Short-Seller Left Plans Appeal After Hong Kong Trading Penalties

  • Left gets 5-year ban, must repay profits and cover legal costs
  • Concerns rise about attitude to negative research in Hong Kong

U.S. short-seller Andrew Left said he will appeal a Hong Kong tribunal’s ruling that he must repay profits and refrain from trading in the territory for five years because he published “false and/or misleading” claims.

Left must repay HK$1.6 million ($206,000) in trading profits and pay about HK$4 million in legal expenses, the Market Misconduct Tribunal said Wednesday. He will face criminal prosecution if he breaks Hong Kong rules again.

“I do not believe the decision properly reflected the case,” Left said in an e-mail Wednesday. “I did an extensive amount of research and am disappointed that the courts have stifled my freedom of speech -- a definite step backwards for efficient markets. Yes, I plan on appealing.”

The penalties follow the tribunal’s August ruling that Left’s Citron Research published a 2012 report that was “false and/or misleading as to material facts or through omission of material facts.”

Some Hong Kong-based investors and analysts are concerned about the case’s implications, arguing that the ruling could stifle negative market commentary. In March, a different tribunal fined Moody’s Investors Service HK$11 million and publicly reprimanded it for a report that was critical about dozens of Chinese companies.

“The bigger issue here is that it’s saying you can’t make short-sell calls or negative calls on the Hong Kong market,” said Brett McGonegal, chief executive officer of Capital Link International. He said that he couldn’t comment on the specifics of the Citron case. “Critical research has definitely got a negative blow by this decision.”

China Evergrande Group, which was renamed from Evergrande Real Estate Group Ltd. in May, dropped 20 percent on June 21, 2012, when Left published his note claiming that the company used accounting tricks to mask its insolvency. Evergrande, based in the Chinese city of Guangzhou, denied the claims.

Analysis of Chinese companies’ accounts can sometimes be difficult because not all the information is available or transparent, said Benedict Cheng, chief operating officer at Fairman Consulting Ltd. Chinese companies also often have shareholding structures that further complicate efforts to examine corporate records, he said.

Fair Market

The Securities and Futures Commission, which brought the case against Left, is trying to ensure that if an analyst publishes a critical report about a company their facts are correct because a stock price decline would generate losses for retail investors, said Andrew Sullivan, managing director for sales trading at Haitong International Securities Group in Hong Kong.

“The SFC is going to try to do everything it can to make sure that Hong Kong is seen as a fair market,” Sullivan said. “The investing public is at stake here.”

Traders who use strategies such as short selling may be deterred from Hong Kong following the ruling, said Ronald Wan, CEO of Partners Capital International Ltd.

“Analysts should be allowed to have their own subjective view, even though the listed companies paint very rosy pictures,” he said.

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 2015, Citron accused Valeant of an Enron-like strategy of recording fake sales. The company’s shares are down more than 80 percent since and it has been embroiled in an accounting scandal that obliged it to restate sales figures from 2014 and 2015.

Left’s recent targets include Cyberdyne Inc., a Japanese maker of robot exoskeletons for patients with spinal difficulties. Chief Financial Officer Shinji Uga disputed the Citron report, which cited declining growth in the company’s core product and valuations that exceeded its peers. The stock has declined about 20 percent since the note’s Aug. 16 publication.

Left’s bets haven’t all been winners. On June 13 he told CNBC he was shorting Facebook Inc., and then told the same channel at the end of August that he no longer had a position. The stock rose 10 percent in that period. In February, Left said he expected Gap Inc. to head below $20 a share within six months. From mid-May, the stock has rebounded to about $26.

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