Andrew Left of Citron Research Indicted by the DOJ and Charged by the SEC
On July 26, 2024, the Securities and Exchange Commission announced litigation filed against activist short seller Andrew Left and his firm, Citron Capital LLC, for devising and executing a $20 million scheme to defraud retail investors who followed his frequent tweets and the research reports he published at his website. On the same day, the U.S. Attorney’s Office for the Central District of California announced a parallel criminal prosecution.
The actions should come as no surprise. In 2021, rumors first circulated about a Department of Justice investigation of professional short sellers. It apparently began with a young lawyer called Joshua Mitts. Mitts also has a Ph.D. in finance and teaches at Columbia University. Reuters explained a bit mysteriously that “[t]he 36-year-old securities law specialist has become an increasingly influential figure in the hot debate over activist short selling since publishing a 2018 analysis of trading data that suggested some players were manipulating the market.” It’s said he’s worked as a consultant for the DOJ, but he has declined to elaborate on his role.
According to Reuters, Mitts spent years compiling an impressive study of market manipulation polluting our capital markets. His focus is on activist shorts, including the well-respected Carson Block of Muddy Waters and none other than Andrew Left. About a year ago, Left told Bloomberg Television that he was being investigated and that his home had been raided, but said he didn’t know why. As Mitts attracted more and more attention Carson Block wrote a blistering response to Mitts’s paper, calling it Distorting the Shorts – A Refutation of Joshua Mitts’ “Short and Distort.” He began with an objection to what he sees as Joshua Mitts’s conflicts of interest—he works with CEOs who believe their companies have been the victims of abusive shorting, and charges $900 an hour—and moves on to a critique of his methodology:
In other words, Joshua Mitts claims to have studied short sellers, but in fact studied almost entirely something else. He chooses a market cap cutoff that produces a “V” pattern. Mitts misattributes the “V” to report authors (let alone short sellers) when it is clearly driven by earnings announcements. He then trumpets $20.1 billion of mispricing (that doesn’t exist) as showing the significant damage that short sellers are supposedly doing when – forgetting all of the other problems with his analysis – this number is a drop in the ocean of his data. However, the problems with his research extend beyond just these.
That is the relatively nice part of Distorting the Shorts. He goes on to discuss a lawsuit Mitts lost badly in the U.K. and adds scathingly:
Despite Joshua Mitts not having actually studied short selling, in 2020, Mitts’ research was used as the basis for a petition to the SEC to enact rules on activist short selling that we believe would significantly curtail the industry. In 2021, numerous short sellers were served with search warrants and subpoenas in what appears to be a wide-ranging Securities and Exchange Commission and Department of Justice investigation into activist short selling. On February 7, 2022, the recently departed former chairman of the SEC, Jay Clayton, explained in a CNBC interview that this investigation “would be looking at as a regulator. First of all, there’s ‘short and distort.’” Businesses and lives are being turned upside down by this investigation, which is seemingly catalyzed by Mitts’ misrepresented, error-filled research. The ultimate casualty of a misguided investigation will be market accountability and investor protection.
Block closes by describing Mitts’s study as:
a non-empirical, conflict-laden polemic based on misrepresentation, selective presentation of data, and lack of academic integrity. Its conclusion that pseudonymous activist short sellers manipulate mid- and large-cap stocks is contradicted by Mitts’ own data. If Mitts had written a short report on a company with comparable lack of rigor and misrepresentation, he would likely have significant legal exposure.
Mitts’s study was criticized by quite a few financial professionals, and embarrassing accusations he made about Israeli short sellers—accusations based on a poor understanding of Israeli currency—tarnished his image a bit.
Despite the talk about a big investigation, and Left’s revelation that he was under investigation, no formal actions were taken. In May 2023, Avi Perry, chief of the DOJ’s market integrity team, said at an event in New York, “You’ll see some more activity from us involving short sellers sometime in the next few months.”
Nothing happened. But it is against this backdrop—the story of Mitts’s study, the DOJ investigation, the anger of Carson Block and other activist shorts—that the story of Andrew Left’s indictment must be understood.
