Hong Kong Tribunal Says Citron’s Left Culpable of Misconduct

  • Market Misconduct Tribunal sides with city’s regulator
  • Left says firm “stands by our journalistic integrity”

A Hong Kong tribunal said U.S. short-seller Andrew Left was culpable of market misconduct for a report that his Citron Research firm published about a stock listed in the city.

The Market Misconduct Tribunal of Hong Kong said Friday that information in the Citron note was “false and/or misleading as to material facts or through omission of material facts,” and that as such Left was either “reckless” or “negligent” in putting the report together.

It’s the second time in recent months that the city’s authorities have ruled against analysts for issuing negative research. In March, a separate tribunal handed down a HK$11 million ($1.4 million) penalty and public reprimand to Moody’s Investors Service for a report that was critical of dozens of Chinese companies. That ruling alarmed Hong Kong-based investors and analysts, who are concerned that such actions could strangle critical commentary about the city’s markets.

“Today is a step backwards for fair and open markets in Hong Kong,” Left said by e-mail. “Citron Research has joined Moody’s as a target of H.K. Securities and Futures Commission sanctions for publishing opinions that we believed to be truthful, thoughtful and documented critical research.”

Evergrande Real Estate Group Ltd., now called China Evergrande Group, fell 20 percent on June 21, 2012, when Left released his note claiming that the company used accounting tricks “to mask” insolvency. Evergrande, based in Guangzhou, China, denied the claims and later filed a police report.

Hong Kong’s Securities and Futures Commission brought charges against Left and his firm in December 2014, accusing him of making about HK$1.7 million profit after selling short 4.1 million shares of Evergrande just before the report’s publication.

The tribunal heard from a witness called by the SFC who questioned Left’s methodology and conclusions. Citron’s claims would be seen as “unreasonable, incorrect or fanciful” by a professional analyst or professional property analyst, Paul Phenix, accountant and former stock exchange Listing Committee member told the hearing.

Among the issues Phenix raised, according to the tribunal’s report, were that Left did not appear to understand Hong Kong accounting rules when asserting Evergrande had hidden liabilities, and he had incorrectly labeled a standard mainland China land purchase structure as fraudulent.

In a statement after the ruling, the SFC acknowledged and thanked the U.S. Securities and Exchange Commission “for its assistance in the investigation of this case.”

Disgorgement Decision

Lawyers for both parties now need to decide what Left’s disgorgement will be after the tribunal ruling, said Timothy Loh, Left’s lawyer in Hong Kong. It may involve repayment of the profit from trading shares, covering costs of the hearing, or a ban from trading in the city, Loh said.

“Citron stands by our journalistic integrity,” said Left. “This court’s opinion simply stifles negative commentary. Our lawyers will consider all options for appeal.”

Francis Lun, chief executive officer of Geo Securities Ltd. in Hong Kong, echoed Left’s view. Friday’s ruling “stifles honest research and freedom of expression,” he said by phone.

The Tribunal said it accepted the SFC’s view that the aim of Hong Kong’s law “is to maintain the integrity of the markets and to protect the public at large from the potentially very damaging effects of false or misleading information.”

Citron has published more than 150 reports in the past 14 years, according to its website. Valeant Pharmaceuticals International Inc. is one of Left’s most famous targets. On Oct. 21, Citron accused Valeant of an Enron-like strategy of recording fake sales. The company, whose shares are down more than 70 percent since, has been embroiled in an accounting scandal in which it had to restate some sales figures from 2014 and 2015.

Last week, Left went after Cyberdyne Inc., a Japanese maker of robot exoskeletons for patients with spinal difficulties. He cited declining growth in the company’s core assistive-limb product and valuations that exceed peers. The stock is down 16 percent since Citron’s note was published. Shinji Uga, Cyberdyne’s chief financial officer, said the report was malicious and contained factual inaccuracies.

Left’s bets haven’t all been winners. Facebook Inc. shares have risen since he announced a short in June. Also that month, he said performance-chemicals maker Chemours Co. was going to zero. The stock was up 45 percent through Thursday. In February, Left said he saw Gap Inc. heading below $20 a share in the next six months. It closed Thursday at $26.39 a share.

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