SEC Charges Publisher for Manipulation Scheme Targeting Retail Investors

Who may be interested: Investment Advisers

Quick Take: The SEC filed a complaint in federal court charging activist short publisher Andrew Left and Citron Capital, LLC, an investment adviser he operated, with securities fraud, alleging a manipulation scheme that targeted retail investors. The complaint alleges that Left generated approximately $20 million in illicit trading profits by engaging in a multi-year scheme of publishing false and misleading statements regarding Left’s stock recommendations to retail investors.

According to the SEC’s complaint, from March 2018 to December 2020, Left published false and misleading statements regarding stock recommendations he made to retail investors via his online platform Citron Research. The recommendations included representations about Left’s trading positions in target stocks and “target prices,” creating the false impression that his trading was aligned with his recommendations when, in fact, he immediately reversed position to profit from the price movements he knew would follow his reports and tweets. Following his statements, target company stock prices moved, on average, more than 12%.

In published reports, tweets, letters, and media interviews, Left allegedly made false or misleading statements about his own trading in and/or exposure to target stocks, and the target prices he published. As detailed in the complaint, Left did not have a reasonable basis for the published price targets; evidence indicates the price targets were not intended to be targets but, rather, “catalysts” to induce retail investors to buy or sell the stock and move market prices so Left could trade against them; and Left sold at prices well above his published target prices for short recommendations and well below them for long recommendations.

According to the SEC’s complaint, Left also made false or misleading statements about Citron Capital having outside investors and Citron Research’s independence as a publisher. In addition to the false and misleading statements, Left allegedly engaged in deceptive acts in furtherance of his scheme, including creating fake “investor letters” in order to create the false impression that Citron Capital was a successful hedge fund with outside investors when, in fact, it never had outside investors and traded Left’s own money; creating anonymous websites to amplify certain of his recommendations; and creating phony invoices for “consulting services” to conceal his receipt of compensation in exchange for publishing certain reports and tweets.

The SEC’s complaint charges Left and Citron Capital with violating the antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder. The SEC’s complaint seeks permanent injunctive relief, as well as disgorgement and civil penalties. In a parallel action, the DOJ and the U.S. Attorney’s Office for the Central District of California announced charges against Left.

For a more detailed discussion of the SEC’s charges see Seward & Kissel’s client alert here.

The SEC’s complaint can be found here.