DOJ Short Seller Probe Fails To Silence Activists

“I don’t understand what this investigation is about,” said Andrew Left of Citron Research, acknowledging he received a subpoena.

Bigstock photo

Bigstock photo

A Department of Justice investigation into activist short sellers doesn’t seem to have stopped many of them from publishing their research.

Since the probe first came to light on December 10 in a Bloomberg news story, six new activist short reports have been published, according to Breakout Point, a research firm and data provider. As of December 20, the stocks those reports targeted had fallen 11 percent on average, according to Breakout Point.

“It’s been business as usual,” Breakout Point’s Ivan Cosovic told Institutional Investor in an email.

Viceroy Research Group, a firm headed by British short seller Fraser Perring, has had the best performance of the group with his short of Austrian technology company S&T AG, published on Dec. 16. The stock is down 26.5 percent since the report was released. S&T said it was analyzing the report but that some of its information was based on outdated information.

Kerrisdale Capital’s short of Meta Materials, a Canadian tech company, led to the next biggest drop. The stock fell 15.1 percent since Kerrisdale’s report was released on December 14. Meta did not respond to a request for comment by press time.


A short report on Ke Holdings, a Chinese housing transactions company, that was published by Carson Block’s Muddy Waters Capital on December 16, has led to a 7.2 percent decline in the stock price. The company said the report was “without merit.”

Bonitas Research’s short of Agrify, a Cannabis company, has been followed by a 14.9 percent drop in the stock price, while White Diamond’s short of, biometrics authentications company, hasn’t had much impact. The stock is down 0.6 percent since the report’s release. Both of those reports came out on December 16. Mephisto Research took on Ciiq Digital, a telematics products company, on December 18. The stock is down 2.3 percent from before the report’s publication and the market’s close on December 20.

Agrify,, and Ciiq Digital did not respond to requests for comment by press time.

The Justice Department’s probe of short sellers is focusing on the relationships between hedge funds and the activist research firms and is looking for evidence that they broke laws in coordinating trading or other activities, according to Bloomberg.

As first reported by II a year ago, some of the activist short sellers are given information by hedge funds and may get a cut of trading profits in what is called a “balance sheet” relationship. While there has been criticism of such arrangements, so far there have been no allegations that it is illegal, and the probe could go nowhere. One short seller called the investigation a “fishing expedition.”

Still, rumors of a probe have circulated throughout the short selling community for months, especially following the GameStop trading frenzy on heavily shorted stocks. It’s unknown how broad the investigation is, though one individual familiar with the investigation says it involves more than 50 different stocks.

The investigation is being run by federal prosecutors looking at the short research and trading in such targets as Luckin Coffee, Banc of California, Mallinckrodt and GSX Techedu, according to Bloomberg.

Marcus Aurelius Value, an anonymous short selling research firm, was one of the firms named as involved in the inquiry, according to Bloomberg, which it said was confirmed by individuals familiar with his situation. Aurelius has written on both Banc of California and GSX, according to the firm’s web site. Aurelius, which did not return a request for comment, has not published on its web site in 2021.

The most prominent short sellers that wrote research on the stocks named by Bloomberg are Citron Research’s Andrew Left and Muddy Waters’ Block.

Left confirmed to II that he had received a subpoena to provide trading information on a list of about 60 stocks, some of which he said he had not traded. (Left quit publishing activist short reports following the GameStop frenzy. He had been publicly short GameStop and lost money on the trade.)

Block declined to comment.

Both Left and Block wrote scathing reports on GSX, now called GAOTU Techedu, and ended up losing money when the stock soared above $100 on a short squeeze. It has since fallen to under $2, largely due to China’s crackdown on the for-profit education sector, but both short sellers had already covered, with a loss, by that time.

The two were on the opposite sides of Luckin Coffee, whose accounting fraud Block first brought to the market’s attention with a report he had received from a Chinese hedge fund short seller. Luckin quickly did its own investigation and admitted to many of the short sellers’ claims. It was delisted from the New York Stock Exchange in the summer of 2020, and the company settled an investigation by the Securities and Exchange Commission about a year ago.

Drugmaker Mallinckrodt, another Left short, was sued by the DOJ and filed for bankruptcy because of its opioid exposure, which was not an issue Left focused on in his reports.

“I don’t understand what this investigation is about,” Left said.