Justice Department Focused On Spoofing And Scalping In Ongoing Short Seller Probe


From ZH

The U.S. Department of Justice reportedly "seized hardware, trading records and private communications" belonging to well-known activist short seller Carson Block last October, as part of a wide ranging investigation into short selling, the Wall Street Journal reported this morning.

The ongoing DOJ probe, which has been in the news over the last several months, is focused on whether short sellers conspired to drive down the price of stocks by sharing reports and engaging in illegal trading practices, including spoofing and scalping.

It had previously been reported earlier this month by Bloomberg that electronic devices belonging to Citron Research's Andrew Left had also been seized from his home in early 2021.

The investigation is "being led in part by the U.S. Attorney’s Office in Los Angeles, an office known for prosecuting organized crime rings," the Journal wrote.

Spoofing is the process of bluffing bids and offers on a certain security, which can create the false impression of buyers and sellers when there are none. It has been against the law since 2010 and, since 2020, the DOJ has charged 20 people with crimes related to spoofing.

The work of the DOJ is being helped along by Columbia Law School professor Joshua Mitts, who published an academic paper called "Short and Distort" wherein he critiqued the tactics of short sellers. He "has been advising" the DOJ in its investigation, the Journal reported.

Days ago, a report by Dealbook stated that, based on Block's analysis, Mitts' academic paper overlooked that only about 20% of the study's authors (who are required to make a disclosure by Seeking Alpha before publishing) said they were short the stocks they were writing about.

"75 percent of the Seeking Alpha cases that the 'Short and Distort' research examined are not in the database of activist short seller campaigns compiled by Activist Insight, a leading provider," Block also pointed out.

Block has called Mitts “a corporate lobbyist masquerading as an academic.”

The critiques of spoofing aren't new, either, and were examined in the case of Muddy Waters' short of Burford Capital.

The London Stock Exchange said it found “no evidence whatsoever” of manipulated trading in Burford after Muddy Waters announced it was short the name in August 2019.

Burford also cited Mitts' report as part of their application to the LSE to try and reveal who was trading in the company's shares prior to a 60% fall in the company's stock price. The London Stock Exchange called the allegations "completely detached from reality" in 2020:

The London Stock Exchange said it had found “no evidence whatsoever” of spoofing or layering, in its own court filings, after a thorough investigation of Burford stock trades. It said it was “difficult to know where to begin with these extreme and wholly unjustified allegations” and attacked Burford’s “willingness to make serious allegations . . . that are completely detached from reality”.

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