DOJ & SEC Bring Enforcement Actions Against Short Sellers, Highlighting Continued Prevalence of Short Selling Against Public Companies

The US Securities and Exchange Commission (SEC) and the US Department of Justice (DOJ) recently announced parallel actions against an activist short seller and his firm, charging them with multiple counts of securities fraud.¹ The charges are the latest reminder of the prevalence of short sellers who seek to drive down the stock price of public companies by engaging in “short-and-distort” campaigns. In these campaigns, short sellers sell a public company’s stock short and then spread disparaging, false rumors about the company, attempting to profit from the stock price decrease caused by their misinformation.

Details of the Enforcement Actions

The DOJ indictment alleged that the activist short seller, Andrew Left, had engaged in a market manipulation scheme designed to impact the stock prices of companies that he targeted, and charged him with engaging in a securities fraud scheme.² According to the DOJ, the short seller publicized sensationalized headlines encouraging readers to sell or buy the stock of a target company. The short seller then profited on the resulting stock price movement by reversing the trading positions of his firm, Citron Capital LLC. In effect, the short seller closed out positions at prices different from the target prices that he publicly recommended.

In a parallel civil action, the SEC also charged the short seller and his firm with engaging in a $20 million multi-year manipulation scheme to defraud investors.³ The alleged conduct, which mirrors that alleged in the DOJ indictment, includes publishing false and misleading statements regarding stock trading recommendations. The SEC claims that Left planned to trade in direct contradiction to public statements.

Recent Rulemaking

A new rule may help the SEC and issuers in identifying certain entities engaged in short and distort campaigns. The SEC recently passed Rule 13f-2, which requires that investment managers file a Form SHO within 14 calendar days after the end of each month, for each equity security over which the investment manager, or any person under that investment manager’s control, has investment discretion with respect to a gross short position meeting the rule’s applicable thresholds.⁸ The compliance date for Rule 13f-2 and Form SHO is January 2, 2025, with the SEC publishing aggregated short sale information beginning in April 2025.

^{1 See https://www.sec.gov/enforcement-litigation/litigation-releases/lr-26056; https://www.justice.gov/criminal/criminal-vns/case/united-states-v-andrew-left.
2 This offense carries a statutory maximum sentence of 25 years in federal prison in addition to 17 counts of securities fraud, each of which carries up to 20 years in federal prison.
3 The SEC is seeking civil monetary penalties, disgorgement, and prejudgment interest.
4 Short-and-distort campaigns, if accompanied by a significant decline in stock price, could increase the risk of shareholder litigation or government enforcement against targeted companies.
5 For instance, public companies may bring claims for defamation, tortious interference in business, violations of state anti-fraud statutes, and other tort-based claims, attempting to recover some of the damages sustained from short and distort campaigns.
6 Many popular financial websites allow short sellers to remain anonymous while promulgating damaging, defamatory reports. Often, such users will claim a First Amendment right to remain anonymous when public companies attempt to identify them.
7 Allied Capital Corporation (Allied) lobbied the SEC to investigate David Einhorn and his hedge fund, Greenlight Capital LLC (Greenlight), after Einhorn publicly explained Greenlight’s short position in Allied and alleged overvaluation of many of Allied’s investments. See https://www.sec.gov/files/oig-496redacted.pdf. Although its investigation of Einhorn and Greenlight was ultimately closed, the SEC followed by scrutinizing Allied, finding that Allied had violated the books and records and internal controls provisions of the US Securities Exchange Act of 1934 (Exchange Act) by failing to maintain accounts that accurately reflected the valuations it recorded of its securities. See https://www.sec.gov/litigation/admin/2007/34-55931.pdf. Additionally, Biovail Corporation (Biovail) brought suit against a number of hedge funds for a short and distort scheme in which Biovail alleged that conspirators spread false information regarding accounting practices and kickback allegations. The suit was ultimately resolved when a New Jersey state court dismissed Biovail’s complaint for failure to state a cause of action. See https://www.nytimes.com/2009/08/21/business/21sac.html. Two years after the original lawsuit was initiated, however, the SEC sued Biovail and a number of its senior executives for engaging in fraudulent accounting schemes. See https://www.sec.gov/enforcement-litigation/litigation-releases/lr-20506.}

Will be interesting to see if MR Anderson Hindenburg 1/ has been telling the truth or 2/ a lot of porkies and it was just a well-planned short attack on Sezzle due to 4 th qtr selling along with publishing incorrect material. i have feeling the 2/ point might be closer to the truth.
Either way he's disbanded the company Hindenburg founder to close short-seller behind Adani, Nikola selloffs | Reuters