Have you heard of Andrew Left? He is a famous short seller running Citron Research blog. Recently, the federal grand jury in California charged Andrew Left with fraud and market manipulation. The Securities and Exchange Commission also chimed in. According to the SEC complaint, Left used “bait-and-switch” tactics to mislead investors and earned $20 million. If convicted on all charges, Left may spend the rest of his life behind bars.

Who is Andrew Left?

Many investors use short selling to make money when a stock price falls. There are many ways to do that by either borrowing shares, buying put options or through other arcane ways.

Andrew Left is an activist short seller. You may have seen his appearances on Bloomberg or CNBC at Mad Money show with Jim Cramer. Left became active in short selling in 1994 when he was 24 years old.

There used to be so-called boiler-room scams. People would get phone calls from call centers pushing questionable investment advice. Callers would promote penny stocks and other fraudulent pump-and-dump schemes. Left got note of this and went against them with short-selling.

Around 2001, Left started his own online blog StockLemon. Later the blog was rebranded to Citron Research. Left issues short reports on firms that he thinks engage in fraud or are overpriced by the market. If you read his reports, they are bombastic and very colorful in nature. That is unlike most Wall Street research notes that are dry and boring to the bone.

How Andrew Left Profits from His Investment Calls

Citron Research is not a financial advisor or an investment company. It is just a blog writing short selling reports. Here is a basic sequence of events when Left issues a short call:

1. Andrew Left would sell Company A short from his own account.
2. He would issue his bombastic reports, tweet about it, go on TV saying that Company A is terrible and will go down. He may add his own price target.
3. The market would react to this media blitz and Company A’s stock would tank.
4. Andrew Left would quickly buy back stock. This gives him a quick profit regardless of whether his report turns out to be correct or not.

Sometimes, Left would issue favorable long reports on companies too.

Overall, short sellers generally have a bad reputation. Most investors do not short companies and instead buy and hold stocks. Hence, hearing that your stock is a lemon does not sound too good, regardless if it is true or not. On top of that, short sellers often irritate a lot of corporate folks. This is especially true for executives whose stock options and reputation have been slashed by the claws of shorting bears.

Andrew Left’s Track Record

Andrew Left earned a lot of attention from the media with some of his calls that turned out to be spectacularly right. His short report on Valeant Pharmaceuticals in Canada and Evergrande Group in China stand tall. As for Evergrande, it was one of the largest bankruptcies in history. They had over $300 billion in liabilities in construction and real estate in China.

Wall Street Journal analyzed 111 short-sale reports of Citron from 2001 to 2014. On average, there was a stock price decline of 42% in the year following the issuance of their research. In total, 90 of 111 stocks were still lower one year later, while 21 stocks gained.

Fraud Charges Against Andrew Left

So, why and for what the US authorities want Left to be behind bars? After all, he was right many time. First, the SEC accuses Left of promoting Citron Research as a hedge fund. In reality, it is just a blog with Left trading his money. These representations are a big no-no in the US without a proper registration.

Alleged Lying About Trading Activity

But, there are other accusations. The real question becomes: did Andrew Left publish a well thought-out report on bad companies and quickly close some or all short positions at profit? Or did he use his large retail investor following to pump something and then dump it with no substantive research done?

The SEC complaint gives some clues. Left at some point went long on a stock called Invitae Corp (NVTA).

Between July 25-30, 2019, Left discussed with his colleague his hope to
“get stock to 30” and asked “[w]hat can I put in a tweet to juice it[?]”

On July 31, 2019, Left again promoted NVTA in a report and tweet as a
good investment to buy and reiterated that Citron Research expected NVTA’s stock
to sell at $100, tweeting “certain that Invitae is on its way to $100.” Left
represented in the report that he “will continue to stay long until the stock hits at
least $65 as we believe it is on its way to $100.”

The SEC alleges that Left and Citron Capital began selling NVTA on that same day at or around $27 to $28 and did not continue to stay long until the stock hit $65.

This may seem bad saying one thing and turning around and doing something else. In fact, it is a recurring theme in the SEC complaint. It is not clear though whether this to any extent influenced the stock price. Perhaps, people buy or sell stocks based on Andrew Left’s reports, not necessarily his trading. This is something the SEC will have to show in courts.

But, the worst part is about “juicing”. The SEC alleges that Left was trying to use his social media following to pump NVTA’s stock price and later dump it. It is a slippery slope and grey area when it comes to famous investors with big following.

Andrew Left’s Cannabis Saga

There are other messages between Left and his portfolio manager on another company called Cronos Group. It is a Canadian cannabis company trading on Nasdaq. Left says:

“I have a hot voice in cannibas. Let’s take a vantage [sic] of it.”

Left instructed Portfolio Manager One to not overthink Citron Research’s next target company stating:

“Stop being such a pussy. It’s OK to be wrong.”

Yes, it is okay to be wrong. But, with that “hot voice”, Left wanted to “take advantage of it,” and did not care about being wrong. Later, Left appeared on CNBC interview where he commented on Cronos. He was repeatedly asked if he still has a short position in it. Left said that he “took a small position off today but I am still extremely short the stock,” and reiterated his recommendation that the stock would trade to $3.50.

The SEC alleges that this statement was materially false. Left had exited more than 75% of his short exposure at well above $3.50 by that time in August of 2018.

The ironic thing is that Cronos actually closed at $12.74 per share the day before Left’s report. Then, it closed 28% lower after the report came out. But, by March 2019 the stock rallied more than 100% only to close at $2.42 in 2022.

So, was Left right in his short call after all?

It looks like the SEC does not care. It seems that the most important thing for the government is that Left lied about lots of stuff. They will have to show that this could have been material to investors who listened to him. Largely, the government accuses him of dishonesty, which may or may not be enough for the case.

Undisclosed Ties to Hedge Funds Accusations

There were other allegations. Prosecutors accused Left of hiding his ties to hedge funds. Allegedly, Left gave early notice of his research or sometimes even passing hedge funds’ trading ideas as his own. Often, hedge funds traded before release of reports and shared profits with Left. They also say that Left lied to the government and denied such compensation ties.

What Will Happen to Andrew Left

At the end of the day, the case is pending. And, we have not heard Left’s part of the story. This indictment is probably a culmination of a multiyear government investigation into trading abuses by short sellers. Prosecutors were combing and probing anything they could find. Likely, Left popped up on their radar as a bigger fish. Also, Left is a wealthy person. My take is that he could have settled with the SEC and paid back his “unfair” profits. But, apparently he chose to fight these charges in court because he thinks he is innocent.

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As Warren Buffett once said: “If a cop follows you for 500 miles, you’re going to get a ticket.” It is possible that the government may have a hard time convicting him. Left may show in court that he never traded or said anything that he did not believe in. But, one thing seems to be clear. Left pushed too far into the gray area of what is considered legal or not. These legal cases will shine a light on these areas and provide more clarity for future reference. 

What do you think, guys, about Andrew Left and this indictment? Did he lose his touch and credibility among retail investors or is he good? Let me know in the comments.