(Adds response from short-selling fund Viceroy, sanctions available to Bafin)
FRANKFURT, March 12 (Reuters) - Germany's Bafin said on Monday that "short-seller" Viceroy Research breached securities law with a report on ProSiebenSat.1 by not notifying the financial watchdog beforehand.
Under German law, any entity that is not a securities firm, a fund manager, a European Union administrative firm or an investment company that intends to publish recommendations on investments in assets must notify Bafin ahead of time, it said.
However, Viceroy said it had received legal advice that its report on German broadcaster ProSieben did not violate the law.
Funds engaged in so-called short selling borrow shares in a company which they sell in anticipation of a fall in the stock price, they are then able to buy the shares back at a lower level if there is a decline, making money on the difference.
ProSieben rejected the critical report by Viceroy that led to a drop of as much as 9 percent in its share price last week, saying allegations of questionable accounting contained in it were "unfounded and distorting reality."
Viceroy said it had published the research legitimately.
"Viceroy Research is entitled to views and opinions under the freedom of speech and public interest," it said in an emailed response to a request for comment.
"We have a full disclaimer to advise of conflicts. As stated previously, our research is from publicly available sources and easily validated."
Bafin also said Viceroy's website did not contain information on where the company was based.
Anyone found guilty of market manipulation under German law faces possible fines and in some cases up to 10 years in prison. (Reporting by Maria Sheahan and Joern Poltz Editing by Arno Schuetze/Douglas Busvine/Alexander Smith)