The prince of darkness Andrew Left, and the long and short of shorting a stock

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Chris Gay is a contributing columnist for The Globe and Mail. He is a former Wall Street Journal staffer and writes the newsletter Figure at Center.

Are short sellers bound for extinction? You might think so given the hand-wringing over Monday’s conviction in the United States of high-profile short seller Andrew Left for securities fraud. Many fear the verdict will discourage the widely used tactic, which plays a critical role in price discovery, the thing markets do best.

Federal authorities charged Mr. Left in 2024 with manipulating stock prices and misleading investors with fraudulent commentary about his positions, among them Nvidia Corp. and Tesla Inc., raking in at least US$20-million in the process. Mr. Left, who runs Citron Research, had pleaded not guilty.

Suggesting after the verdict that he would appeal, Mr. Left cast the trial as an issue of speech rights, telling New York Times reporter Andrew Ross Sorkin in an e-mail that he was convicted for “telling the truth and making a profit.” He added: ”What this does for future of free speech is chilling. Can individual investors not talk SpaceX?”

This requires some parsing. Mr. Left was not convicted for speaking his mind, but for defrauding investors. Intentions matter in such cases, and the government’s evidence regarding his intentions proved compelling to the jury.

Short seller Andrew Left’s conviction shows social media can be used to rip off retail investors

Matthew Reilly, acting assistant chief of the fraud section of the Justice Department’s criminal division, adduced Telegram messages, e-mails and trading data showing that Mr. Left repeatedly issued authoritative social-media posts about companies and then profited from quick, prearranged trades. He was “tweeting with one hand and trading with the other,” while “secretly plotting to take advantage of retail investors,” Mr. Reilly told the jury in a closing statement.

Short selling is the risky practice of borrowing shares to sell them for x price, expecting to repurchase them at a price lower than x. This can be an act of hedging against losses or straight-up speculation by people incentivized to make prices fall. It’s this latter practice that drives opposition to shorting, which opponents say exacerbates price declines. Proponents argue that short selling plays a critical role in price discovery, the complex process by which markets digest information and arrive at fair value. They also observe that regulatory attempts to curtail short selling during the 2008 meltdown did more harm than good.

What’s more, the Securities and Exchange Commission, the U.S.’s chief federal markets regulator, already bans abusive practices such as “naked short selling,” selling stock you don’t own or haven’t arranged to borrow. This creates “phantom shares,” i.e. the illusion of supply where there may not be any, and can prevent delivery.

Yale School of Management professor Frank Zhang told Bloomberg that the Left verdict will have a chilling effect on short sellers, because “it will scare them into silence.” Mr. Left’s conviction, he said, “sets a dangerous precedent for short sellers, who now fear that publishing negative research and exiting trades quickly will trigger federal audits and market manipulation charges.”

U.S. jury finds prominent investor Andrew Left guilty of securities fraud

Edwin Dorsey, who covers the shorting world in his newsletter The Bear Cave, agreed that some chilling is likely for a certain species of trader. “If you’re a big, long, short hedge fund and you’re not publishing commentary, I don’t think this is going to have a big effect,” he said. But “activist” short sellers – those who seek out, report on and short problematic stocks – are a different matter. “What was really on trial here is trading around reports,” Mr. Dorsey said, “and the government made clear they do not like it when you trade quickly around reports.”

But if trades look suspicious, shouldn’t they draw scrutiny? If you’re not planning to manipulate the market, why would you worry? Overzealous regulators? Under a Trump regime that views regulators the way drug cartels view Interpol? (It was the Biden administration that brought Mr. Left’s case.)

Knowing what we know about the personality types drawn to Wall Street, the notion that they’ll abandon a potentially profitable game for fear of regulatory blowback seems a stretch, even with the headwinds of a surging market and the departure of some big players. These are the sort of people, after all, who take calculated risks for a living, and one of those risks is an unpleasant encounter with the law when you’ve pushed the envelope too far. It’s an ethos concisely expressed 20 years ago by scruples-challenged sellers of fire-in-the-hole mortgage securities winking at each other with the text-message shorthand “IBGYBG”: “I’ll be gone, you’ll be gone.”

But not all is lost. And if traders have to curtail short selling, there’s an alternative bet: whether Donald Trump will pardon Mr. Left. So far, I’m not seeing him on Polymarket under “Who will Trump pardon by 2027?” But if Sam Bankman-Fried and Nicolás Maduro are pulling 7 per cent each, his chances aren’t zero.