The Securities and Exchange Commission (SEC) is investigating Sandell Asset Management following allegations that the firm engaged in naked short selling and violated short selling rules, by selling borrowed stock without approval, so distorting the market and driving down prices.
SEC Chairman Christopher Cox warned about naked short selling cases earlier this year, but this is the first action the SEC has taken on the issue.
Though hedge funds say the practice improves the efficiency of the market, the US authorities believe it can lead to market manipulation.
Sandell investors say the SEC notified them of the investigation by letter.