On Tuesday afternoon, I called Andrew Left, a prominent short seller with a history of documenting alleged corporate wrongdoing and betting against companies such as Valeant Pharmaceuticals, Shopify, and the Chinese real estate giant Evergrande.
“Hey Charlie, I’m at the airport,” Left answered. “I’m sitting down, having a vodka.”
His choice of drink was understandable given the events earlier that day. Late on Monday night, after a two-week trial, Left was found guilty in a Los Angeles federal court of 13 counts of securities fraud.
The prosecutors accused Left of disseminating his research on social media and financial television to influence stock prices and profit significantly, labeling his actions as market manipulation. The jury agreed, and Left now faces the possibility of 20 years in prison when he is sentenced in August.
There is something unsettling about Left’s admission of deliberately influencing stock prices for profit. Major firms have strict policies against trading based on research, placing stocks on restricted lists. Journalists, including myself, refrain from purchasing individual stocks to avoid conflicts of interest, as our reports can impact stock prices.
Left, however, was a quintessential day trader with a reputation and platform capable of amplifying market fluctuations when his research was released. Having a correct opinion on a stock, as was often the case with Citron Research, should not be criminalized.
Although the trading may appear suspicious, this type of trading around research reports and public comments occupies a legal gray area. Deliberately moving stocks can be interpreted as manipulation, but a suspicious appearance alone isn’t meant to result in a 20-year prison sentence.
Left’s lawyers argued this to the jury. In a single day, Left could earn more than most people do in a lifetime. His reputation as a short seller didn’t help his case, as making money from declining stock values doesn’t sit well with many people, even if it involves exposing malpractices necessary for proper market functioning.
Swaying the jury
“All the jury heard from the prosecution was that I worked with hedge funds, that I’m a short seller, and that I made two-and-a-half million dollars in one day, and they were like, whaaat?” Left recounted.
The questions arise: Do the prosecutors understand the law, or are they attempting to make short selling effectively illegal? Did they anticipate that the average jury member might not fully grasp the role of short sellers?
In my experience covering finance, I’ve witnessed some dubious short-selling tips, but most market upheavals, like the dot-com crash of 2000 or the 2008-2009 financial crisis, stemmed from the long side—where people bought stocks based on irrational exuberance and hype.
Short selling often involves identifying overvalued stocks, like Left did with Valeant, securities overpriced due to irrational economics (such as mortgage-backed securities during the 2008-2009 crisis), or fraudulent companies like Enron.
Jim Chanos, a legendary short seller, revealed Enron’s deceptive practices. He profited by shorting the stock—borrowing shares, selling them, and then buying them back at lower prices—based on research indicating investor delusion.
Short selling might be more necessary now than ever as stocks continue to surge to irrational heights driven by inflated AI valuations.
The lead prosecutor in Left’s case noted on X that “short selling is not a crime. Mr. Left was convicted of fraudulently manipulating the market, not for ordinary short selling.”
Indeed. The indictment claims Left posted, “Citron buys $NVDA. This is the first time in two years [the] stock offers an appealing risk-reward to investors . . . We see $165 before we see $120.” His alleged crime was selling his position two hours later in the $150-$153 range,
However, since that “notorious” trade, Nvidia shares have increased by nearly 6,000%.
Short selling was central to Andrew Left’s prosecution, even though his predictions were largely accurate. The authorities emphasized his profits from shorting a cannabis company called Cronos. It was trading at $11.50 in 2018 when he set a short-selling price target of $3.50. Again, his alleged crime was selling when his research drove shares lower before reaching the price target.
On Friday, Cronos shares closed at $2.74.
