(Bloomberg) — Short seller Andrew Left said a Securities and Exchange Commission lawsuit was accusing him of breaking a rule that doesn’t exist and asked a judge to dismiss the regulator’s fraud claims against him.
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Left, 54, is facing both criminal and civil cases alleging he and his firm, Citron Research, misled investors with inflammatory social media posts setting “extreme” target prices in hopes of nudging stock prices long enough for him to make profitable trades.
On Friday, Left moved to have the SEC suit tossed. He hasn’t yet made a similar filing in the parallel criminal case. Both cases are in federal court in Los Angeles and stem from a multi-year government probe into the short-selling industry. A number of other short sellers have beefed up their disclaimers in response to the charges.
The SEC accused Left of fraud on the grounds that he failed to publicly disclose his private trades when he was making his blistering social media comments. The short seller’s lawyer, James Spertus, argued in Friday’s filing that there was no rule requiring such a disclosure and that Left’s disclaimers already warned investors not to make assumptions.
“The SEC cannot engage in rulemaking through an enforcement action without violating due process,” Spertus said. The lawyer argued that such a rule would in any case be an unconstitutional encroachment on free speech because it would “compel him to disclose his personal trading strategy for securities.”
Left’s argument that there is no clear rule barring his conduct could factor into his criminal defense. His lawyers could try to argue it shows that he had no intent to commit fraud, which prosecutors must prove to win his conviction. He faces a maximum of 25 years in prison if he’s convicted on the most serious charge of securities fraud conspiracy.
Neither the SEC nor federal prosecutors immediately responded to request for comment on Left’s filing. The SEC will have a chance to respond to the filing before the judge makes a decision.
The government has said it has extensive evidence in the form of emails and text messages seized from Left’s electronic devices. They allegedly show Left working with others in advance of his public statements about companies to try to profit from his own trades, even if those trades didn’t match what he was allegedly suggesting investors should do.
Left is also accused of concealing his ties to hedge funds that allegedly made trades on his behalf.
Spertus on Friday downplayed Left’s impact on the market, calling “absurd” the SEC’s claim that his tweets and reports had an impact on multibillion dollar companies like American Airlines Group Inc. and Tesla Inc. According to the filing, Left never concealed what he was doing.
“Reasonable investors know, even without reading Mr. Left’s published disclaimers, that his strategy is to realize gains from price corrections,” Spertus wrote. The lawyer also said the SEC’s fraud claims fail because Left wasn’t misleading investors with his estimates.
“The SEC fails to disclose that Mr. Left’s published target prices were true in almost every case,” Spertus said. “When the omitted facts are included, the SEC’s fraud theory falls apart.”
The case is SEC v. Left, 24 cv 06311, US District Court, Central District of California (Los Angeles).
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