An ongoing investigation into the practices of several stock market short-sellers is heating up, and the Department of Justice is exploring if it can use a federal law that was originally enacted to prosecute the mafia, according to a report.
The Justice Department sent subpoenas to a number of short-selling firms last year.
According to two sources familiar with the situation, potential charges under the RICO act are still an option.
RICO charges have been leveled against Wall Street participants before. Michael Milken was charged with racketeering in the 1980s, but he reached a plea deal that did not include those charges. The price manipulation of precious metals was the subject of racketeering charges against executives from JPMorgan.
The current investigation into the trading practices of short-sellers is focused on whether or not the tactics were used around the same time a negative report was published.
According to previous reports, the DOJ seized hardware, trading records, and private messages from various short-sellers and is focused on two practices that could lead to big gains for traders.
In 2010 the practice of spoofing was banned in order to make the market more efficient. Activist short-sellers are selling out of their positions for profits without revealing it.
Short-sellers get a lot of blowback from the companies they target and the investors of those companies. Some see their tactics as predatory, as they often have the power to move a stock that they might have a position in by releasing a critical report. Critics say the reports use misleading information that doesn't give a complete picture of the situation.
Some short-sellers have a track record of exposing fraudulent companies that go bankrupt. Among the companies that were the target of short-seller research were Enron, Sino-Forest, and Wirecard AG.
One person who is happy with the investigation is Musk.
The Justice Department is investigating short sellers. Musk said in an e-mail to CNBC that the SEC should have done something about it.
The position of Musk against short-sellers is unsurprising given that he was a popular target for short-sellers for a long time. According to data from Koyfin, only 2% of the shares ofTesla were sold short in 2019.
The investigation by the Justice Department has reached nearly 30 investment and research firms that engage in short-selling. No one has been accused of wrongdoing, and the investigation may not lead to charges being brought.
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