Citron Research Employee Settles Fraud Allegations
Ryan Choi, an employee of Citron Research, has agreed to a settlement with the Securities and Exchange Commission (SEC), paying over $1.8 million. The charges stemmed from two tweets and subsequent trading activities.
SEC's Allegations Against Choi
The SEC announced on Tuesday that Choi "negligently participated in a scheme to defraud Citron Research readers in relation to two tweets posted by the platform". The SEC's press release further elaborates that Choi allegedly worked with Left in December 2020 on the research and content for two buy recommendations that Left issued through Citron Research.
The SEC's complaint alleges that Choi failed to act responsibly by not conducting sufficient research or due diligence, which he then provided to Left to back up the recommendations included in Citron Research's tweets. The SEC further alleges that Choi traded swiftly on the price increases that followed the two Citron Research tweets and negligently failed to ensure adequate disclosure of this trading activity in the tweets.
Reaction to the Allegations
This raises the question that if failing to conduct enough due diligence is a crime, then the entire sell side, most CNBC guests, and Cathie Wood should all be held accountable.
Charges Against Citron's Head
Andrew Left, the head of Citron, is facing charges from both the Department of Justice (DOJ) and the SEC for securities fraud. He has stated that he would "never" accept a plea deal. His lawyer stated in July that the case will fail for six independent reasons, asserting that there is no obligation to the market to disclose private trading intentions.
Impact on Short Sellers
Regardless of Left's conviction or acquittal, the case is expected to discourage short sellers from publicly sharing their research on companies they perceive to be overvalued or whose stock prices are based on false information. This could lead to a decrease in the sharing of market research, which could have negative implications for the financial markets.
Charges Against Andrew Left
Federal prosecutors charged short seller Andrew Left with fraud earlier this summer, accusing him of making misleading statements about stocks to profit from price moves triggered by his reports. Left is known for his firm Citron Research, which targets market "lemons". He gained fame for betting against Valeant Pharmaceuticals and GameStop during the meme stock craze, but his success has been dwindling in recent years.
Bottom Line
The case of Ryan Choi and Andrew Left brings to light the potential pitfalls and legal implications of trading based on insufficient research and due diligence. It also raises questions about the transparency of trading intentions and the responsibility of traders to the market. What are your thoughts on this matter? Do you think the charges are justified? Feel free to share this article with your friends and discuss. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.
