Prospects for Prominent Short-Seller and Social Media Publisher Take a Left Turn

This post has been updated: On October 22, 2024, the SEC announced it had settled charges with a former associate of Citron. The update is below.

On July 26, 2024, Andrew Left, a prominent "securities analyst, trader, and frequent guest commentator on business cable news channels," and his firm, Citron Capital LLC ("Citron"), were charged by the Securities and Exchange Commission ("SEC") with violating the anti-fraud provisions of the federal securities laws in the U.S. District Court for the Central District of California. Left was also indicted by the Department of Justice ("DOJ") in the same court, charged with one count of engaging in a securities fraud scheme, 17 counts of securities fraud tied to purchases and sales of stocks Left "recommended," and one count of making false statements to federal investigators. Left faces the prospect of significant jail time and tens of millions of dollars in penalties and disgorgement related to what the SEC alleges to be approximately $20 million in illegal trading profits. On July 29, 2024, Left appeared in federal court in Los Angeles to enter a not guilty plea on the criminal charges.

These actions are the latest in a years-long campaign of elevated scrutiny of social media behavior regarding stocks and, in particular, of "activist short-sellers" such as Left and Citron.

The Charges

The SEC and DOJ allege that Left touted certain long and short positions in equities and options using his popular online and social media presence. Left would allegedly wait for his social media activity to have the desired impact, with certain stocks moving more than 12% based on his recommendation, and then take the opposite position to capture gains associated with the movement his social media statements had generated. In a particularly egregious example of this behavior, the SEC alleges that on January 8, 2019, Left and Citron acquired short exposure in the stock of a video streaming company, published a tweet heavily disparaging the stock and touting their short position, and then bought shares long to cover their short position, which Left exited 90 minutes after publishing the tweet and misleadingly posted that they were watching "from the side." According to the SEC, Left made approximately $700,000 from his manipulative statements and related trading in the streamer's stock.

According to the SEC and DOJ, Left carried out his schemes by touting his management of a supposedly large and highly successful hedge fund: Citron. But Citron never had outside investors, according to the government. It was a merely a vehicle that Left used to make personal investments. The complaint and indictment further allege that Left used his highly trafficked Twitter account to further his scheme. Left is alleged to have posted as "Citron Research," which Left presented as an independent research outlet at the same time he was allegedly receiving millions of dollars from several hedge funds in connection with trades made that were recommended by Citron and/or touted by Left on Twitter.

The complaint and indictment allege that, using Citron Research, Left would represent that he intended to hold certain positions until they reached declared price targets to encourage activity in the stock, but he would secretly exit before the price target was reached. For example, Left published a tweet stating that Citron held a long position in XL Fleet Corp. and expected the stock price to reach $60/share. But in the minutes before publishing this tweet, the SEC alleges, Left placed a limit order to sell shares of XL Fleet Corp. at $27.50/share. XL was trading at approximately $25 per share at this time. Citron sold 98% of its shares the following day and, according to the SEC, generated $2.3 million in proceeds.

Left also allegedly used his reputation and access to prestige media to spread false and misleading views on stocks in which he would take the opposite position. Left allegedly appeared on CNBC Fast Money to tout his short position in Cronos Group, telling the interviewer that he was "extremely short the stock" when, in fact, he had exited more than 75% of his short position well above the target price he touted to CNBC.

Finally, Left is alleged to have published trading recommendations without conducting "adequate research." For example, the SEC complaint highlights communications between Left and a business associate in which Left supposedly confesses that he had not done research on Vuzix Corporation before recommending the stock to his readers.

Takeaways

The SEC and DOJ's allegations span several years and cover many stocks that Left and Citron touted. While the complaint and indictment contain particularly alarming allegations of fraud, they come on the heels of a years-long campaign by the commission to scrutinize communications on social media and, in particular, show a greater interest in "activist short-sellers" who publish negative information about issuers in connection with their (sometimes alleged) respective short positions. As DWT continues to monitor this matter, individuals and entities considering publishing a position on a particular tradeable instrument and suggesting or making trades should exercise great care and consider seeking the advice of counsel before they do so. 

Update: Andrew Left Behind – Former Citron Associate Settles Charges With SEC

On October 22, 2024, the Securities and Exchange Commission announced that it had settled charges with Ryan Choi, a former associate of Citron and Andrew Left.[1] Choi was alleged to have negligently participated in a scheme that operated as a fraud to encourage buying activity in stocks that Left and Choi would then quickly exit for profit. 

According to the SEC, Choi was responsible for failing to conduct adequate research or due diligence with respect to two tweets that the commission alleges were made by Left through his Citron Research account on X (formerly known as Twitter). The SEC's Complaint against Choi states that he was supervised at all times by Left and that Choi entered orders for Citron that were directed by Left. In total, Choi's trading around these two tweets (which concerned Vuzix Corporation and XL Fleet Corp.) are alleged to have resulted in over $1.6 million in profits.

In his settlement with the SEC, Choi agreed to pay disgorgement and penalties totaling over $1.8 million.[2] Although the Consent Agreement Choi executed in conjunction with his SEC settlement does not expressly require his further cooperation, we expect that he will be an important witness as the SEC and DOJ continue to move forward with their respective charges against Andrew Left.

[1] Ryan Choi, U.S. Securities and Exchange Commission Litigation Release No. 26164, Oct. 22, 2024.  Available at: https://www.sec.gov/enforcement-litigation/litigation-releases/lr-26164.

[2] Case No. 2:24-cv-09082, Dkt. No. 4 (Oct. 22, 2024).