Muddy Waters founder Carson Block was reportedly served with a search warrant as Justice Department investigates illegal trading tactics by short-sellers

• Short-seller Carson Block of Muddy Waters was reportedly served a search warrant in October, according to The Wall Street Journal.
• The warrant is related to the Department of Justice's investigation into illegal trading activity.
• The Justice Department has seized hardware, trading records, and private messages, according to the report.

Short-seller Carson Block of Muddy Waters was served a search warrant in October by the FBI, according to a report from the The Wall Street Journal.

The warrant is related to an ongoing probe by the Department of Justice related to illegal trading activity by short sellers. Specifically, the Justice Department is looking into whether short-sellers conspired together to drive down stock prices by sharing critical research reports ahead of time, the report said, citing people familiar with the matter.

Insider reached out to Block for comment but did not yet receive a response in time for publication of this article.

The Justice Department has seized hardware, trading records, and private messages and is focused on the act of "spoofing" and "scalping," two tactics that could lead to big gains for traders. Spoofing is an illegal practice banned in 2010 in which a trader floods the market with fake orders in an effort to influence a stock price, while scalping is related to activist short-sellers selling out of their position for profits without disclosing it.

Short-sellers are an unloved group of market participants that get a lot of blowback from the companies they target and the investors of those companies. Some see their tactics as predatory, as they have the power to move a stock price that they might have a position in on the release of a critical report. Critics say these reports use misleading information that doesn't give a complete picture of the situation at hand.

But short-sellers play an important role in the market as some have a proven track record of identifying and exposing fraudulent companies that sometimes go bankrupt. Such fraudulent companies that were the target of short-seller research included Enron, Sino-Forest, and Wirecard AG, among others.

Block himself published research on Sino-Forest that exposed the company and was briefly short shares of Wirecard, which went bankrupt and wiped out $14 billion in market value in 2020 due to fraud.

Andrew Left of Citron Research is another prominent former short-seller that has also been roped into the investigation as federal agents took computers belonging to him, according to Bloomberg News. Left gave up on short-selling last year after the meme-stock mania led to a number of high-profile short squeezes.

All-in, the investigation by the Justice Department has so far ensnared nearly 30 investment and research firms that engage in short-selling. No one has been accused of wrongdoing and the investigation can lead to no charges being brought.