As of recent, U.S Prosecutors, have been circling the idea of building cases off of a federal law known as RICO to pin a large hedge fund firms that have been short selling stocks. The Department of Justice has been recently been probing further on this matter. Hedge Funds and Research firms have been catching the eye of the public as speculation grows on the possibility of charges being filed. Short selling is defined as when one opens a position of borrowing a security, or share of a stock that the investor believes will decrease in value and selling it on the open market. They then plan to buy it back later at a lower price, making profit of the difference.
The Racketeer Influenced and Corrupt Organizations Act, known as RICO, was originally established in 1970 and allows for prosecution of all individuals involved in unlawful activities engaging in organized crime. In the past RICO charges have been used to target the mafia, who notoriously was involved in money laundering, drug trafficking and other forms of organized crime. It is well known that a RICO charge is a very serious matter, and the punishments from previous cases have been very intense.
Most recently, in September of 2021, R&B singer R.Kelly has been convicted by a federal judge on racketeering conspiracy charges, alleging that Kelly used his music career as a crutch to further pursue a criminal enterprise. That being said, RICO cases are not commonly seen in the financial sector, and it has not been made clear yet what specific charges, if any, will be pursued. However, a racketeering case would open the doors for prosecutors to investigate a number of investors, even if they indirectly participated in the criminal activity.
The DOJ (Department of Justice) has been probing further, in hopes to diminish corporate crime. A pattern of activity needs to be established, as well as the DOJ needs to continue to investigate whether funds have been a part of a “short and distort” scheme; meaning they need to find out whether companies have falsified research reports that include negative or misleading information about the company of a stock that they have placed trades on. Last year, the DOJ started with issuing subpoenas to firms including Muddy Waters Research, LLC and Citron Research, initially probing further on trading around negative reports. The retail investors who have been investing into stocks that are heavily shorted in the past year have been speculating that a lot of the recently discussed topics have been going on for a long time. Stay tuned as this is an ongoing investigation.