On July 26, 2024, the Securities and Exchange Commission (SEC) filed a Complaint in the U.S. District Court in Los Angeles charging activist short publisher Andrew Left and Citron Capital, LLC, an investment adviser he operated, with securities fraud, alleging a manipulation scheme that targeted retail investors.  That same day, the Department of Justice (DOJ) announced a federal criminal indictment charging Left with multiple counts of securities fraud in connection with the same conduct.

This case follows a recent SEC settlement with Anson Funds Management, LP and Anson Advisors, Inc. (together, “Anson”).  According to the SEC’s Order, Anson failed to adequately disclose their work and economic arrangement with Left.¹

According to the SEC, from March 2018 to December 2020, Left published false and misleading statements regarding stock recommendations he made to retail investors via his online platform Citron Research.  The recommendations included representations about Left’s trading positions in target stocks and “target prices,” creating the false impression that his trading was aligned with his recommendations when, in fact, he immediately reversed position to profit from the price movements he knew would follow his reports and tweets.  The alleged scheme related to 23 stocks and generated approximately $20 million in illicit trading profits.

In published reports, tweets, letters, and media interviews, Left allegedly made false or misleading statements about his own trading in and/or exposure to target stocks, and the target prices he published.  As detailed in the Complaint, Left did not have a reasonable basis for the published price targets; evidence indicates the price targets were not intended to be targets but, rather, “catalysts” to induce retail investors to buy or sell the stock and move market prices so Left could trade against them; and Left sold at prices well above his published target prices for short recommendations and well below them for long recommendations.  At times, according to the Complaint, Left drastically revised price targets in draft reports leading up to their release or   published price targets inconsistent with his privately expressed views.

Here are two examples from the Complaint:

NVTA

• On July 17, 2019, with long exposure to Invitae Corporation (NVTA), Left promoted NVTA in a Citron Capital “investor letter” stating, “on the long side we’re most excited about our position in Invitae (NVTA)… we continue to add to our position at current levels… and expect the stock to trade at $100 in the next 24 months.”
• On July 18, 2019 and for the next week, Left and Citron Capital sold NVTA shares at an average price of $24.
• On July 31, 2019, Left again promoted NVTA, telling investors in a reprot, “will continue to stay long until the stock hits at least $65 as we believe it is on its way to $100.”
• The same day, Left and Citron Capital sold their shares between $27 and $28; they did not stay long in the stock until it hit $65.
• In the days leading up to the release of the July 31, 2019 report, Left had adjusted the NVTA price target in internal drafts from $60 to $100. At the same time, he told a colleague he wanted to “get the stock to 30” and asked, “What can I put in a tweet to juice it[?]”

CRON

• On August 27, 2018, Left messaged an Anson portfolio manager, “I have a hot voice in cannabis. Let’s take a vantage [sic] of it.”  Left instructed the portfolio manager not to over think Citron Research’s next target stock stating, “Stop being such a pussy.  It’s okay to be wrong.”  And he told him, “we can DESTROY CRON” and through a “cron short we could get 2 bucks,” referring to Cronos Group (CRON), a Canadian cannabis company.
• On August 29, 2018, with short exposure to CRON, Left sent draft bullet points to the Anson portfolio manager with a $6 price target for the stock, than another draft with a $5 target. On August 30, 2018, the portfolio manager sent a report to Left to be published through Citron Research, with the price target at $7.50 for CRON.
• That same day, Left published a report and tweet with a $3.50 price target: “$CROM tgt price $3.5M Everything that is contaminated about the Cannabis space. ALL HYPE with possible securities fraud.”
• In an interview on CNBC at the end of the day, Left was asked whether he continued to hold a short position in CRON: “what’s relevant to people watching is, are you just as short the stock right now as you were at the beginning of the day.” Left replied that he “took a small size position off today but I am still extremely short the stock” and repeated his recommendation that the stock would trade to $3.50.
• At the time of the interview, Left had already exited more than 75% of his short exposure to CRON. Left then bragged to the Anson portfolio manager that trading around recommendations to retail investors was like taking “candy from a baby.”

According to the SEC, Left also made false or misleading statements about Citron Capital having outside investors and Citron Research’s independence as a publisher.  For example, on August 16, 2019, Left published a long report on General Electric (“GE”) stock.  In the report, Left criticized a third-party short publisher’s report, published the day before, which had disclosed that he was being paid a percentage of profits from a hedge fund that was trading around his short report.

Left wrote:

No credible hedge fund or short seller would ever do this….  Unfortunately, what we have just witnessed with [third-party short publisher] is reckless, dishonest, and most importantly secretive—all which gives short selling a bad name… in 18 years of publishing, we have never been compensated by a third party to publish research.  More important, compensation tied to the ‘success of a trade’ would not pass internal compliance nor would it pass compliance of any fund that Citron would collaborate with on ideas. 

Contrary to these statements, the SEC alleges, ten months earlier, Left had received $1.1M from Anson in connection with publishing recommendations on two stocks; and, at the time he made these statements, Left was receiving compensation from a second hedge fund related to trading around stocks that were the subject of Citron Research reports, including GE.  The compensation from the second hedge fund, according to the Complaint, would eventually total $2.6M.

In addition to false and misleading statements, Left allegedly engaged in deceptive acts in furtherance of his scheme, including creating fake “investor letters” in order to create the false impression that Citron Capital was a successful hedge fund with outside investors when, in fact, it never had outside investors and traded Left’s own money; creating anonymous websites to amplify certain of his recommendations; and creating phony invoices for “consulting services” to conceal his receipt of compensation from Anson in exchange for publishing certain reports and tweets.

The SEC’s Complaint charges Left and Citron Capital with violations of § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and §17 of the Securities Act of 1933, and seeks, among other things, disgorgement, civil penalties, and a bar preventing Left from serving as an officer or director of a publicly traded company.

The DOJ’s indictment charges one count of engaging in a securities fraud scheme, 17 counts of securities fraud, and one count of making false statements to federal investigators.  If convicted, Left faces 25 years in prison on the securities fraud scheme count, 20 years on each securities fraud count, and five years on the false statements count.

S&K Observations

The SEC does not allege that it is a fraudulent practice to publish truthful, well-researched short reports with appropriate disclosures and, following their publication, take off risk.

We can see why portions of the complaint may be concerning to activist short sellers and publishers, but in each instance alleged—beyond the fact that Left took off risk while recommending investors sell a stock—there were false or misleading statements and/or deceptive acts that accompanied the trade.

In fact, in the Complaint, the SEC appears to take a moment to contrast Left’s conduct with the third-party publisher who issued the short report on GE, properly disclosing his financial arrangement with the hedge fund trading around his report.

All the same, short sellers are often unpopular including, at times, with the SEC.  To the extent this action could be viewed as a shot across the bow for short sellers and publishers, it is a warning to do it right.

For this reason, among other things, it is critical that all factual statements in published short reports be 100% accurate and that such reports contain appropriate disclosures concerning economic arrangements or incentives, and trading, so as not to mislead readers as to publishers’ activities.