In Defense of Andrew Left
I know Andrew Left, I like Andrew Left, and I consider Andrew Left to be a positive force for markets and the pioneer of the activist short movement. Without Andrew Left markets would have more fraud and fewer skeptics willing to go public. And like many, I was sad to see someone I respect be charged with fraud and market manipulation in both an SEC complaint and Department of Justice indictment.
I’ve read the SEC complaint, the DOJ indictment, as well as most media reporting on this case and feel there are important deficiencies the government and media are missing.
Please join me as we explore four issues with this case:
1. Commentary and Trading around General Electric
The Department of Justice indictment against Andrew Left alleges he “initiated a media campaign to discredit another activist short seller’s short report on GE and artificially inflate the price of GE stock to benefit defendant LEFT’s trading positions.”
Below is a screenshot from page 27 of the DOJ indictment:
For emphasis, here are some relevant quotes from the GE portion of the indictment:
“On or about August 16, 2019, defendant LEFT initiated a media campaign to discredit another activist short seller’s short report on GE and artificially inflate the price of GE stock to benefit defendant LEFT’s trading positions.”
“At approximately 10:44 a.m., defendant LEFT posted to the Citron Twitter Account: ‘Markopolos report on $GE was the worst that activist short selling has to offer. Aggressive accounting is not fraud. Disingenuous all the way through . . . .’ The post included a link that directed viewers to Citron’s own GE report published on Citron’s website.
“Defendant LEFT made false and misleading representations in Citron’s GE report to manipulate the price of GE’s stock and benefit his own trading positions. Specifically, defendant LEFT represented that, “Citron took the opportunity to buy stock as well.” In truth, at the time defendant LEFT made the statement, he had already placed an order to sell his shares, and within approximately one hour of posting Citron’s tweet and report on GE, defendant LEFT had sold all of his shares of GE for a profit of at least $70,000.” (Emphasis mine)
What happened?
On August 15, 2019, analyst Harry Markopolos launched a website called gefraud.com (archived here) and published a 175-page report titled “GENERAL ELECTRIC, A BIGGER FRAUD THAN ENRON” (archived here).
The report and website by Mr. Markopolos alleged that GE was “A Bigger Fraud Than Enron” and “on the verge of insolvency” and made users click on a lit-up sniper scope to access the “whistleblower report.”
Below is a screenshot of Mr. Markopolos's now-deleted website:
The report seemed to rely on spurious logic, even at one point claiming GE “failed the Madoff test” because GE’s profit margin in its industrial units (~14.7%), was higher than Bernie Madoff’s annual returns (~12%). Below is slide 15 of the now-deleted Harry Markopolos GE report:
Since Mr. Markopolos’s 2019 report calling GE “A Bigger Fraud Than Enron,” the stock has risen ~275%.
However, the Markopolos GE report caused GE stock to fall about 11% on the day of its publication, its largest single-day decline since 2008. In a CNBC interview, Mr. Markopolos said he was working with an anonymous “mid-sized U.S.-based hedge fund” that was betting against GE and would share some of its profits with him. However, he refused to disclose the fund’s name or positioning because he “promised them confidentiality.”
Let’s get this straight: according to the DOJ, Harry Markopolos getting paid by an anonymous hedge fund to falsely call GE “A Bigger Fraud Than Enron” and “on the verge of insolvency” is totally fine.
However, Andrew Left tweeting criticism about the GE allegations under his own name is “a media campaign to discredit another activist short seller’s short report on GE and artificially inflate the price of GE stock.”
Had Andrew Left not tweeted about GE, he could have privately profited off his correct belief that the Harry Markopolos GE report is “disingenuous all the way through” any way he wanted. However, because he publicly shared his view that the GE allegations had no merit, he somehow needs to hold his position for more than a quick intraday gain? Otherwise, it’s a crime?
Moreover, the Harry Markopolos GE report had the following disclosure:
“Prior to the initial distribution of this Report on August 15, 2019, the [author] entered into an agreement with a third-party entity to review an advanced copy of the Report in exchange for later-provided compensation. That compensation is based on a percentage of the profits resulting from the third-party entity’s positions in the securities, derivatives, and other financial instruments of, and/or relating to, General Electric. Those positions taken by the third-party entity are designed to generate profits should the price of GE securities decrease.”
In the activist short industry this is what is commonly called a “balance sheet deal” whereby someone with capital, the balance sheet partner, typically takes a very aggressive short-term position against a stock. Then the activist, in this case Markopolos, releases a report hoping to cause a decline in the target stock. If the balance sheet partner profits, they share a portion of the profits with the activist.
Because of regulatory haziness, this practice has become very commonplace often with anonymous activists and balance sheet partners outside U.S. jurisdiction. Ironically, balance sheet partners have every incentive to aggressively trade around short reports, often covering their short the very day an activist issues a sell recommendation.
Harry Markopolos’s predictions were wrong, beyond inflammatory, and he likely profited millions by causing a temporary multi-billion-dollar decline in GE stock.
