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Andrew Left would not be the first middle-aged finance guy to quit grinding so hard. On Friday, the well-known short seller behind Citron Research was charged with 17 counts of securities fraud by the US Department of Justice, crimes that prosecutors say were worth $16mn of profits. He also faces a civil complaint from the Securities and Exchange Commission.
Left’s biggest score was a decade ago, when he accused the Canadian pharmaceutical company Valeant, backed by Bill Ackman no less, of accounting irregularities. Those allegations were eventually confirmed.
But, according to the US authorities, in recent years his campaigns have featured situations where he quickly bought or sold stock after disclosing a position in order to capture immediate profits — when he publicly indicated he was planning to be in those trades for longer. The immediate moves in those stocks, of course, came because he had credibility from his Valeant takedown.
Short sellers have a scruffy reputation in many quarters. Their worst critics condemn them as manipulators; some even call for a ban on this practice of betting against companies. But the shorts are also a form of market accountability when regulators, whistleblowers and plaintiffs’ lawyers are not enough. Left will rely on these defences, along with claiming that the government has no set standards that define how short sellers should ply their trade.
The Feds, for their part, believe that they have a straightforward case. Left, for example, published price targets for positions, but allegedly exited trades far more quickly — often within minutes of a report — than he led the public to believe. He went on news programmes and made disclosures about his positions that allegedly were untrue at the time.
It often takes months or even years for the claims of a short seller to be vindicated. Sometimes a short seller can be correct about their criticisms of a company but the stock itself never reacts commensurately. Short sellers’ profits are bounded as a stock can only go to zero. Yet their potential losses are theoretically infinite: to cover their positions, they must buy back the stock at the market price.
It is a tough life. And many short sellers have understandably thrown in the towel amid a relentless bull market. The worst outcome, however, may be the funds that do not want to do the hard work any more — but still want to be on television and are trying to squeeze out profits.