(Bloomberg) — U.S. authorities have charged famed short seller Andrew Left with committing fraud through stock trades, social media posts and research reports — their biggest move yet in a yearslong campaign against traders who promote their bearish bets.
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The Securities and Exchange Commission on Friday alleged that Left used his company, Citron, to make an estimated $20 million in illegal trading profits involving about two dozen companies. The Justice Department also announced a criminal case against Left, accusing him of securities fraud and lying to investigators about compensation he received from hedge funds.
The cases against Left stem from a broad U.S. effort to examine ties between hedge funds and skeptical researchers. The investigation has rocked the industry for three years as investigators sought information on dozens of money managers and activists, as well as transactions involving more than 50 stocks.
According to the SEC, Left used social media or television appearances to make recommendations about a stock in which he had a short or long position, sometimes giving a target price at which he believed the stock would trade. The Justice Department said Left created the false perception that his public comments on a stock were consistent with his business activities.
“The Left has deliberately exploited its ability to move stock prices by targeting stocks popular with individual investors and posting recommendations on social media to manipulate the market and make quick and easy money,” the Justice Department said in a statement.
Lyft’s attorney, James Spertus, said in an email that the government’s case was “flawed” and that his client was not required to disclose his personal business intentions. Spertus said the information Lyft released was “honest information,” which is what is needed to ensure efficient markets.
“The Justice Department and the SEC are threatening the integrity of the securities markets and putting the health of our financial system at risk by trying to silence a publisher of honest information who also trades the securities he writes about,” Spertus said.
Stock Trading
According to prosecutors, Lev would quickly close positions after issuing a research report or making comments, allowing him to profit from short-term price movements.
According to the SEC, Lyft’s misconduct has affected stocks including Tesla Inc., Roku Inc., American Airlines Group Inc. and Nvidia Corp.
“This fraudulent practice deceived investors and allowed Lev to use his Citron Research reports and tweets as catalysts from which he could make short-term profits,” the SEC alleged in the complaint.
The mere appearance of a research paper by a prominent startup can send a stock price tumbling before the market has had time to debate its merits—which can be especially hard for small investors who can’t react quickly. Companies and shareholders have increasingly complained about this, prompting congressional hearings.
Left benefited from his foreknowledge that he was about to make market moves, according to the Justice Department indictment. For his strategy to work, Left knew investors needed to believe that the recommendations and positions he made were genuine, not merely tools for personal gain, prosecutors said.
“Candy from a child”
The SEC alleges that Left bragged to colleagues that some of his statements caused individual investors to trade the way he wanted them to, and that it was like “taking candy from a child.”
The SEC lawsuit documents dozens of social media posts, reports and comments from Left from March 2018 through December 2020.
Lyft was charged 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 allege that Lyft lied to law enforcement when he said his company never exchanged compensation with a hedge fund. U.S. authorities allege that Lyft received more than $1 million from two hedge funds.
–With the assistance of Catherine Burton.
(Updates with leftist lawyer’s comment in paragraphs 6 and 7.)
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