GameStop Short-Sellers Fear Justice Department Investigation

AMC and GameStop short-sellers fear they may bear the brunt of a renewed market manipulation investigation by the US Justice Department (DoJ).

Short-seller Andrew Left says he fears capture for doing something he believes is perfectly legal.

Short Sellers Prosecution for Predatory Trading

A few years ago, bipartisan politicians started investigating what they called “predatory” short selling that tanked stock prices and incurred major losses for everyday investors.

While federal investigators haven’t divulged details on who or what they are investigating, the DoJ’s head of market integrity and major fraud said a few weeks ago the public could witness the results of its short-selling probes.

The investigation has prompted Left and Carson Block, the founder of Muddy Waters research, to pause activities.

Left rose to prominence after retail investors gathered to create a squeeze on stock Left and others had shorted. Investors were betting against brick-and-mortar game retailer GameStop after the pandemic tanked sales in 2021.

Short-sellers borrow stock to sell it later and buy it back when its price falls. However, if the price rises, there is theoretically no limit on how much money the trader can lose.

A short-squeeze occurs when a stock price rises instead of falling, forcing the trader to supply more funds to keep their position open. If, instead of offering more funds, they can close the position, push the price higher, and force other investors to do the same.

Carried out repeatedly, this process pushes the price higher and higher in a process called a short squeeze.

Left’s Practices May be Market Manipulation

Activist short-sellers like Left investigate suspected irregularities that cause a company’s stock price to fall. They then line up a position, publish research, and wait for the stock price to fall. Left himself was banned by Hong Kong authorities for publishing a report about the crisis at Chinese property group Evergrande.

The speed at which their research is disseminated gives executives little time to respond, prompting criticism of the practice as unethical at best. The practice has driven some innocent companies out of business, argues former federal prosecutor Paul Pelletier. Moreover, US laws forbid trading methods that artificially influence stock price swings.

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