(Bloomberg) -- Short sellers are beefing up disclaimers in their research reports in the clearest signal yet that last month’s criminal charges against Andrew Left are reverberating through the industry.
Hindenburg Research and Kerrisdale Capital both upped warnings in reports this week in the wake of the charges against Left, who is accused of misleading investors by making quick trades after issuing his investment recommendations.
The new language shows that short sellers have long-term concerns about the impact of the Left case on an industry that critics say sometimes operates in legal gray areas. US authorities brought the charges against Left as part of a yearslong crackdown against traders who tout their bearish bets and can reap a profit if their predictions are right.
While Hindenburg made a small tweak to language about “derisking” in a legal disclaimer it includes at the bottom of its reports, Kerrisdale took the opportunity to blast the government’s case. The firm said the charges had upended its belief that it was enough to issue truthful reports with disclaimers that made it clear they could make money from a stock falling — without a detailed explanation of their trading strategy.
“So in the absence of second-by-second trading updates and so that investors don’t feel wronged that we may close out of a lot of a position very quickly after publishing, just assume that that is exactly what we’ll do,” Kerrisdale said in the fine print of a report Tuesday. “Then, you won’t be, er, defrauded. Or something like that.”
Kerrisdale and Hindenburg declined to comment on the changes. Neither firm has been accused of any wrongdoing.
Once one of the most active short sellers on Wall Street, Left, the founder of Citron Research, was charged in July with securities fraud and accused of generating about $20 million in illicit profits. He pleaded not guilty in a federal court in Los Angeles.
Left, 54, allegedly exploited his ability to move stocks in almost two dozen companies, including American Airlines Group Inc. and Tesla Inc. Prosecutors say he misled investors with inflammatory tweets and “extreme” target prices in hopes of nudging a stock up or down just long enough to make his own trades. The US Securities and Exchange Commission filed a parallel civil case.
Some short sellers say they are concerned that the government appears to have wildly misunderstood how the short-selling industry works. Among Left’s key defenses are his own disclaimers.
Left’s lawyer, James Spertus, said the charges will undermine traders who provide a valuable service by exposing companies that are overvalued as a result of accounting fraud or other hidden malfeasances.
‘Truthful Information’
“The theory of the case is that the people who publish truthful information must also disclose their private trading intentions — that is going to cut off the flow of truthful information to the markets,” Spertus said in an interview.
The cases against Left stem from a wide-ranging US effort to examine relationships between hedge funds and skeptical researchers. The probes have rattled the industry for three years as investigators have sought information on dozens of money managers and activists, as well as transactions involving more than 50 stocks.
The case will at least make short sellers more cautious about some issues, including price targets, “because there’s an indictment out there,” said Kir Kahlon, founder and chief investment officer at Scorpion Capital. He doesn’t predict a chilling effect from the case, per se, as much of the indictment is specific to Left’s alleged conduct and doesn’t target short selling itself.
“The indictment makes no allegations about the practice of price targets or short selling,” Kahlon said. “They are just going after false statements, that’s it.”
Ivan Cosovic, the founder of a data firm that tracks activist short sellers’ campaigns, said that so far this year, the number of new short reports is on par with last year and it might be too soon to see an effect on the industry.
“The true impact of the Citron-SEC situation on publishing strategy of activist short sellers might only become apparent in the coming months,” said Cosovic, founder of Breakout Point, based in Dusseldorf, Germany.
Tweets, Statements
The Left indictment stitches together his tweets and other public statements with confidential electronic communications to show what prosecutors describe as intentional efforts to move stock prices and mislead investors.
Left’s trading around price targets is just part of the case. The indictment also alleges he hid Citron’s financial relationships with a hedge fund, even fabricating invoices and wiring payments through a third party to conceal his profit.
Spertus said Left posted a disclaimer on his website saying no one should make assumptions about his trading. And, he said, Left’s predictions about companies were accurate.
“Prices don’t always move toward the target in a linear way and it could take a year or two before the target is reached,” Spertus said. “The idea that someone has to hold on until their target price is reached or disclose their own trading intentions — that’s just going to stop the flow of information to the market.”
--With assistance from Carmen Reinicke, Bailey Lipschultz and Hema Parmar.
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