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Hong Kong Tribunal Rules Against U.S. Short-Seller Andrew Left
Market Misconduct Tribunal finds Left was ‘reckless’ or ‘negligent’ in spreading information
WALL STREET JOURNAL
By JULIE STEINBERG
Updated Aug. 26, 2016 7:02 a.m. ET
HONG KONG—A Hong Kong tribunal found U.S. short-seller Andrew Left, best known for his critique of drug company Valeant Pharmaceuticals International Inc., was “reckless” or “negligent” for spreading false and misleading information about a Chinese property developer.
Hong Kong’s Market Misconduct Tribunal ruled in favor of the city’s securities regulator and against Mr. Left, a Los Angeles-based short seller who published a scathing report on Hong Kong-listed Evergrande Real Estate Group Ltd.—now called China Evergrande Group—in 2012.
The tribunal in its decision Friday said Mr. Left’s allegations of “insolvency” and “fraudulent accounting” at Evergrande were false, and that he should have checked with an expert and the company before publishing them. Mr. Left could face penalties, to be determined later, that include giving up his profits on the trade and a ban from trading for a period in Hong Kong.
The civil case, which the tribunal heard earlier this year, spotlights regulators’ concerns over analysts and traders who point to alleged problems at companies and bet that their share prices will fall. Some say short sellers benefit the market by digging up damaging information that might not otherwise surface. Others say they publish misleading comments to profit from driving down stock prices.
The debate over what constitutes allowable commentary has taken on particular urgency in Hong Kong in recent months. A different tribunal in March said ratings giant Moody’s Investors Service must pay 11 million Hong Kong dollars (US$1.4 million) because of errors and “misleading and unfair” language in a July 2011 report that highlighted “red flags” at certain Chinese companies. Moody’s is appealing the decision.
Shareholder activists say they fear such cases, which indicate closer scrutiny by regulators, could have a chilling effect on free speech in Hong Kong’s markets.
Mr. Left said in a phone interview he is considering an appeal. Hong Kong’s securities regulator in a press release thanked the U.S. Securities and Exchange Commission for its help with the case. The legal action is the first brought by the regulator against a short seller.
Mr. Left’s Citron Research publishes reports often peppered with profanity and taunts aimed at corporate executives. He frequently appears on U.S. business television channels to pan stocks, including a recent broadside against Facebook Inc. He says investors don’t fully appreciate the threat that the social-networking site faces from upstarts like Snapchat, and that Facebook isn’t worth its $353 billion market capitalization.
The 45-year-old Mr. Left lives in a mansion overlooking Los Angeles, across the street from Slash, the former lead guitarist of rock band Guns N’ Roses. Mr. Left invests only his own money and said he has made profits every year since he started short selling 15 years ago.
He gained prominence for his criticisms of Valeant’s accounting in October 2015, when he suggested that Valeant had used its relationship with a mail-order pharmacy to commit fraud. Valeant denied Mr. Left’s allegations, but the company has restated past earnings because of its relationship with the pharmacy. The Wall Street Journal has reported that Valeant is under criminal investigation.
Mr. Left’s criticisms contributed to a sharp decline in Valeant’s stock, which at one point had declined more than 90% from its high. Mr. Left had a short position in Valeant as recently as July, but he said Thursday that he doesn’t currently hold any position. A Valeant spokesman declined to comment.
In the Evergrande case, Mr. Left sold short 4.1 million shares of the company before publishing a report on his website on June 21, 2012, claiming the property developer was “insolvent” and had used “at least six accounting shenanigans to hide it.”
After publishing the report, Mr. Left bought back the shares for a total realized profit of HK$1.7 million. On the day the report was published, Evergrande’s share price fell as much as 20% before closing down 11.4% at 3.97 Hong Kong dollars (around 51 U.S. cents).
A spokesman on Friday couldn’t be reached, but Evergrande has denied the allegations in the past. Moody’s in January of this year downgraded the company’s debt deeper into junk territory amid concerns about the developer’s debt-funded growth strategy. Profit attributable to shareholders fell 17% in 2015 from a year earlier, while revenues were up 20%.
In its decision released Friday, the tribunal said Mr. Left’s allegations of accounting tricks “displayed a significant ignorance of the accountancy standards” Evergrande had to follow.
The tribunal said that when Mr. Left published his report on Evergrande, he “consciously disregarded the real risk” that it was “false and/or misleading as to material facts.”
Mr. Left didn’t consult an accounting expert regarding the allegations he made in the report, and didn’t contact the company before publishing, the tribunal said, thereby shirking his “obligation.” Mr. Left also “must have appreciated” his report’s impact on other investors, the tribunal wrote.
The tribunal is setting too high a bar for publishing commentary, Mr. Left said.
“What company would ever say ‘you’re right’?” when confronted with allegations of fraud, he said.
Mr. Left said the ruling was biased against short sellers. Bullish analysts haven’t been similarly charged for writing positive reports on stocks that later tanked, he said.
“If you don’t like my commentary, it’s reckless,” he said. “But if you do, it’s not.”
Lawyers for Hong Kong’s securities regulator and Mr. Left have three weeks to suggest appropriate penalties to the tribunal.
—Michael Rapoport contributed to this article.