The Early Andrew Left
We know now that the SEC’s Los Angeles office had been investigating Left for several years, as had the DOJ. A grand jury had been convened by the DOJ in January 2024 and handed down its indictment on July 25, 2024. At the time the conduct described in the complaint and the indictment took place, Left lived in Beverly Hills; he has since moved to Boca Raton. Both the complaint and the indictment allege that for at least three years, he made tens of millions of dollars manipulating and misleading the retail investors who followed him on his website, on Twitter, as it was called then, and who also tuned in for his appearances on various financial television networks. Law enforcement and the securities regulator saw what he did as a cruel betrayal of trust, and also as violations of the securities laws and, for good measure, as crimes.
Left, now 54, was just starting out when the internet appeared and, to use an irresistible cliche, changed everything forever. Today, a great many people have no idea what life without it was like; it’s something that’s always been there. But before the mid-’90s, only professional techies or the technology-curious knew about, much less used, usenet (“user net”) groups. Then suddenly Prodigy and Compuserve appeared, and everyone had to have email and the World Wide Web. The financial sector was dramatically affected. Though the SEC lagged technologically—and, some would say, still does—it deserves credit for developing EDGAR and phasing it during the late 1990s.
The biggest change was felt by brokerages and their clients. By around 1994, new broker-dealers designed to operate as discount service providers opened. Many had no brick-and-mortar offices; not, at least, the kind that were only a quick drive away for clients all over the country. They were instead a mouse click away. The discount commissions they offered were enormous. The cheapest lowered their rates to $9.99 a trade. Commissions charged by full-service brokers could run into the hundreds of dollars, depending on the size of the purchase or sale.
Until that time, most people who invested in equities bought blue chips or mutual funds. The more adventurous might take their brokers’ advice to pick up some index funds and roll over the dividends. Few traded stocks frequently. They didn’t have the time to spend calling their brokers several times a week, and as noted, commissions were very high.
With the arrival of online brokers, all that suddenly changed. For better or worse, would-be billionaires could do their own research, explore possibilities their full-service brokers would never have suggested, and trade as often as they liked. The markets picked up, as new investors moved into them. On February 23, 1995, the Dow Jones Industrial Average crossed 4,000 for the first time. This year, it crossed 40,000 for the first time.
Many young retail investors began to think of themselves as traders, even as day traders. Most didn’t (yet) have serious money to spend, so they looked for inexpensive plays. For that, more and more turned to the over-the-counter market, where penny stocks were sold. People on financial chat boards discussed how much more impressive they sounded if, instead of telling friends they owned 100 shares of IBM, they could say they owned 10 million shares of a stock with a cool name, but no revenues.
Penny stocks became much more popular. Those that reported to the SEC were traded on the OTC Bulletin Board, the OTCBB. The OTCBB was reluctantly run by the NASD (the National Association of Securities Dealers; now called the Financial Industry Regulatory Authority, or FINRA). Those that were not SEC registrants were called “Pink Sheets”, because quotes for them were published on pink paper. Their trading was overseen by the National Quotation Bureau. Both OTCBB and Pink stocks were only traded by telephone. Traders could order them online, but execution was only possible by phone.
Cromwell Coulson and a group of associates purchased the NQB in the late ‘90s, and quickly implemented what they called “Pink Link”. Now known as OTC Link, it made electronic execution possible, and greatly accelerated the trading process. The new company was called Pink Sheets, after the kind of stocks they mostly traded at that time. Pink Sheets set up its own website, and tried to persuade issuers to make disclosure to them, to give people who wanted to play the pennies at least some information to work with. At first, Pink Sheets didn’t charge much, and many issuers were willing to play along in the hope of attracting new investors. The cherry on top for Pink Sheets was that in 1999 and 2000, the SEC insisted that OTCBB issuers catch up with the periodic financial reports required of them by the Securities Exchange Act of 1934. Many were unwilling or unable to do so, and thousands were delisted to the Pinks. They became the responsibility of Pink Sheets. Which, of course, is now called OTC Markets Group.
