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DoJ Opens Criminal Probe Into Short Selling Research Firms, Hedge Funds - Report

The U.S. Department of Justice has opened a criminal probe into the practices of hedge fund and research firms that rely on short selling, Bloomberg News reported Friday.

The U.S. Department of Justice has opened a criminal probe into the practices of hedge fund and research firms that rely on short selling, Bloomberg News reported Friday, less than a day after a note from Hindenburg hived nearly $1 billion from the market value of Tecnoglass. 

Bloomberg said the investigation will be run by the DoJ's Los Angeles office, with help from Federal prosecutors, and will focus on how, or if, hedge funds track stocks targeted by the research firms prior to the publication of reports on specific companies. 

The probe will seek to discover if there was any improper coordination, or possible market abuses, and will include the study of dramatic movements in stocks such as Luckin Coffee and Banc of California, Bloomberg reported, citing sources close to the investigation. 

Short sellers are investors who bet against a certain stock by borrowing it from one party and then selling it on various exchanges or platforms in the hope of buying it back at a lower price in the future - and pocketing the profits.

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Wall Street pros argue that short sellers provide several key functions in the market, including price discovery and additional liquidity, while critics counter that some rely on "predatory" practices that can damage companies and wipe-out small investors.

So-called short reports have the potential to trigger wild swings in stock prices, as evidenced Thursday by the 36% plunge in shares of Tecnoglass  (TGLS) - Get Tecnoglass Inc. Report, which was targeted by Hindenburg Research with accusations of faked revenues and unseemly criminal ties. 

Earlier this year, Citron Research, one of the most high-profile short-sellers on Wall Street one of the initiators of the GameStop  (GME) - Get GameStop Corp. Class A Report phenomenon, said it will no longer produce reports that urge investors to bet against stocks.

The group, lead by Andrew Left, was initially targeted by retail investors from the Reddit chatroom Wallstreetbets for its views on GameStop Corp. GME and was partly responsible for the so-called "short squeeze" that ultimately lifted shares in the money-losing video game retailer more than 1700% over a twelve-day period.

The Securities & Exchange Commission issued a statement at the same time, vowing to "protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws."

"Market participants should be careful to avoid such activity. Likewise, issuers must ensure compliance with the federal securities laws for any contemplated offers or sales of their own securities," the statement added.