SEC and DOJ accuse high-profile short-seller of $20 million securities fraud

Andrew Left is well known on business TV channels, and on the web for his short-selling advice. “With over 150 reports, Citron has amassed a track record identifying fraud and terminal business models second to none among any published source,” he says on the site.

However, that advice may not have been as pure as it first seemed - the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) have announced charges against the 54 year-old Boca Raton stock analyst and his firm, Citron Capital LLC, for their involvement in what the authorities are calling a multi-year, $20 million fraud scheme. Left, a frequent guest on business television channels such as CNBC, Fox Business, and Bloomberg Television, allegedly used his public platform to manipulate stock market activity for personal gain.

SEC’s allegations

According to the SEC’s complaint, Left and Citron Capital engaged in deceptive practices by using the Citron Research website and related social media platforms to recommend long or short positions in 23 companies on at least 26 occasions. These recommendations were presented as consistent with their own trading positions. The complaint states that these recommendations caused the target stocks to move by more than 12 percent on average. After issuing these recommendations, Left and Citron Capital allegedly reversed their positions to capitalize on the stock price movements. For instance, Left reportedly bought back stock immediately after telling his followers to sell and sold stock after advising them to buy.

The SEC further alleges that Left and Citron Capital made false and misleading statements to the market. One claim was that they would maintain a long position in a stock until it reached $65, but they began selling when the stock hit $28. They also falsely claimed that Citron Research was an independent research outlet that had never received compensation from third parties, despite having compensation arrangements with hedge funds.

The SEC’s complaint charges Left and Citron Capital with violating Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934, as well as Rule 10b-5. Left is also charged with control person liability under Section 20(a) of the Exchange Act for Citron Capital’s violations. The SEC seeks remedies including permanent injunctions, disgorgement, prejudgment interest, civil monetary penalties, and bars from serving as an officer or director and from trading penny stocks.

DOJ’s indictment

In a parallel action, the DOJ has charged Andrew Left in a 19-count indictment, including one count of engaging in a securities fraud scheme, 17 counts of securities fraud, and one count of making false statements to federal investigators. Left is expected to be arraigned in the coming weeks in the United States District Court in downtown Los Angeles.

“This defendant allegedly used his platform as a securities commentator to manipulate the markets and enrich himself in the process,” said United States Attorney Martin Estrada. “The integrity of our securities markets is essential to the health of our financial system, and those who undermine that integrity imperil the savings of hard-working people. My office’s Corporate and Securities Fraud Strike Force will continue to protect the public by rooting out malfeasance by corporate insiders who believe they are above the law.”

According to the indictment, Left used Citron Research’s online presence, including its website and Twitter account, to influence stock prices by publishing sensationalized and inflammatory commentary. He allegedly established long or short positions in stocks before publishing recommendations, profiting from the subsequent price movements. Left is accused of using short-dated options contracts to maximize his gains and submitting limit orders to close his positions as soon as the stock price hit a certain level.

“Mr. Left’s presence on financial television networks and his significant online following provided him with a credible platform to allegedly disguise his intentions and manipulate the investing public for personal gain,” said Akil Davis, the FBI’s Assistant Director in Charge of the Los Angeles Field Office, in a statement.

Left also allegedly misrepresented Citron’s financial relationships with hedge funds to maintain the appearance of independence. He is accused of lying to law enforcement about these relationships, claiming Citron had never exchanged compensation or coordinated trading with hedge funds.

In one example cited in the indictment, Left, who previously lived in Beverly Hills, took positions in Nvidia Corp. and promoted the stock on Citron’s Twitter account, only to sell his positions for a profit of nearly $1 million within hours, despite publicly stating a higher target price.

Potential penalties

If convicted, Left faces significant penalties, including up to 25 years in federal prison for the securities fraud scheme count, up to 20 years for each securities fraud count, and up to five years for the false statements count.

The investigation is being conducted by the FBI and the United States Postal Inspection Service. The case is being prosecuted by Assistant United States Attorneys Alexander B. Schwab and Brett A. Sagel, and Trial Attorneys Lauren Archer and Matthew Reilly.