One of the peculiarities of modern securities regulation is the stark contrast in outcomes depending on whether you promote speculative penny stocks or issue warnings about their dangers. This is precisely what happened to Andrew Left, a well-known short-seller. Left has built a reputation for alerting the market, often using Twitter, about overvalued stocks and fraudulent public companies. His strategy involves “shorting” these stocks, which entails borrowing shares from the targeted company and then selling them. Left makes a profit when he repays the shares with a stock that has significantly decreased in value. Although short-selling has been a part of the stock market for a long time and was traditionally embraced by regulators for sniffing out market manipulation, individuals like Left are now viewed as the villains, facing crackdowns on alleged market abuses from federal authorities.
To fully understand Left’s situation, we need to go back to January 2021, when COVID was still rampant, and people were in lockdown. Online trading became a popular pastime, particularly among first-time investors who sought tips and information on stocks to buy. Reddit chat rooms emerged as a source of information, despite being notoriously unreliable. These forums were filled with individuals trying to profit quickly by hyping certain stocks. The madness ensued when struggling companies like GameStop and AMC Theatres, trading under the symbols GME and AMC, skyrocketed due to chatroom hype. First-time investors were drawn to these “meme stocks” because they seemed to represent the triumph of the average person over hedge fund professionals. However, they were oblivious to the underlying dubious activities.
The hype surrounding these stocks created a phenomenon known as a “short squeeze.” Professional traders like Left, who had bet against the success of GME and AMC, found themselves forced to repurchase the stocks at high prices, resulting in significant losses. This chaos ultimately led to the collapse of Melvin Capital, a hedge fund. Left and his hedge fund, Citron Research, managed to escape a similar fate by a narrow margin. The little guy had seemingly won, while the shorts suffered the consequences. This unlikely victory of the “underdogs” will be the focus of a forthcoming movie aptly titled “Dumb Money,” which portrays meme-loving individuals taking on the hedge fund giants. Despite the feel-good nature of such a story, it does not accurately reflect how markets operate in the long run. Ultimately, the poor fundamentals of companies like GME and AMC prevailed, leading to a significant decline in their stock prices. The momentary hype surrounding meme stocks dissipated, leaving many small investors, who had clung onto these stocks following social media pumping, with substantial losses.
Interestingly, there seems to be no significant regulatory crackdown on the market frenzy caused by meme stocks. Instead, the attention appears to be directed at short-sellers like Left, who had warned about the dangers of these stocks and engaged in legitimate research. Left finds himself as public enemy number one, facing raids on his home by federal authorities. Despite his track record of accurate predictions, the feds remain tight-lipped about their intentions. Left raises concerns about the erosion of freedom of speech if people are unable to trade stocks and share their opinions.
The larger issue at hand is the Department of Justice and the Securities and Exchange Commission’s lack of understanding about how markets truly function. Without short-selling, which is becoming increasingly rare due to the experiences of individuals like Left, the market risks becoming dominated by fraudulent actors reminiscent of the infamous “Wolf of Wall Street,” Jordan Belfort. Belfort, a real-life fraudster, manipulated penny stocks and caused significant financial losses for his victims. The SEC and DOJ declined to comment on the matter.
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