That was the world Andrew Left entered as he came of age. He first worked for a hard-sell, high-pressure commodities brokerage. He quit after nine months, but in December 1998, the National Futures Association went after the firm, with the result that all of its current and former employees were sanctioned. Left was said to have “made false and misleading statements to cheat, defraud or deceive a customer in violation of NFA compliance rules.” Perhaps it was a foreshadowing of what was to come 25 years later.
He’d become interested in short selling at the very end of the ‘90s, and his interest intensified as the dot.com crisis set in, taking down one insubstantial company after another. Some that had been high-flyers only months before were reduced to penny status; others came close, but struggled on. A decent trader could find a viable short without much trouble. Left began to write up reports about the companies he was shorting and published them on a website he created, called StockLemon.com. In 2007, he changed its name to Citron Research.
In his reports, Left was usually correct about the companies he targeted. Most were badly run, mispriced, or outright scams. His writing style, colloquial and often comic, provoked and amused readers. He attracted a large following. At least some of those followers put his recommendations to work for them. He claims he’s been sued a number of times, but never lost a case.
But now he isn’t dealing with mere civil litigation. As his near-contemporary and fellow short seller Anthony Elgindy learned more than 20 years ago, criminal indictments are serious trouble.
The SEC Lawsuit and the Indictment
The SEC’s complaint and the indictment make substantially the same allegations. The complaint alleges that Left used his Citron Research website and social media platforms on at least 26 occasions to publicly recommend taking long or short positions in 23 different companies, and claimed those recommendations accurately reflected his and Citron Capital’s positions. But the SEC says that was not true: his reports and especially his social media statements were riddled with outright lies. Kate Zoladz, Director of the SEC’s Los Angeles Regional Office, said, “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.” All of this activity took place between March 2018 and December 2020.
Left was charged in a 19-count indictment “alleging he used his public platform to illicitly profit by manipulating stock market activity and trading contrary to the position he presented to the public.”
Contrary to what’s usually the case, the indictment offers a clearer and more persuasive account of what happened. It begins by describing Left’s workplace in California. In 2018, he formed Citron Capital, LP, which was a hedge fund incorporated in Delaware and registered as an investment adviser in California. Left owned 85 percent of Citron Capital, LLC, which was the general partner of Citron Capital, LP (collectively, “Citron Capital.”)
He worked with an individual identified in both the complaint and the indictment as “Individual A.” Individual A obviously served as an informant against Left. He was a securities analyst and trader, and the minority partner in Citron Capital.
When Left gave interviews or appeared on television, the indictment says, he was “required” to disclose his positions in stocks he’d targeted. {He was not actually required; he was requested to do so by journalists and television hosts.) Oddly, he did not do so on his website, nor did he, apparently, do it even in his research reports. Although the Citron Research website promises that interested parties can request copies of “archived reports,” there is no list of those reports. Only one, written on April 11, 2023 for a generative AI company called Edgio (EGIO) remains. In it, he explains why he believes EGIO is a good company, adding that with its shares outstanding at only about 7.8 million, it could be an attractive acquisition for a major player. There is, however, no information about whether he had a position in the stock at the time of writing, or, if he did, how much stock he owned.
While it seems not to be considered invariably necessary for analysts to disclose long positions with specificity, it’s nonetheless good for them to do so. It’s generally thought to be imperative to disclose short positions, and to update that information when the position is covered.
Left avoids that, at least in the site’s general disclaimer and in the disclaimer specific to Edgio. The latter reads:
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 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.
That leaves a good deal to be desired.
By the late 2010s, Left had developed a theory that made him a good deal of money: if he could trigger a “catalyst,” that would cause the stock price to move up or down immediately, and he could clean up by buying or selling into the movement. The catalyst might be the publication of a report, the announcement of a new target price, or anything else that would catch the attention of his audience. According to the indictment, he often “made false and misleading statements and half-truths to deceive investors to believe that he held a position when, in fact, after using his influence on the market to manipulate stock prices in a particular direction, [he] closed his positions to capitalize on the temporary price movement caused by his public statements.”
