SEC accuses well-known short seller and his company of fraud
The U.S. Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) have charged well-known activist and investor Andrew Left and his firm, Citron Capital, for their alleged involvement in a years-long $20 million fraud scheme. According to the agencies, the company issued false and misleading statements regarding investment recommendations on stocks. Left faces up to 25 years in prison for the charges, which include fraud involving Nvidia and Tesla. Note that it was allegations by Left that set off a wave of short-seller attacks last year against Kazakhstan’s Freedom Holding.
The accusations
According to the SEC press release, Left used his website, Citron Research, and associated social media platforms at least 26 times to publicly recommend long or short positions in the stocks of 23 companies, presenting these recommendations as aligned with his and Citron Capital’s own positions. In line with Left’s recommendations, the share prices of the target stocks moved more than 12% on average. The SEC claims that after the recommendations were published and the prices moved, Left and Citron Capital quickly switched their positions to profit from the movements, buying stocks immediately after advising to sell and selling stocks immediately after advising to buy.
In October 2018, the DOJ, which also brought charges, stated that Left took a long position in EV manufacturer Tesla and the next day posted on X (formerly Twitter) that the firm “holds a long position in Tesla this quarter;” however, within minutes, Left placed an order to sell more than half of the position, profiting at least $1 million, the DOJ alleges. The following month, Left similarly promoted his long position in Nvidia, which was trading at around $144 per share, claiming he expected the price to reach $165 per share, only to sell his entire position in less than two hours, the DOJ asserts.
The SEC claims that Left’s wrongdoing affected many stocks, including Roku and American Airlines Group, besides Nvidia. “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 states in its complaint. The mere publication of research from a well-known “bear” can trigger a sharp drop in stock prices before the market has a chance to assess its validity, which is especially hard on small investors who cannot react quickly. Left has also previously targeted companies in Canada, including Shopify, Valeant Pharmaceuticals International (now known as Bausch Health), and Canadian cannabis producers. In February 2021, Shopify, a target of short sellers, confronted Citron Research. Shopify stock had fallen 11.6% after Left stated that the company was “overselling” its profit potential. “We vigorously defend our business model and stand resolutely behind our mission and the success of our merchants,” Shopify said in a statement.
Left allegedly concealed that third parties, including hedge funds, inspired his comments and that, in exchange for compensation, he warned them before publishing his positions, allowing them to profit or minimize losses, the DOJ claims. “To maintain the false pretense that Citron’s recommendations and positions were sincerely held, defendant Left made false and misleading representations and half-truths about his economic incentives, conviction in Citron’s analyses, and valuations of Targeted Securities,” the DOJ states.
The complaint alleges that Left and Citron Capital made several false and misleading statements regarding their future actions. For example, it is claimed that the defendants informed the market they would remain long one of the target stocks (not named in the SEC document) until the price reached $65 per share, while they actually began selling at $28 per share. They also are said to have falsely represented Citron Research as an independent research outlet that never received compensation from third parties to publish information on target companies, even though the defendants had compensation arrangements with hedge funds. In 2019, Left publicly stated that Citron never received payment from third parties for publishing stock research, but the DOJ claims that Left received over $1 million from two different hedge funds in 2018 and 2019 that held short positions in stocks targeted by Left.
The Freedom case
Recall that Citron allegations set off a wave of short-seller attacks last year against Kazakhstan’s Freedom Holding. In the summer of 2023, Freedom became the subject of an investigation by the U.S. short-selling firm Hindenburg Research, which claimed that Freedom had close ties to Russia, engaged in market manipulation, and published false financial statements. In particular, the August 15 Hindenburg report alleged “brazen sanctions evasion,” while CEO Timur Turlov was said to still secretly control the Russian business, falsify revenue data, conduct risky operations with client funds, and manipulate the market regarding the company’s stock. The Hindenburg investigation pushed Freedom Holding’s stock down as much as 8%, but it rebounded during the same trading session.
In January 2024, an independent audit conducted by lawyers from Morgan, Lewis & Bockius, as well as the forensic accounting firm Forensic Risk Alliance, contradicted Hindenburg: “The external review found generally that the allegations in the Hindenburg Report did not take account of important facts and were not supported by evidence,” according to a Freedom Holding press release published on the SEC’s website. The external review was commissioned by the holding’s independent board members, despite what was perceived as the baselessness of the Hindenburg allegations.
“At that time, Freedom’s stock was the target of an information attack, and we see that Citron and Hindenburg were not averse to participating in such dark PR campaigns, making numerous false allegations to harm the company and its shareholders, forcing them to sell at a depressed price,” said a Freedom spokesperson.
What’s next for Left and Citron
Activist short sellers claim to play an important role in the market, while critics accuse them of “shorting and distorting,” which unfairly harms public companies. The charges against Left and Citron are the culmination of an investigation by prosecutors in Washington D.C. and Los Angeles and SEC investigators that began in 2019. Bloomberg first reported on the DOJ investigation in December 2021.
The case against Left is part of a broad U.S. effort scrutinizing the relationships between hedge funds and “skeptical researchers,” as short sellers are sometimes called. This has riled the industry for three years now, as investigators have sought information about dozens of fund managers and activists and transactions involving more than 50 stocks. “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 DOJ statement reads.
“Andrew Left took advantage of his readers. He built their trust and induced them to trade on false pretenses so that he could quickly reverse direction and profit from the price moves following his reports. We uncovered these alleged bait-and-switch tactics, which netted Left and his firm $20 million in ill-gotten profits, and we intend to hold Left and his firm accountable for their actions,” said Kate Zoladz, director of the SEC’s Los Angeles regional office. Among other things, the SEC seeks disgorgement, prejudgment interest, and civil monetary penalties against Left and Citron, as well as conduct-based injunctions, an officer-and-director bar, and a penny stock bar against Left.
“Some of the conduct described in the indictment is pretty normal in the short-seller community. You can still run afoul of securities laws when you lie about your position, your ties to hedge funds and the source of your search,” said Robert Frenchman of the New York law firm Dynamis. If Left is found guilty, he faces a maximum sentence of 25 years in federal prison for the securities fraud scheme, up to 20 years for each count of securities fraud, and up to five years for making false statements, the DOJ said.
