Andrew Left built a reputation on Wall Street as an outspoken investor skilled at making money by uncovering corporate frauds and betting against overvalued stocks. But federal authorities claim that Mr. Left sometimes misled his loyal followers about his intentions.
The authorities in Los Angeles filed criminal and civil fraud charges in July against Mr. Left, the founder of Citron Research, claiming he generated at least $16 million in illegal trading profits through stock manipulation. Prosecutors and regulators accused Mr. Left of using his fame to tell investors to do one thing while he traded the other way, failing to adhere to the price targets he published in reports on stocks.
The charges arose from a yearslong investigation into the activities of several traders known as activist short sellers: investors like Mr. Left who publicly publish critical reports on companies and then bet on a decline in those companies’ stock prices. Mr. Left was the lone short seller charged with wrongdoing and some legal experts are questioning whether the government overreached with some of its claims against him.
The charges against Mr. Left have also unnerved other activist short sellers. Some suggest Mr. Left became an easy target given his public profile and because short sellers are sometimes seen as a scourge on Wall Street, where most investors like to see stock prices go up instead of down.
Companies targeted by short sellers often push regulators and lawmakers to go after the investors, who say they feel unfairly maligned. The charges against Mr. Left appear to take issue with common practices by activist short sellers. Some have said they are considering revising their disclosures about trading policies.
Short sellers say they help keep markets in check, particularly during times of over-exuberance, when investors may overlook company fundamentals as share prices climb. Activist short sellers often compare themselves to investigative journalists, performing a valuable service by calling out frauds and digging up dirt.
Mr. Left, 54, who used to live in Beverly Hills, Calif., now resides in Boca Raton, Fla. A judge set bail at $5 million, and Mr. Left was required to post $1 million in cash or other collateral.
The crux of the criminal and civil charges against Mr. Left is that he never intended to trade in a way that was consistent with the recommendations in his reports.
The Securities and Exchange Commission called it a “bait and switch” strategy. “Left bought back stock immediately after telling his readers to sell, and he sold stock immediately after telling his readers to buy,” the agency said.
Federal prosecutors said Mr. Left used “exaggerated language” in his commentary and “exploited his ability to move stock prices” with his social media posts.
Legal experts said that authorities seem to be suggesting that when Mr. Left put a price target for a company’s stock in his reports — a common practice in stock research across the financial industry — he was bound to adhere to it and trade according to his own advice for a period of time.
“This is a tough case,” said Andrew Calamari, a lawyer with Finn Dixon & Herling and a former director of the New York office of the S.E.C. “They seem to be saying he made very specific misrepresentations that he was planning to hold a position and he didn’t. People can change their minds.”
James Spertus, a lawyer for Mr. Left, said his client, who pleaded not guilty to criminal charges, never deceived investors about his trading intentions.
“There are no lies here,” Mr. Spertus said. “Mr. Left is a trader and he is not holding his own investments until the targets are reached. No one expects him to.”
Authorities also contend that Mr. Left had financial arrangements with hedge funds, some of which traded around the release of his reports, and that he misled investors by not disclosing those deals. Federal prosecutors said Mr. Left lied to an investigator about his dealings with hedge funds.
The authorities have not alleged that Mr. Left’s research reports contained false allegations against the companies they covered. Investors and analysts like Mr. Left also have a First Amendment right to recommend to investors to buy or sell a stock.
Gina-Gail S. Fletcher, a professor at Duke University School of Law who specializes in market regulation, said traders are not required to immediately disclose their buy and sell orders. She also said the authorities might have had a hard time building a case against Mr. Left if he hadn’t published price targets.
“You are under no obligation to speak, but when you speak you have to be truthful,” she said. Still, there was something “unsatisfying” about the charges as presented, she said.
Representatives for the U.S. Attorney’s Office for the Central District of California and the S.E.C. declined to comment.
Legal experts said the charges against Mr. Left seem to overlook the fact that sometimes short sellers must abandon a price target to avoid what’s known as a short squeeze.
Short sellers make money by borrowing shares, selling them and then waiting for the price to fall to buy them back cheaper to return to the lender. In a short squeeze, the price of a stock rises instead of falls, forcing short sellers to buy the shares to limit the loss on their bets.
Mr. Left was one of the more notable short sellers who lost money in the 2021 meme-stock craze, as masses of individual investors helped drive up the share price of GameStop even though the video game retailer’s business was struggling. In part, these buyers saw their actions as a form of rebellion against the well-heeled investors betting on a decline.
Mr. Left and other sophisticated investors shorting GameStop had lost billions of dollars in the short squeeze.
One of the S.E.C.’s proposed remedies in its civil complaint against Mr. Left would forbid him from trading within five days of releasing a report. Some lawyers said that would allow for investors to gang up on Mr. Left and generate a short squeeze.
“That five-day period is totally arbitrary,” said Daniel Hawke, a lawyer for the firm Arnold & Porter and a former director of the S.E.C.’s market abuse unit. “Five days in a market that reacts in seconds or minutes to news is onerous and inequitable.”
Edwin Dorsey, who writes The Bear Cave, a newsletter that focuses on corporate fraud and misconduct, said he is surprised that authorities were putting so much emphasis on Mr. Left’s price targets.
“Price targets are fluid,” said Mr. Dorsey, who said he does not short shares of companies he writes about.
Mr. Dorsey said Mr. Left is an unusual target for the authorities to go after given that he has helped expose fraud at a number of companies, including the pharmaceutical firm Valeant. Mr. Left’s firm says on its site that “more than 50 companies” the company has written about have become the subjects of regulatory investigations.
“From my perspective, we are just in an era where there is just so much antipathy to short sellers,” said Carson Block, the founder of Muddy Waters Capital, another well-known activist short selling firm.
Federal authorities served a subpoena and a search warrant on Mr. Block and his firm during the investigation that led to charges against Mr. Left. The S.E.C. recently notified Mr. Block that it did not intend to file charges against him, according to a person briefed on the matter.
“Until we get to a point where a lot of people lose lots of money and see the risks as real,” Mr. Block said, “we are going to be decidedly unpopular.”
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