(Bloomberg) — US authorities have accused well-known short-seller Andrew Left of engaging in fraudulent activities through stock trades, social media posts, and research reports. This marks their most significant action in a long-running crackdown on traders who promote their bearish positions.
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The Securities and Exchange Commission (SEC) alleged on Friday that Left’s firm, Citron, made approximately $20 million in profits from illegal trading involving nearly two dozen companies. The Justice Department also filed a criminal case against Left, accusing him of securities fraud and lying to investigators about compensation from hedge funds.
These cases against Left are part of a broader US initiative to investigate the relationships between hedge funds and skeptical researchers. Over the past three years, these investigations have unsettled the industry as they looked into multiple money managers, activists, and transactions involving more than 50 stocks.
According to the SEC, Left would use social media or TV appearances to make recommendations about stocks in which he had short or long positions, often providing a target price. The Justice Department stated that Left would create a false impression that his public comments on a stock were consistent with his trading activity.
“Left knowingly manipulated stock prices by targeting stocks popular with retail investors and posting recommendations on social media to manipulate the market and make quick profits,” said the Justice Department.
James Spertus, Left’s lawyer, argued that the government’s case was flawed and that his client was not required to disclose his personal trading intentions. Spertus maintained that the information Left shared was truthful and essential for market efficiency.
Stock Trades
Prosecutors claim that Left would quickly close positions after releasing a research report or making comments to exploit short-term price movements.
According to the SEC, Left’s actions affected stocks such as Tesla Inc., Roku Inc., American Airlines Group Inc., and Nvidia Corp.
The SEC alleged that this fraudulent behavior deceived investors and allowed Left to profit from his Citron Research reports and tweets.
The mere presence of negative research from a prominent short-seller can trigger a stock drop before the market can assess its validity, which can be particularly detrimental to small investors. Companies and shareholders have raised concerns, leading to congressional hearings in the US.
The Justice Department indictment states that Left profited from his advance knowledge of market movements triggered by his actions. To succeed, investors needed to believe that Left’s recommendations were genuine, not just tools for his personal gain.
‘Candy From a Baby’
The SEC alleges that Left boasted to colleagues about manipulating retail investors with his statements, likening it to taking “candy from a baby.”
The SEC lawsuit details numerous social media posts, reports, and comments from Left between March 2018 and December 2020.
Left faces charges in a federal court in California, including engaging in a securities fraud scheme and making false statements to investigators. If convicted, he could receive over 25 years in prison.
Prosecutors assert that Left lied to law enforcement by denying any compensation exchange with a hedge fund. US authorities claim that Left received more than $1 million from two hedge funds.
–With assistance from Katherine Burton.
(Updates with Left lawyer’s comment in sixth and seventh paragraphs.)
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