As an example of the kind of deception Left used, the indictment describes his dealings in Cronos Group Inc. (CRON), a flagging pot stock:
On or about August 27 and August 28, 2018, in electronic communications, defendant LEFT wrote Individual B, a portfolio manager for Hedge Fund A: “I have a hot voice in cannibas[;] Let’s take a vantage of it”[;] and “what stock is alll retail… the best shorts are retail shorts no doubt[;] we can make money in weed[;] i have good weed track record…do we go long [other company] or short CRON… we can DESTROY CRON,” and “cron short we could get 2 bucks.”
Two days later, on August 29, he began to set up a short position shortly after the opening bell. By the next morning, he “had built a short position of approximately 883,900 shares of short exposure to CRON (including a short equity position, put options purchased, and call options sold).” Once he’d completed that, at approximately 10:07 a.m., he tweeted a link to his report on “CRON: The Dark Side of The [sic] Cannabis Space,” adding for good measure: “ALL HYPE with possible securities fraud…” At the time CRON was trading at about $11.50 a share. He set a target price of $3.50. At 11:08, he tweeted once again, saying he’d be on CNBC at 5:25 p.m. to discuss CRON.
What he did not mention was that about 24 minutes after his first tweet, he’d placed orders to begin closing out his short position. By the close, he’d reduced his net short exposure by 61 percent. When he appeared as announced on CNBC’s Fast Money, he was asked twice about his position:
The host followed up and asked, “Are you just as short the stock right now as you were at the beginning of the day?” [Left] falsely stated that he only covered a “small size” of his short position in CRON earlier that day when, as [he] then knew, at the time of his appearance on CNBC, he had already closed more than 60% of his pre-tweet positions.
On the following day, he wrote once again to Individual B, saying that when he realized it was retail investors who owned CRON, his trades were “like taking candy from a baby.” To make matters worse, in October 2023, he said in testimony under oath before the SEC that he did not target stocks with large retail bases.
Yes, what he said about CRON’s shareholders was nasty. Being nasty isn’t a crime, though lying to federal authorities is, even if the lie you tell isn’t an enormous one. Martha Stewart learned about that the hard way. But there’s another, more important, issue here: CRON was indeed a scam, just as Left said it was. On October 24, 2022, the SEC sued the company and its Chief Commercial Officer for accounting fraud and other misconduct. In the press release announcing the action, the agency said:
In agreeing to settle with Cronos, the Commission determined that the company should not incur a financial penalty, given its timely self-reporting, significant cooperation, and remediation.
Some of the conduct in question occurred in 2019, so we might ask just how “timely” CRON’s confession was. Did any of its “cooperation” have to do with Left and his allegations concerning the company? He was right about CRON.
Left and the Anson Companies
Another important part of the case against Left is his involvement with Anson Funds Management, LP, and Anson Advisors, Inc. In January 2021, Left was questioned by a postal inspector to whom he said that he was “[n]ever… never, never, never” compensated by hedge funds. He was also asked if he ever shared the content of his reports with hedge funds before their publication:
“No, no, no, the only thing I might do… I might double check a spreadsheet … [I]t’s always done to make sure it’s factually right.” In fact, defendant LEFT routinely shared the content of Citron’s commentary with hedge fund managers in advance of publication to give them advanced [sic] notice and time to establish or adjust their trading positions and thereby profit or minimize losses from price volatility caused by Citron’s publication.
The DOJ has the receipts, in the form of “false invoices” Left sent to Anson in late December 2018. They’re described as for money owed Left for “Research Services,” when in fact they were for a cut of Anson’s profits from its own trading in Left’s targeted companies.
Much more is known about the relationship between Left and the Anson companies. On June 11, 2024, the SEC filed an order instituting administrative proceedings and cease-and-desist proceedings against the two Anson companies. Both companies had by then submitted settlement offers that were accepted by the agency. According to the order, from at least 2018 through 2023:
the Private Placement Memorandum (“PPM”) for Anson Investments Master Fund (“AIMF”), the private flagship fund that Respondents advised, described a short position investment strategy to be used for AIMF but omitted that AIMF’s investment strategy involved working with activist short publishers and trading in the target securities, including around the time the reports were issued by activist short publishers, and paying a portion of AIMF’s trading profits to the short publishers in exchange for the short publishers sharing their work with Respondents in advance of posting it publicly.
