(Times Of Update) — Trampled by markets and attacked by angry executives, short sellers now find themselves facing their biggest concern yet: the U.S. government.
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The new federal charges that one of the industry’s most prominent players, Andrew Left, committed securities fraud are sending shockwaves through the already shrinking sector of investors who specialize in betting against specific stocks. For a group that has long stirred controversy by taking on some of the biggest names in business, it’s a particularly sobering moment.
The U.S. government spent years investigating the industry’s practices, but as investigations by the Justice Department and the Securities and Exchange Commission have petered out in recent months, many have begun to think the probes have failed. Even Left, who stepped down after investigators seized his computers and phones, has gotten back into the game.
Everything changed on Friday.
Prosecutors have announced criminal charges against him, while the SEC has filed a civil suit — cases that could upend his company, Citron, and send him to prison for years.
According to the SEC, Left generated about $20 million in profits from illegal trades involving nearly two dozen companies. Prosecutors accused him of repeatedly misleading the public, disputing what they called “sensationalized” reports and describing times when he indicated he would continue betting much further down the road, even though he was already withdrawing his winnings.
At one point, Left bragged to colleagues that some of his public statements were urging retail investors to trade the way he wanted and that it was like taking “candy from a baby,” according to the SEC.
Other short sellers and their supporters were quick to argue Friday that the alleged misconduct was unique to Left and should not be taken as a general rebuke of bearish investing.
Still, some say it could make it harder for short sellers to find backers. Some predict they may have to spend more on legal advice and tone down their public statements.
“Faulty theory”
Left’s lawyer attacked the government’s case, saying it was based on a “flawed theory” that investors had a duty to specify their trading plans beyond disclosing their activity to the market. The lawyer warned that the charges would have a chilling effect on downside hunting, hurting public investors by leaving corporate wrongdoing unrevealed.
“The fact that Mr. Left trades the securities he researches and writes about is well known, and there is no rule or law requiring a publisher who discloses that he is trading to also publish his private trading intentions,” attorney James Spertus said in an emailed statement. “The allegations filed today should concern all investors because the publication of truthful information is essential to efficient markets.”
Short sellers have attracted an increasing number of antagonists in recent years…
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