04/23/2012 01:16 pm ET

Walmart Mexico Probe Prompts Hedge Fund Short Selling

It looks as if the fallout from the Walmart Mexico bribery scandal is only beginning.

Hedge Fund investors say they may short shares of Walmart de Mexico, the big box retailer's Meixco division, after a New York Times investigation found that the company allegedly bribed officials to gain market dominance in the country and that top executives at Walmart covered it up. Walmart shares dropped nearly 5 percent Monday morning, in the first day of trading after the report.

Still, hedge fund investors say that they're more likely to target shares of Walmart de Mexico, which is 69 percent owned by Walmart, according to CNBC. When traders and investors sell a stock short, they are essentially betting that it will fall, and usually push the price down further.

"I would not consider Wal-Mart shares expensive, but I definitely would not be a buyer at these levels. I'm more interested in shorting the Mexico traded 'pure play,'" Daniel Yu, a private activist investor told CNBC.

The Securities and Exchange Commission has tried to limit the ability of hedge funds and others to short sell rapidly declining stocks and push them further into the ground, according to the NYT. In 2010, the agency reinstated the Depression-era "uptick" rule, which bans traders from short selling a stock unless there was a price uptick. The 2010 version of the rule only affects stocks that see a 10 percent one-day decline. Hedge funds still claimed the rule went too far when it was reinstated.

The possibility that the share price of Walmart and its Mexican division will fall is likely just one in a slew of worries company officials are facing in light of the NYT probe. The company will probably be subject to increased regulatory scrutiny in years to come and some top executives may end up leaving, according to Reuters.

In addition, Walmart exposed itself to legal risks after it disclosed that it's investigating its Mexico division for possibly violating the U.S. law that makes bribery in foreign countries illegal, the Wall Street Journal reports. Prosecutors have ramped up enforcement of the law in recent years, according to the WSJ, making Walmart vulnerable.