Left is identified only as “Short Publisher A.” (At one point, he is also identified as “Individual A.” It isn’t clear why; probably it’s just a mistake.) His share of Anson’s trading profits amounted to more than $1.1 million, paid through a third party. The issuers about which Left provided information were Namaste Technologies, which traded on the Canadian Securities Exchange as NXTTF, and India Globalization Capital, which traded on the NYSE Amex as IGC. For IGC, Left merely tweeted a few times. We’re told that a single bearish tweet from early October 2018 stating that the stock was overvalued made AIMF about $500,000 the day it was posted to Twitter.
The order does not specify whether Anson paid Left for anything else, but it does make clear that he was not the only “activist short publisher” the Anson companies were associated with. None of them is named, and Left is the only one whose dealings with them are described in detail. We’re told only that Anson had formal consulting agreements with some of the short publishers. Does that mean they were in the clear with the DOJ and the SEC? We aren’t told.
The Anson companies’ conduct violated a number of provisions of the Advisers Act. As a result, Anson Funds was assessed a civil money penalty in the amount of $1.25 million. Anson Advisors was ordered to pay $1 million. That is a slap on the wrist given what the price eventually paid by Left will probably be. He’s charged with more than just his dealings with Anson, of course, but Anson seems to have been let off the hook easily. It will, apparently, move forward without suffering serious consequences.
What about the other “short publishers” who had dealings with Anson? Was the leniency shown by the SEC only offered on the condition that the Anson companies would provide detailed information about those other activist short sellers? We don’t know, but there could be more shoes left to drop.
An Australian activist investor called John Hempton is puzzled by the indictment. Hempton, founder and co-owner of Bronte Capital Management Pty Ltd., has followed Left’s adventures from his StockLemon days. Hempton’s wary of the short seller, because he came to see him as often coming close to crossing the line. But he points out that Left was not only right about CRON; he’s been right about many of the companies he accused of fraud. One of them was Valeant Pharmaceuticals, which Left worked to expose. Hempton shorted the stock and made a profit.
Hempton’s point is that the SEC and DOJ allegations, which largely boil down to Left lying about how long he intended to hold positions, should perhaps be balanced against the service he performed, which was busting quite a few scams. There is value in bursting bubbles, even for investors who may resent it in the moment. As for Left’s aggressive approach to the analysis of dicey companies, and the flamboyant language he employs, the only real question about that is whether his assessment is, in the end, the right one. Yes, he covered most of his CRON short position immediately after he announced he’d taken it. He lied to CNBC, saying the short position was still intact. That was wrong. But if we had a quarter for every time somebody lies on X, we’d be richer than Elon Musk. Most users know the truth is not a valuable commodity on social media, and, if what’s said is important to them, will make an effort to verify it, or will at least ignore what isn’t really important.
The once-voluble, eager to be interviewed Andrew Left has not commented about the criminal indictment and SEC civil lawsuit. His attorney, James W. Spertus of Spertus Landes Josephs in Los Angeles and a former federal prosecutor told Axios, “I think the government’s interest in trying to regulate … through cases they prosecute is a result of the meme stock craze, but Andrew Left has been around since 2001.” He added that the indictment is based on “contorted rhetoric, trying to make it appear like he was telling lies… There’s not one lie alleged that is provable.”
It will be interesting to see how both cases develop, and what defenses Left presents. Axios reports that “a source familiar with the matter” said law enforcement and the regulator are “sending a message about the kind of behavior that is not going to be tolerated in the market.” If so, we won’t be surprised to see more actions against activist short sellers.
For further information about this securities law blog, please contact Brenda Hamilton, Securities Attorney, at 200 E. Palmetto Park Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, or by email at [email protected]. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
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