Carson Block’s Muddy Waters among short sellers being probed by U.S. Justice Dept By Reuters

By Jody Godoy, Svea Herbst-Bayliss and Chris Prentice

(Reuters) -U.S. short seller Carson Block is being probed by the Justice Department as part of a wide-ranging investigation into short-sellers and hedge funds focused on suspected coordinated manipulative trading, according to two people familiar with the matter.

The Justice Department early last year issued subpoenas to dozens of firms, which included requests for funds’ trading records, as part of the probe, Reuters and other media outlets reported in December. The agency issued a second round of subpoenas months later, Reuters reported.

Block, the high-profile short seller behind privately held investment research firm Muddy Waters (NYSE:) Research LLC, is among those being probed, according to the people. Block was subpoenaed and served with an FBI search warrant last year, one of those people said. The Wall Street Journal reported Block was under scrutiny earlier on Wednesday.

Block, who made his name by exposing accounting problems at a slew of Chinese companies including Sino-Forest, and a spokesperson for the Justice Department declined to comment.

Reuters reported in December that Andrew Left of Citron Research was also being probed. Bloomberg News, which was first to report the probe, previously reported that Anson Funds and Marcus Aurelius Value are also under scrutiny.

In a December statement, Citron Research said it knew of “no wrongdoing” and had “cooperated fully with the government’s investigation.”

The U.S. Securities and Exchange Commission is also involved in the probe, according to a third person with knowledge of the matter. The SEC did not respond immediately to request for comment.

The sweeping probe is being led by a team based at the agency’s Washington headquarters that focuses on rooting out market manipulation, one of the first sources and two other people said. It is exploring relationships among the hedge funds and short-selling firms that publish negative reports on publicly-traded companies.

Short-sellers make profits by betting stocks will fall.

The practice of touting negative research and profiting when the stock falls has been criticized by public companies and some academics who say the allegations can be false and the traders are artificially deflating share prices to the detriment of shareholders.

Academics at Columbia Law School who have researched the issue have dubbed the practice “short and distort.” Block and other short-sellers who publicize their bearish views say they are protecting investors by exposing fraud or other problems.

For the Justice Department, the inquiry marks new territory for a team that has been building up its use of data surveillance to detect more sophisticated forms of market manipulation, according to one of the sources.

The agency is looking into whether the coordinated trading is designed to create boost trading volumes and drive prices down on news of the short report, two of the sources said.

That would be akin to so-called “spoofing” practices seen in the futures market, one of the sources said. Spoofing is a type of market manipulation where traders put in bids or offers to create the false impression of either demand or a lack of demand and profit when the market moves in response — misconduct the Washington-based Justice Department has been focusing on over the past few years.