Write to Julie Steinberg at julie.steinberg@wsj.com
http://www.wsj.com/articles/hong-kong-tribuna...1472185068
Hong Kong Tribunal Rules Against U.S. Short-Seller Andrew Left
Market Misconduct Tribunal finds Left was ‘reckless’ or ‘negligent’ in spreading information
WALL STREET JOURNAL
By JULIE STEINBERG
Updated Aug. 26, 2016 7:02 a.m. ET
HONG KONG—A Hong Kong tribunal found U.S. short-seller Andrew Left, best known for his critique of drug company Valeant Pharmaceuticals International Inc., was “reckless” or “negligent” for spreading false and misleading information about a Chinese property developer.
Hong Kong’s Market Misconduct Tribunal ruled in favor of the city’s securities regulator and against Mr. Left, a Los Angeles-based short seller who published a scathing report on Hong Kong-listed Evergrande Real Estate Group Ltd.—now called China Evergrande Group—in 2012.
The tribunal in its decision Friday said Mr. Left’s allegations of “insolvency” and “fraudulent accounting” at Evergrande were false, and that he should have checked with an expert and the company before publishing them. Mr. Left could face penalties, to be determined later, that include giving up his profits on the trade and a ban from trading for a period in Hong Kong.
The civil case, which the tribunal heard earlier this year, spotlights regulators’ concerns over analysts and traders who point to alleged problems at companies and bet that their share prices will fall. Some say short sellers benefit the market by digging up damaging information that might not otherwise surface. Others say they publish misleading comments to profit from driving down stock prices.
The debate over what constitutes allowable commentary has taken on particular urgency in Hong Kong in recent months. A different tribunal in March said ratings giant Moody’s Investors Service must pay 11 million Hong Kong dollars (US$1.4 million) because of errors and “misleading and unfair” language in a July 2011 report that highlighted “red flags” at certain Chinese companies. Moody’s is appealing the decision.
Shareholder activists say they fear such cases, which indicate closer scrutiny by regulators, could have a chilling effect on free speech in Hong Kong’s markets.
Mr. Left said in a phone interview he is considering an appeal. Hong Kong’s securities regulator in a press release thanked the U.S. Securities and Exchange Commission for its help with the case. The legal action is the first brought by the regulator against a short seller.
Mr. Left’s Citron Research publishes reports often peppered with profanity and taunts aimed at corporate executives. He frequently appears on U.S. business television channels to pan stocks, including a recent broadside against Facebook Inc. He says investors don’t fully appreciate the threat that the social-networking site faces from upstarts like Snapchat, and that Facebook isn’t worth its $353 billion market capitalization.
The 45-year-old Mr. Left lives in a mansion overlooking Los Angeles, across the street from Slash, the former lead guitarist of rock band Guns N’ Roses. Mr. Left invests only his own money and said he has made profits every year since he started short selling 15 years ago.
He gained prominence for his criticisms of Valeant’s accounting in October 2015, when he suggested that Valeant had used its relationship with a mail-order pharmacy to commit fraud. Valeant denied Mr. Left’s allegations, but the company has restated past earnings because of its relationship with the pharmacy. The Wall Street Journal has reported that Valeant is under criminal investigation.
Mr. Left’s criticisms contributed to a sharp decline in Valeant’s stock, which at one point had declined more than 90% from its high. Mr. Left had a short position in Valeant as recently as July, but he said Thursday that he doesn’t currently hold any position. A Valeant spokesman declined to comment.
In the Evergrande case, Mr. Left sold short 4.1 million shares of the company before publishing a report on his website on June 21, 2012, claiming the property developer was “insolvent” and had used “at least six accounting shenanigans to hide it.”
After publishing the report, Mr. Left bought back the shares for a total realized profit of HK$1.7 million. On the day the report was published, Evergrande’s share price fell as much as 20% before closing down 11.4% at 3.97 Hong Kong dollars (around 51 U.S. cents).
A spokesman on Friday couldn’t be reached, but Evergrande has denied the allegations in the past. Moody’s in January of this year downgraded the company’s debt deeper into junk territory amid concerns about the developer’s debt-funded growth strategy. Profit attributable to shareholders fell 17% in 2015 from a year earlier, while revenues were up 20%.
In its decision released Friday, the tribunal said Mr. Left’s allegations of accounting tricks “displayed a significant ignorance of the accountancy standards” Evergrande had to follow.
The tribunal said that when Mr. Left published his report on Evergrande, he “consciously disregarded the real risk” that it was “false and/or misleading as to material facts.”
Mr. Left didn’t consult an accounting expert regarding the allegations he made in the report, and didn’t contact the company before publishing, the tribunal said, thereby shirking his “obligation.” Mr. Left also “must have appreciated” his report’s impact on other investors, the tribunal wrote.
The tribunal is setting too high a bar for publishing commentary, Mr. Left said.
“What company would ever say ‘you’re right’?” when confronted with allegations of fraud, he said.
Mr. Left said the ruling was biased against short sellers. Bullish analysts haven’t been similarly charged for writing positive reports on stocks that later tanked, he said.
“If you don’t like my commentary, it’s reckless,” he said. “But if you do, it’s not.”
Lawyers for Hong Kong’s securities regulator and Mr. Left have three weeks to suggest appropriate penalties to the tribunal.
—Michael Rapoport contributed to this article.
Write to Julie Steinberg at julie.steinberg@wsj.com
http://www.wsj.com/articles/hong-kong-tribuna...1472185068
