Put up or shut up seems to the message Andrew Left, the famous short seller, is sending to the Securities and Exchange Commission.
Left, who has been charged with fraud by the Department of Justice and the Securities and Exchange Commission, is asking the SEC to come up with a rule that specifically details what trading is illegal — because right now there isn’t one.
A six-page formal petition filed with the SEC by law firm Dynamis on behalf of Left is asking for rulemaking “to clarify the legality of trading by investors who publicly comment on securities,” according to the law firm.
The SEC has charged Left and his firm, Citron Research, for engaging in a $20 million scheme to defraud followers by publishing false and misleading statements regarding his supposed stock trading recommendations.
“Once recommendations were issued and the stocks moved, Left and Citron Capital quickly reversed their positions to capitalize on the stock price movements,” the SEC’s complaint said. “Left bought back stock immediately after telling his readers to sell, and he sold stock immediately after telling his readers to buy.”’
Neither the SEC nor the DOJ accused Left of making false statements about the companies he wrote about. But they claimed covering his shorts or closing out his positions after publishing his views still misled investors. Now the SEC wants Left and any business associated with him to be banned 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,” the commission’s complaint said.
The problem is that the SEC has no rule prohibiting such trading, which is common practice among short sellers, nor any trading bans surrounding short selling. If the commission wants to charge Left, short sellers argue it needs to create a rule instead of trying to legislate through enforcement. (Legislating through enforcement is a practice that the SEC under Chairman Gary Gensler was criticized for, specifically surrounding cryptocurrencies.)
“After publicly commenting on a security, how long must an individual wait to make a trade?” the petition asks. The petition also wants the SEC to clarify whether disclaimers can provide a safe harbor for traders who disclose their intentions, and determine whether trading restrictions apply to all investors.
Many activist short sellers do cover their short positions after releasing reports, relying on extensive disclaimers attached to their reports that specifically say they may change their trading positions at any time. They have also argued that the same rules should apply to Wall Street analysts who offer stock tips.
Left is one of several short sellers who were caught up in a wide-ranging investigation by the DOJ and the SEC over their trading, but while many engage in similar activities, so far he is the only one who has been charged.
“The lack of clear guidelines has created an environment where millions of people who engage in routine discussions about stocks could now face SEC enforcement actions,” according to Dynamis.
Left’s lawyers also sent a letter to incoming SEC Chair Paul Atkins, alerting him to the petition and mentioning President Donald Trump’s promise of “free speech.”
“This matter directly aligns with President Trump’s commitment to free expression, as expressed in the President’s recent Inaugural Address,” they wrote.
“The SEC’s recent enforcement actions create a dangerous chilling effect on free speech and market participation,” said Eric Rosen, founding partner of Dynamis and one of Left’s attorneys.
