- Andrew Left's trial for securities fraud kicks off this week.
- The government has accused Left of making $16 million by manipulating stock prices.
- Legal experts say that the government's case against Left isn't a slam dunk.
Short-sellers occupy a unique position in American finance. They've inspired Hollywood scriptwriters, infuriated company CEOs, and been branded both the heroes and villains of Wall Street.
Now the question of what a short-seller is allowed to say and do will be under scrutiny in a Los Angeles courtroom as one of the most famous members of the tribe goes on trial for alleged securities fraud.
Andrew Left, the founder of Citron Research, is accused of dishonestly manipulating the price of more than 20 stocks by publicly posting his opinions on them and then trading after the prices moved to make a fast buck.
Facing charges that carry up to 25 years in prison, Left has said that he is, naturally, nervous about the trial, which kicks off on Monday. Legal experts who have been following the case told Business Insider that they don't think it's a slam dunk for federal prosecutors.
James J. Angel, an associate professor at Georgetown University's business school who specializes in financial regulation, said convincing a jury of stock market manipulation is difficult because it requires proving malicious intent.
"Unless you get some kind of really, really hard evidence, it's hard to prove just from trading records," he said.
He noted the tension between public companies and activist short-sellers, who investigate corporations they believe are overvalued and sometimes expose fraud and spark investigations by legal and regulatory authorities.
"The SEC gets lots of complaints from issuers about short sellers, and most of them are unfounded," Angel said. "Part of the playbook is to blame the evil, nasty, naked short sellers for a company's problems to distract attention from a broken business model.
"The SEC would love to have a short-seller's scalp to show that they take this seriously in order to improve their reputation for market integrity."
Left made his name by exposing fraud. After a Citron report likened Valeant Pharmaceuticals to the scandalous Enron, the SEC and federal prosecutors took action against the drug company. Citron's website lists dozens of other companies it says were subject to regulatory action as a result of its reports.
The indictment against Left says he used his prominence and platform to enrich himself at the expense of others to the tune of $16 million. He's accused of hiding and lying about financial deals with hedge funds and misrepresenting his trading positions in market-moving posts and TV appearances.
"For example, after denouncing one company as a 'fraud' on CNBC's 'Fast Money,' Left allegedly falsely claimed to have covered only a 'small size' of his position in the company's stock when, earlier that same day, he allegedly closed out more than sixty percent of his position," prosecutors said in a news release when he was indicted in 2024.
He is charged with violating Section 10(b) of the Securities Exchange Act, which Angel and some other legal scholars have said is vague. Left told Business Insider last month that he didn't understand what the rules were regarding sharing stock market analysis and opinions online.
His attorneys tried and failed to get the case dismissed by arguing that Left's statements were protected by the First Amendment.
"The government may not like that activist short-sellers like Left make a living by publishing negative opinions that move the market downward," they wrote. "But it is a bedrock constitutional principle that the government cannot single a person out for prosecution based on the content of that person's speech."
Attorney Jay Auslander, a partner at Wilk Auslander, who has defended other short-sellers in civil SEC enforcement cases, said free speech doesn't cover fraudulent statements.
"The First Amendment argument is definitely clever, because the idea is, 'I have a right to go ahead and express my opinion.' You do. That's not contested, but just because you have a right to do something doesn't mean you have an absolute right."
Mark David Hunter, a partner at Hunter, Taubman, Fischer & Li and a former SEC enforcement attorney, said manipulation can refer to anything that impacts the natural ebb and flow of financial markets.
"If I take a short position and I hope the stock price goes down and I share things that I think are legitimately bad about the company, is that a manipulative practice?" he asked. "I would say no."
If a jury finds that Left specifically publicly shared a positive opinion on a stock and shortly thereafter offloaded his position, it will qualify as manipulation that could be credibly alleged by the DOJ, according to Jerome Thomas, a partner at global law firm Baker McKenzie.
"As to proving this manipulation happened beyond a reasonable doubt, that's a different question and one for the jury," Thomas noted. "The question is ultimately going to be whether the 'misrepresentations' can be factually established or if there is other information out in the public that somehow negates the effect/materiality of these misrepresentations."
Hunter expressed skepticism that prosecutors will be able to definitively prove what they are alleging, noting that cases like this are often settled by plea deals and never reach the courtroom. He revealed surprise that Left's trial is moving forward, noting that most similar cases involving securities fraud involve an extensive paper trail, which typically adds up to documented evidence.
"If he's taking a case to trial, where there's going to be a lot of documentary evidence, it makes me think the government has just misstated the position, and now they've locked themselves in," he said.
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