treacherous period for short sellers. Some bearish funds threw in the towel as government stimulus drove equity markets, a situation exacerbated during the pandemic. The pressure intensified during 2021’s meme-stock frenzy, when retail investors banded together to bid up shares of popular short targets, inflicting losses on hedge funds and other traders. By late January of last year, Citron vowed to give up short-selling research and focus on long bets.
Some of the loudest short-selling critics include executives at companies that were later found to have engaged in malfeasance. But legions of small investors have also expressed outrage over stock slumps, especially during last year’s wild trading. Amid the complaints, members of Congress started demanding more government scrutiny.
Researchers make money in a variety of ways beyond placing their own bets. Some sell insights to subscribers, or make arrangements to give clients, such as hedge funds, ideas in exchange for a cut of the profits. Paying customers often get to see research alleging problems at publicly traded companies before publication.
One area of focus is how investors set up their bets that stocks will decline. Investigators have been looking, for example, for signs that money managers might try to engineer startling stock drops to induce selling by market makers or other investors, or engage in other abuses, such as insider trading, people familiar with the matter have said.
—With assistance from Matt Robinson.
This article was provided by Bloomberg News.