The bears are on the table? The U.S. Department of Justice began investigating short trades

Recently, the U.S. Department of Justice is investigating the short-term institutions, focusing on the illegal behavior of the bears to cooperate with researchers to spread false and distorted information about the value of the company, and use this information to earn a large number of "α" in the short term.

According to Bloomberg, the U.S. Department of Justice's fraud team and federal prosecutors in Los Angeles will jointly conduct a criminal investigation into short-selling by hedge funds and research institutions. Authorities are delving into the symbiotic relationship between funds and researchers, looking for clues that hedge funds have profited from misconduct such as planning stock plunges and engaging in insider trading.

Numerous well-known short targets, including Luckin Coffee, Who to Learn from, Bank of California, Mallinckrodt, and many other well-known short targets have been closely watched by investigators, and dozens of companies will be on the first list of investigations. Many of the stocks on the list have long been shorted by short-selling institutions such as Citron, Muddy Waters Capital and Carson Block.

In addition, Bloomberg also said that short-selling agencies Anson Funds and Marcus Aurelius Value are also on the survey list.

While the survey "greatly shocked" a large number of short-selling institutions, it also thrilled the hordes of retail investors on Reddit, Stocktwits and Twitter. Many U.S. retail investors have long demanded that the authorities tighten their oversight of hedge funds, especially after the trading frenzy of stocks such as GME and AMC at the beginning of the year. According to Bloomberg, retail trader Brandon Fike excitedly said after learning the news:

"I'm very excited about the news. The link between short selling and corruption has been discussed so far this year, and now is the time for meaningful action against hedge funds. ”

However, objections were also expressed. A lawyer for Citron said the investigation may have been routine and that he did not believe that the "short operation market theory" espoused by the investigators in the relevant departments could be confirmed.

According to Bloomberg, Citron's lawyer James Spertus said:

"Citron and Mr. Left were successful because they conducted high-quality research and kept other bears strictly confidential until the report was published."

According to Bloomberg, authorities are investigating the financial relationship between hedge funds and researchers. In the United States, foundations sometimes provide researchers with substantial consulting fees to obtain timely and in-depth insights into certain companies. For many researchers, these consulting fees are their main source of income.

Against this backdrop, some hedge fund companies have a crooked mind, offering researchers targets that they can then issue "tough" research reports in the market.

In 2018, Dallas-based Sabrepoint Capital provided researcher Quinton Mathews with $9,500 a month in funding and encouraged him to delve deeper into real estate firm Farmland Partners. Subsequently, the researcher published an article under the pseudonym Seeking Alpha criticizing Farmland, causing the company's stock price to fall by 39% at one point. Farmland then filed a lawsuit to force Quinton Mathews to reveal his identity and retract the misrepresentation, which led to a settlement with him. In a statement from Quinton Mathews, he said:

"[The article] contains allegations of inaccuracies and falsehoods."

For years, the U.S. Securities and Exchange Commission (SEC) and the Justice Department have been pursuing hedge funds for "distortion and short-selling" behavior, that is, publishing misleading and false information to depress the stock prices of the companies concerned and profit significantly from the process.

Academia has also been encouraging the U.S. authorities to address the issue. At the beginning of last year, Mitts, Coffee and more than a dozen other well-known U.S. securities law experts jointly urged the SEC to establish a more perfect short-term regulatory policy, requiring short-term investors to disclose their closing time. If it is found that a short position is immediately closed for profit within a period of time when a negative report is issued, causing the stock price to fall, it will be convicted of "market manipulation".

According to a study by Joshua Mitts of Columbia University, bearish reports do leave bears with money-making opportunities. Joshua Mitts found that more than 1,700 anonymous reports by bears between 2010 and 2017 contributed to more than $20 billion in mispricing. The short panic caused by the bears' report will cause the stock price to encounter a short-term "panic sell-off" before it rebounds, although sometimes this time is short, but it is enough to make the experienced bears profitable.

It is worth mentioning that the days of the American bears this year can be described as "house leaks in the overnight rain".

Before the US Department of Justice announced the launch of the short trading investigation, in the context of the Federal Reserve's large release of water and the continuous rise of us stocks, Wall Street has a situation of "bulls making money and shorts crying".

Wall Street insiders mentioned that the days of bearish sadness first began with the old short-selling institution Citron. Because its boss made a "big taboo" of shorts, made short statements on social media and exposed his true position, Citron suffered from a large number of retail "network violence" at the same time, but also encountered a large number of retail investors and professional hedge funds mixed in the retail joint "short". Under the joint strangulation, the share price of game station (GME) soared, once exceeding $50 billion, forcing citron to abandon its nearly 20-year-old bank and announce that it would no longer publish short reports.

Also suffering heavy losses in the battle was Melvin Capital, which was able to tide over the storm after accepting a joint $2.75 billion injection from Citade and Point72.

On November 11, unable to stop the Fed's flood, the world's "most pessimistic" hedge fund "went out of business" in the longest bull market in the history of the US stock market. According to investor filings, the fund has fallen 2.6 percent so far this year, with assets falling to about $200 million from about $1.7 billion in 2015.

Russell Clark, fund manager at RC Global Fund, has spent much of the past decade shorting U.S. stocks, and has been stepping up his bearish bets in the face of relentless liquidity shocks from the Federal Reserve, the European Central Bank and global central banks. He said in 2019 that he was convinced the stock market crash was coming.

Documents released by the SEC on Nov. 15 also show that Michael Burry, a fund manager known for his "big shorts," has given up some of his biggest shorts. His fund, Lion Asset Management, pulled out of short bets last quarter on Tesla, Google parent Alphabet, "Wood Sister" Cathie Wood's ARK Innovation fund and the largest Treasury exchange-traded fund, iShares 20+ Year ETF.

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