That’s all good according to this indictment, instead, the government believes Andrew Left correctly criticizing the Markopolos GE report is a crime because he profited ~$70,000 in an intraday trade in GE stock.
2. Commentary and Trading around Vuzix (VUZI)
Pages 25-26 of the SEC complaint allege that Andrew Left “published trading recommendations without conducting adequate research.” Below is a screenshot from the SEC complaint:
This portion of the complaint is puzzling. Let’s go through paragraph by paragraph:
“141. Between December 16, 2020 and December 22, 2020, Left and Citron Capital established long positions in Vuzix Corporation (‘VUZI’), meaning that they would profit if the stock price increased.”
Fine.
“142. On Friday, December 18, 2020, Left published a tweet through the Citron Research platform telling the market that the company was undervalued and suggesting that VUZI was a good buy: ‘Getting emails about shorting $VUZI. NO WAY we would short this flyer. Small market cap with story that is tied to 5G, $AMZN and $PLUG and Covid. There has to be easier pickings...still doing research. Risk/Reward easier on other high flyers’” (Emphasis mine)
How is a tweet claiming “NO WAY we would short this flyer” and “There has to be easier pickings...still doing research” a long recommendation? The tweet doesn’t even say Andrew Left is long. At most, this is a recommendation not to short Vuzix, not a “recommendation” to invest in the company.
“143. Later that day, Left admitted to a colleague that he had only ‘put out that tweet to see what would come back to me,’ demonstrating Left had not actually done research on whether VUZI was an appropriate investment to recommend to Citron Research’s readers.”
Given Andrew Left’s tweet says he is “still doing research” it can be reasonably expected that he had not yet conducted deep research on Vuzix.
Also, Andrew Left saying he ‘put out that tweet to see what would come back to me,’ could simply mean he is trying to get more information on the company and by tweeting about it he would get replies, DMs, and emails with more info. Nothing wrong with that.
“144. After Left issued the tweet, Business Associate One conducted research over the weekend into VUZI by speaking with VUZI company representatives and others in an effort to determine if the company was a good long investment. Business Associate One concluded that it was not an appropriate long investment, telling Left that ‘we can’t have enough conviction in this being an actual long’ investment.”
Again, this all stems from one tweet saying he was “...still doing research.” Andrew Left then continued his research and realized he didn’t want to invest in the company.
“145. However, even after receiving research that the company was not a good investment, Left did not remove the tweet from Citron Research’s platform, nor did he communicate to the market that he did not have the conviction to recommend VUZI as a long investment.”
Again, given Andrew Left didn’t recommend investing in Vuzix originally, he therefore has no moral obligation to “communicate to the market that he did not have the conviction to recommend VUZI as a long investment.”
The SEC also says Andrew Left “did not remove the tweet from Citron Research’s platform.” If Andrew Left deleted his tweet, one could just as easily argue he was “covering his tracks” or “presenting a false track record.”
“146. Instead, Left and Citron Capital sold their stock in VUZI within three days of the tweet, generating profits of over $700,000.”
Again, it’s not entirely clear what’s wrong. A stock can go up or down for a variety of reasons and a tweet saying “NO WAY we would short this flyer” and “There has to be easier pickings...still doing research” isn’t particularly promotional language. Moreover, it’s not entirely clear that the Andrew Left tweet is entirely responsible for the rise in Vuzix stock between December 16, 2020 and December 22, 2020. For example, the company rose on a December 17, 2020 partnership with Envirotainer and a December 22, 2020 deal with “one of the largest general merchandise retailers in the United States.”
Andrew Left put out a neutral-ish tweet saying he was doing research on a company, did research, based on his research decided to sell his starting position, and made money in the interim largely by getting lucky the company announced a few big deals.
3. Allegations About Citron Capital and Managing External Capital
Both the DOJ indictment and SEC complaint make allegations around Andrew Left’s Citron Capital and claims of managing external capital. For example, the DOJ indictment says Left established Citron Capital “to advance the false pretense that he successfully managed third-party investors’ funds and was a credible investment adviser.”
Likewise, the SEC complaint also alleged that Citron Capital published investor letters to “create the false impression that Citron Capital was a successful hedge fund with investors, when in fact Citron Capital never had any outside investors and Left simply used Citron Capital to trade his own money.”
First, Andrew Left’s reputation comes from decades of exposing corporate misconduct and frauds such as Valeant, Mallinckrodt, and Evergrande. The notion that Andrew Left’s reputation comes from establishing Citron Capital is simply not consistent what I’ve seen following the activist short world.
Second, even if true that Citron Capital didn’t manage external capital, based on the SEC’s complaint and media reporting it appears Andrew Left and/or Citron Capital managed external capital at another fund, potentially Atom Investors.
A June 2021 Institutional Investor article about Atom Investors describes the firm as a “multi-manager platform” and reported that “Atom also has a research relationship with Andrew Left’s Citron Capital, but the firm is not an investor in his hedge fund.”
