U.S. Prosecutors Investigate Short Selling Activity in Bank Shares

Reuters reported that according to a source familiar with the matter, federal prosecutors in Washington are investigating short sellers' activities during the recent volatility in US bank shares, which was sparked by the failure of three regional lenders since March.

Short sellers, who profit from betting that shares will fall, have faced increased scrutiny over the past week as government efforts to stabilize the sector have faltered and investor fears over the health of regional lenders have grown.

The Justice Department is interested in short sellers' activities around the banking crisis as a possible case of securities market manipulation. While other regulators are also assessing potential market manipulation by short sellers, the involvement of criminal prosecutors raises the stakes for potential wrongdoers.

SEC Chair Gary Gensler and California regulators have also been keeping an eye out for any potential misconduct. However, the standard for launching a formal investigation is high, and it remains unclear whether prosecutors will ultimately bring any charges.

Analytics firm Ortex data reveals that short sellers made $1.2 billion in paper profits during the first two days of May due to the banking crisis. However, a brief rebound in bank stocks on Friday reduced some of those negative bets. Critics of short sellers argue that they harm companies, but short sellers and their advocates claim they play an essential role in monitoring public firms.

Last week, the American Bankers Association asked the SEC to investigate significant short sales of bank shares that did not seem to reflect the issuers' financial condition. Since at least 2021, the Justice Department and the SEC have been investigating possible manipulation by short sellers and hedge funds in negative research reports.

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Reuters