The U.S. Department of Justice (DOJ) has filed criminal charges against Andrew Left, a prominent short seller and activist investor. Left, the founder of Citron Research, is accused of running a stock manipulation scheme that earned him "at least $16 million in quick profits."
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What is short selling?
Short selling is a way investors can profit when the value of an asset falls. It entails borrowing and selling shares on the open market, then buying the same amount later, hopefully at a lower price.
Suppose you borrow 10 shares of Company A and sell them for $100 each, netting $1,000. Then, Company A’s share price fell to $40 one month later. You’ll buy the same 10 shares for $400 and hand them to the owner. Then, you’ll keep the $600 left as your profit.
However, what if Company A’s share price increases to $150 one month later, and 10 shares now cost $1,500? You’ll have to find an extra $500 to add to your $1,000 and buy the shares. In this case, you lost $500.
Short sellers often conduct extensive research on a company they believe has shaky finances or is outrightly fraudulent. They then release detailed reports about this company to the public, hoping the negative news will cause investors to flee and sink the company’s share price. If successful, they profit. Otherwise, they lose money.
You might wonder if there is a conflict of interest when people simultaneously spread bad news about a company and profit from it. “Would people not just spread false news about companies and profit from short-selling them?” Not at all: any short seller must disclose if they have any trades related to the company they’re denouncing. If they intentionally spread false news about companies and profit from it, that’s market manipulation, which can attract criminal and civil charges. Andrew Left is dealing with such charges…”
Short sellers profit when they expose financially weak or fraudulent companies. Hence, they’re financially motivated to identify dodgy companies whose shares trade on the stock markets, helping keep the markets safe. This idea is why people tolerate or love short sellers.
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The U.S. Justice Department accused Andrew Left of abusing his popularity to manipulate stock prices and earn profits. As a frequent guest on cable news channels, Left allegedly profited from some of his short recommendations without disclosing to viewers about a potential conflict of interest.
For example, prosecutors said Left posted a tweet on his popular Twitter account about Roku, a video streaming company, being “uninvestable.” He opened short positions on Roku minutes before that tweet and profited $700,000 by closing his positions barely an hour later.
Left isn’t just accused of illegally profiting from short selling. He also allegedly hyped some stocks to profit from them as retail investors followed his advice. For example, Left tweeted about being bullish on Nvidia, expecting its share price to reach $165 (when it traded at $144). He bought Nvidia shares shortly before the tweet and sold them less than two hours later, netting $930,000.
Note: Left is presumed innocent unless convicted in a court of law. He reserves the right to defend himself in court; a judge or jury would have the final say.
Was Left indicted for short selling?
No, he wasn’t, as short-selling isn’t illegal. He was indicted for posting stock recommendations and profiting from them without disclosing his short or long positions in his recommendations. Had he transparently disclosed the financial interest in his stock recommendations, it wouldn’t be a problem.
Short-selling is legal. However, short sellers can’t spread bad news about companies without disclosing their short positions. If you spread negative news about a company intending to profit from it, you must disclose the potential conflict of interest to readers. This way, they’ll know whether to believe you even when you have financial incentives to spread negative news.
You can read the full Left indictment here: U.S. vs. Andrew Left.
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