According to an article published recently in the Institutional Investor, the SEC’s pending case against well known “short and shout” researcher Andrew Left and Citron Research for securities fraud and market manipulation could have wider implications for the activist short selling business. However, we wonder whether this case could also impact the unregulated independent research industry.
SEC Case Against Left
A few weeks ago, the SEC charged Andrew Left and his firm for engaging in a $20 million scheme to defraud readers by publishing false and misleading statements regarding his stock trading recommendations. Left is subject of both a criminal indictment by the Department of Justice and a civil complaint by the Securities and Exchange Commission.
According to the SEC’s complaint, Left is accused of, “Once recommendations were issued and the stocks moved, Left and Citron Capital quickly reversed their positions to capitalize on the stock price movements. Left bought back stock immediately after telling his readers to sell, and he sold stock immediately after telling his readers to buy.”
The SEC is seeking to ban Left and any business associated with him from trading any security for five days after he publishes anything about it, “whether through a report, tweet, social media post, media interview, or other written or oral means.”
Left was arraigned in a Los Angeles federal court a few weeks ago week and plead not guilty to the charges.
Potential Impact of this Case
Clearly, the SEC is trying to make an example of Andrew Left to motivate the activist short-selling community to halt the various practices the SEC feels are manipulative and harmful to retail investors.
If the SEC imposes such a trading ban on Left as part of its “consent decree” to settle the case, some in the industry suggest this could be used as a precedent for future cases against activist short sellers. While others don’t agree, they admit that such a trading ban would be a clear sign that the SEC plans to aggressively go after other activist short sellers who adopt similar practices. This case would have a very real chilling effect on the industry.
However, such a trading ban wouldn’t just impact the activist short seller community. Many independent research firms could also be impacted by such a ban. Research analysts at most regulated firms like investment banks and broker-dealers are prohibited from trading in the stocks they cover. However, this is not the case for analysts who work at unregulated firms such as independent research providers.
Over the past decade, the team at Integrity Research Associates has conducted numerous compliance audits of both regulated and unregulated research providers. While analysts at some independent research firms have very few restrictions about trading in the companies they cover (other than disclosing their ownership), other IRPs have trading blackout periods ranging from 48 hours to 30 days. Some firms even limit their trading in covered stocks for some defined period before a research report is published.
Obviously, a trading ban against Andrew Left would make it clear to all independent research providers that they would need to implement regular trading restrictions on covered companies, companies mentioned on social media or TV, as well as force them to adopt trade monitoring for all research analysts.
Our Take
The SEC’s case against Andrew Left could clearly have an impact on “short and shout” research firms like Muddy Waters and Gotham City, activist short sellers, and meme stock promoters like Roaring Kitty. Many in the space argue that a trading ban like the one the SEC is considering for Andrew Left will make short selling much more difficult.
Whether the SEC is able to win their case against Andrew Left or not, most industry insiders see it as a warning to the activist short seller community as a whole. Clearly, the government has pursued this case in an effort to regulate social media speech it believes is harmful to unsophisticated retail investors.
However, the case against Andrew Left could also have unintended consequences on the wider independent research industry – requiring unregulated IRPs to implement and manage more extensive and costly research compliance policies. The big question is whether such changes could have a chilling effect on the independent research industry in the U.S. We will be paying close attention to these developments over the coming months and will report on the outcome of this SEC enforcement action.