The SEC complaint also says in part, “Citron Capital acted as a sub-adviser for Hedge Fund Two.” Again, another potential indication of advising and/or managing external capital.
At times it appears the SEC and DOJ are presenting internally inconsistent narratives both alleging Andrew Left falsely claimed to manage/advise external capital to bolster his reputation while also criticizing him for managing/advising external capital in an unethical manner.
4. Allegations Around Language in Citron Reports
Page 8 of the SEC complaint alleged that Andrew Left often wrote articles “in a sensationalist exposé style and strongly encouraged readers to sell the stock of the target company” and highlighted terms and phrases such as “fraud,” “investors have been warned,” and the “SEC should immediately HALT this stock.”
If truthful, what’s wrong with identifying a fraud as a fraud? Or calling a scam a scam? Why can’t you declare “investors have been warned” after you warn them about a risk?
And in March 2020, when Andrew Left wrote the “SEC should immediately HALT this stock” he was referring to Inovio Pharmaceuticals (NYSE: INO), which claimed it developed a COVID-19 vaccine very early in the pandemic. The company later abandoned its vaccine candidate and the stock ultimately fell ~95%. Maybe the SEC should have halted the stock?
Taken together, the deficiences outlined in the four examples above seem glaring enough to raise doubts about the remaining allegations outlined in the SEC complaint and DOJ indictment.
At the heart of this matter is the idea that it’s unsavory for a short activist to take a large short position, release critical research on a company, and then quickly turn around and cover some or all of their position.
I agree that this can feel wrong. That’s why I never bet against the companies I write about in The Bear Cave and instead only make money from reader subscriptions.
Yet, practically the entire activist short industry relies on trading around reports.
The criticism against Andrew Left would be better placed on nearly any activist short seller regularly doing balance sheet deals, many of whom run anonymous firms working with anonymous balance sheet partners — trading just as aggressively around reports with much less accountability for being wrong.
And rather than provide clarity, this indictment raises more questions around what is allowed.
Can you do months of research on a company, make a huge bet against that company, publish a truthful report on fraud or malfeasance, and then quickly unwind your outsized position?
Before this indictment, most activist short sellers would say yes — it’s their model. Now, maybe not so much.
Can you tip a friend? Or two? Can you charge someone for early access? Do you need to disclose if you do?
Can you work with a third-party balance sheet partner to trade around a report? Can they cover the day you publish? What if you establish divisions to be unaware of your partner’s trading? Is ignorance bliss?
Why isn’t a boilerplate disclosure — “Neither Citron Research nor Citron Capital will update any report or information to reflect changes in positions that may be held by a Citron Related Person” — enough?
What if you don’t include a price target? What if you don’t include any analysis? What if you are just tweeting memes?
What if you claim you will take a short to the end of the Earth? Now are you legally obligated to?
What if you wait 48 hours to cover a short? A week? A month?
What if you explicitly say you plan on covering within 48 hours of your report?
And who is the victim of Andrew Left’s activities?
Do investors really get hurt hearing Andrew Left give his opinion on investing in Tesla and Nvidia and shorting Cronos and Namaste?
And when does it become okay to change my position if I talked about it publicly?
The answer to that last question can be found on page 44 of the SEC complaint, part V, where the SEC asks the court to:
“Issue an order against Defendant Left… permanently restraining and enjoining Left from, directly or indirectly, including, but not limited to, through any entity owned or controlled by Left, purchasing or selling a security within five (5) trading days following any Publication by Left, or through any entity owned or controlled by Left, about that security. For purposes of this injunction, ‘Publication’ means the dissemination of information on a security, to the public, either directly or indirectly, whether through a report, tweet, social media post, media interview, or other written or oral means.” (Emphasis mine)
Where did this rule about not trading a security within five days of publication come from?
Is five days the new standard? Is that a law or recommendation?
Does the five-day rule apply to just Andrew Left? Activist shorts? Hedge funds? Ira Sohn pitches? Seeking Alpha authors? Substack authors? MBA stock pitch competitions?
Does the five-day clock refresh if you briefly comment again?
What if your views genuinely change within five days? Do you need to wait to tell the market you made a mistake?
In sum, the indictment against Andrew Left muddies the waters in an already vague regulatory landscape, discourages short-sellers and skeptics from sharing detailed analysis on frauds, and limits their ability to profit on their own work. The actions against Andrew Left erodes free speech around the edges, misunderstands the basics of the activist short landscape, lets the true bad actors off the hook, and creates a setup for government overreach in determining whether anybody’s market views are sincerely held.
Cautious investing to all.
Probably a weak case and gets quietly settled for a nominal fee. These allegations should be looked at from the long side authors with insane promotional and sensational articles, which are published 1000x more than activist short research.
How can the SEC not look at ARK for example putting out ridiculous price targets on their holdings, ie Tesla and then selling Tesla the same day promoting on social media and TV appearances.
Agreed, sounds like a load of BS and if found guilt, would be setting a dangerous precedent.