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(Bloomberg) — US authorities accused famed short-seller Andrew Left of committing fraud through stock trades, social media posts and research reports — their biggest move yet in a yearslong crackdown against traders who tout their bearish bets.
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The Securities and Exchange Commission alleged Friday that Left used his firm, Citron, to generate about $20 million in profits from illegal trading involving almost two dozen companies. The Justice Department also announced a criminal case against Left, accusing him of securities fraud and allegedly lying to investigators about compensation from hedge funds.
The cases against Left stem from a wide-ranging US effort to examine relationships between hedge funds and skeptical researchers. The probes have rattled the industry for three years as investigators have sought information on dozens of money managers and activists, as well as transactions involving more than 50 stocks.
According to the SEC, Left would use social media or television appearances to make recommendations about a stock, on which he had short or long positions, sometimes giving a target price at which he thought the stock would trade. The Justice Department said Left would create a false perception that his public comments on a stock were in line with his trading activity.
“Left knowingly exploited his ability to move stock prices by targeting stocks popular with retail investors and posting recommendations on social media to manipulate the market and make fast, easy money,” the Justice Department said in its statement.
James Spertus, a lawyer for Left, said in an email that the government’s case was “defective” and his client had no duty to disclose his personal trading intentions. Spertus said that the information Left published was “truthful information” which is needed for markets to be efficient.
“The DOJ and the SEC threaten the integrity of the securities markets and put the health of our financial system at risk by trying to silence a publisher of truthful information who also trades in the securities he writes about,” said Spertus.
Stock Trades
Left, according to prosecutors, would also quickly close positions after releasing a research report or making comments. That would let him take advantage of short-term price movements.
According to the SEC, Left’s misconduct touched stocks including Tesla Inc., Roku Inc., American Airlines Group Inc. and Nvidia Corp.
“This fraudulent practice deceived investors and allowed Left to use his Citron Research reports and tweets as catalysts from which he could derive short-term profits,” the SEC alleged in the complaint.
The mere appearance of research from a prominent bear can send a stock into a tailspin before the market has time to debate its merit — which can be especially hard on small investors who can’t react quickly. Companies and shareholders have increasingly cried foul, prompting US congressional hearings.
Left profited from his advance knowledge that he was about to trigger movements in the market, according to the Justice Department indictment. For the his strategy to work, Left knew that investors needed to believe that the recommendations and positions he set forth were sincerely maintained, and not just vehicles for him to personally profit, prosecutors said.
‘Candy From a Baby’
The SEC alleges Left bragged to colleagues that some of his statements caused retail investors to trade the way he wanted them to and that it was like taking “candy from a baby.”
The SEC’s lawsuit documents dozens of social media posts, reports and comments from Left from March 2018 through December 2020.
Left was charged in an indictment in federal court in California with one count of engaging in a securities fraud scheme, 17 counts of securities fraud and making false statements to federal investigators. If convicted, he could face more than 25 years in prison.
Prosecutors claim that Left lied to law enforcement by stating that his firm never exchanged compensation with a hedge fund. US authorities allege 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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