Some thoughts on the Andrew Left indictment

Or what happened to the short-seller investigation from the DOJ

Those who follow the gutter-end of the stock market will already know of the indictment of Andrew Left - an early and prominent activist shortseller.

I am fascinated.

I have known Left for a number of years. We communicated by email when I was a nobody and he was quite famous. I met him a couple of times later - and decided to avoid him thereafter. I thought him “sharp” in the Australian slang sense of the word - aggressive - and at the edge of the law - but probably careful to stay (just) within the lines.

I don’t enjoy dealing with “sharp” people. Avoidance is safe.

Because I thought him likely to be legally aggressive, but to stay within the lines - I was surprised at the indictment.

You can find the indictment here.

Left’s reputation

I started reading Andrew Left’s Citron Research about twenty years ago. (I read it far less intensely than I used to these days). In those days he was pointing out fraud after fraud after fraud. And he was almost always right.

And it was always clear he traded around his research reports. He often (indeed almost always) called out fraud. And he was right so much of the time that you were right to trust first and verify later.

The legal problem the indictment has

Left is accused of spreading false information about stocks, causing the price to move sharply and trading around those price movements - even if he implies that he is holding (or shorting) stocks for the long term.

I am a bush lawyer - and someone with more legal expertise may deem to correct me - but there is a general problem with this case.

1. Buying some short dated options (puts/calls) and making a profit from trading them is legal.

2. Saying things that you believe about a company (even if they are wrong) is first amendment protected speech. You have to believe these things though - you can’t knowingly lie.

3. Saying things you believe (first amendment protected free speech) cannot make a legal trade illegal otherwise it would be a law against constitutionally protected free speech.

I do not do this (and it would not be legal in Australia) but if an American were to say a bunch of things they believe about a $20 stock and imply that it was worth $100, but then was to sell it on the price spike they induced for $25 that would be - on the above logic - legal.

To win this case the DOJ needs to prove that Andrew Left said things that he did not believe or knew to be false in order to move the stock. (The more advanced lawyers will talk about Sullivan protections and the like - but the idea is I gather basically sound.) [Post publication editors note: a sophisticated reader has argued to me that if Left were reckless in his statements he is also likely in trouble. Given that he was right most the time and in the cases the DOJ actually raises it is going to be very hard to prove he was reckless.]

The DOJ has a hard case - because you can’t necessarily tell what was in Andrew Left’s head when he published his research reports.

Some of the indictment reads like bullshit to me

This section seems particularly weak:

To draw the attention of news-based trading algorithms and to alarm investors, defendant LEFT included sensationalized headlines and inflammatory language in the Citron reports, such as “fraud” and “smoking gun.” In employing this rhetoric, defendant LEFT generally sought to maximize the impact on the price of the Targeted Security as quickly as possible and create the opportunity for defendant LEFT to profitably exit his position as quickly as possible.

The reason this is particularly weak is that Left was right again and again about things being a fraud. He called fraud and he was right again and again. Given he was right many times it will be very hard to argue that he did not believe the words “fraud” and “smoking gun” when he said them.

This section of the indictment is almost self-defeating:

On or about August 30, 2018, at approximately 10:07 a.m., defendant LEFT posted on the Citron Twitter Account, including a link to a Citron short report with the headline, “CRON: The Dark Side of The Cannabis Space” and a tweet stating “$CRON tgt price $3.5. Everything that is contaminated about the Cannabis space. ALL HYPE with possible securities fraud . . . .” At the time of the tweet, CRON was trading at approximately $11.50 per share.

On or about August 30, 2018, at approximately 11:08 a.m., defendant LEFT posted again on the Citron Twitter Account, promoting his short position on CRON, that, “Andrew Left from Citron on CNBC Fast Money 5:25pm ET to discuss why $CRON is the most overhyped of all the ‘pot stocks’ with a target price of $3.5[.]”

The reason why this is self-defeating is Left called Chronos a fraud and traded on his publication of that.

But Chronos almost certainly was a fraud. The SEC charged with fraud and they settled. Seriously - the link is here.

It is going to be effectively impossible to argue that argue that Left did not believe Chronos was a fraud when he suggested it was. After all he was right.

At this point the case looks comically weak.

As for the price target - can someone observe that six years later Chronos is trading almost precisely at Andrew Left’s price target:

Some of the indictment is stronger

The Justice Department however does address this issue - and they specifically accuse Left of lying about things - things that should be testable.

For example here they are alleging a direct lie:

LEFT also falsely represented that he did not share Citron’s commentary with hedge funds before the reports were published. In truth, defendant LEFT often provided third parties, including hedge funds, with advance notice of the anticipated publication of Citron’s commentary to enable the third parties to profit by trading around the commentary and, in other instances, mitigate their losses by adjusting their positions before publication.

This is a direct allegation that Left lied. If they can prove that they win.

But they have to prove that

a). He said that he did not share the commentary with hedge funds before the reports were published, and

b). That he actually did.

c). That the purpose of the lie was to move the stock.

If he did do this it should not be hard to prove. The only thing I know for certain is that he never shared any of the information with me. (But we do not like each other. I am not on his Christmas Card list.)

However here is a report that Left wrote criticising Harry Markopoulos’s take-down of GE. It is a report I agree with as I also criticised Markopoulos, as did many other short sellers as was reported in the Financial Times.

This GE piece is referred to in the DOJ indictment. Here is a link to Left’s 2019 General Electric. In it Left explicitly states:

First, Citron would like to state that 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.

That statement is either true or false. If it is false the DOJ should be able to find the cash flow - and if they do Left is likely to be convicted.

The indictment also accuses Left of lying to investigators about this issue. And there it likely to get murky because the same GE report contains this disclaimer:

As of the publication date of a Citron report, Citron Related Persons (possibly along with or through its members, partners, affiliates, employees, and/or consultants), Citron Related Persons clients and/or investors and/or their clients and/or investors have a position (long or short) in one or more of the securities of a Covered Issuer (and/or options, swaps, and other derivatives related to one or more of these securities), and therefore may realize significant gains in the event that the prices of a Covered Issuer’s securities decline or appreciate. Citron Research, Citron Capital and/or the Citron Related Persons may continue to transact in Covered Issuers’ securities for an indefinite period after an initial report on a Covered Issuer, and such position(s) may be long, short, or neutral at any time hereafter regardless of their initial position(s) and views as stated in the Citron research. Neither Citron Research nor Citron Capital will update any report or information to reflect changes in positions that may be held by a Citron Related Person.

On first glance that disclaimer contradicts the paragraph that says they have never been compensated by a third party to publish research. I suspect there is some nuance there. For instance Left may have been compensated by a third party to do research. In that case both the statement and the disclaimer are not mutually contradictory.

Whatever: the disclaimer states in plain text almost everything that the DOJ says is nefarious.

• there are associates

• they trade with derivatives

• they may be long, short, or neutral at any time hereafter regardless of their initial position(s) and views as stated in the Citron Research report

But again what he said about Markopolos and GE was utterly correct. Markopoulos suggested that GE’s uncapped long-term-care liabilities would drag them to zero. Those liabilities it appears were fully provided for and GE was a great stock after Markopolous wrote his dodgy report.

Given that he was right it is going to be very hard to suggest that he lied.

But there is a case here. If the DOJ can prove that Left had been compensated by a third party to publish research and that compensation had been tied to the “success of a trade”, then he lied in the Markopolous/GE report. And deliberate lies are not first amendment protected free speech. And if he made those lies to move the stock then he is guilty of stock manipulation.

I am watching. If I had to bet on this Andrew Left will win his case. But I do not have to bet on it so I will just watch on, fascinated.

John