by Carrington Calder, Associate Member, University of Cincinnati Law Review Vol. 93
I. Introduction
The stock market has no shortage of public figures who can influence others to invest their money, however, problems arise when public figures use this influence to profiteer off their followers. Investors with high levels of publicity and influence can manipulate the public in securities schemes by inducing their followers to buy or sell securities at artificial prices.[1] By making a public representation but trading oppositely, fraudsters can reap large profits. Stock commentator and notable short seller Andrew Left was recently charged with criminal and civil charges for such a scheme.[2] United States v. Left could refine precedent and clarify the standard for prosecuting charges of securities fraud under Title 18 of the United States Code (“Title 18”).[3]
While not obviously applicable to securities fraud, the recent Supreme Court wire fraud case, Ciminelli v. United States, creates an interesting effect when applied to securities fraud charges like those in Left’s case.[4] Ciminelli seems to require the prosecution to prove that the defendant not only intended to deprive victims of valuable information, but also deprived them of property.[5] Applied to securities fraud schemes this precedent can add a hurdle to the prosecution’s pleading requirements.
This article will argue that Ciminelli contains a limited application to Left’s defense and that the prosecution can quickly adapt to the new requirements to plead securities fraud under Title 18.[6] Part II will provide background on applicable case law and the charges against Andrew Left. Part III will apply precedent to Andrew Left’s case and discuss the requirements of securities fraud under Title 18.[7] Lastly, Part IV will conclude by summarizing how Left’s case could affect the future of securities law.
II. Background
A. Ciminelli v. United States
In Ciminelli v. U.S., the Supreme Court granted review of the defendant’s conviction for a bid rigging scheme to obtain state funded development projects.[8] New York was undergoing a billion-dollar development project and the defendant, Ciminelli, had an arrangement with officials that would guarantee him the development contracts for his construction company.[9] Ciminelli was charged with wire fraud under Title 18.[10]
The prosecution’s case relied on the United States Court of Appeals for the Second Circuit’s longstanding “right to control” theory.[11] Under the right to control theory, the deprivation of potentially valuable economic information is sufficient for a wire fraud conviction under Title 18, and intangibles such as information can be categorized as property under the statute.[12] The right to control theory requires no damage to a victim, simply that the victim was “deprived of potentially valuable economic information that it would consider valuable in deciding how to use its assets.”[13]
However, the Supreme Court ruled for the defendant, stating the deprivation of information is not a violation of a traditional property interest.[14] By convicting the defendant based only on the deprivation of information, the lower court had impermissibly expanded the statute to an interest that had not been “long recognized as property.”[15] Because the right to control theory rests on “intangibles” such as information, the Court overruled holding that money or property must be the object of the fraud.[16] The Court held that the deprivation of necessary information is not the deprivation of a property interest and reversed and remanded the case.[17]
B. Title 18
In Ciminelli the defendant was charged under Title 18 with wire fraud, but Title 18 also covers securities fraud.[18] There are specific requirements for securities fraud including: a scheme to obtain money or property; intent to defraud; and a nexus to a security.[19] Unlike other securities fraud claims, intent to harm must be present for a violation under a Title 18 securities fraud charge.[20] Among other charges, Left is charged with securities fraud under 18 U.S.C. 1348.[21]
C. Cases Applying Ciminelli
1. United States v. Constantinescu
United States v. Constantinescu has the traditional hallmarks of a securities “pump and dump” scheme.[22] Defendant Constantinescu and associates were internet personalities who offered stock advice and frequent encouragement on strategies to navigate the stock market.[23] Defendants used social media sites like X (formerly Twitter) and Discord to peddle these strategies to followers.[24] The prosecution alleged that defendants would “pump” stocks by posting on the internet which stocks they were holding, why the stocks were attractive, how long they would hold the stocks, and the target price at which the stocks should be sold to make the most profit.[25]
By convincing followers to purchase the stock, the price became artificially inflated.[26] Defendants then sold the stocks, contrary to their prior statements, essentially “dumping” the stock.[27] For example, the indictment alleged that the defendants purchased 539,389 shares of Surface Oncology Inc., which traded under the ticker SURF, at an average price of $8.24 per share.[28] The defendants then collectively posted that they were long on the stock meaning that they expected the price to rise and were going to hold on to the stock.[29]
However, over the next nine days, the defendants liquidated their holdings of SURF with some benefitting from price increases to sell as high as $9.03 per share.[30] One defendant stated that he had “[a]dded to my SURF position right before close,” despite having already sold the entirety of his holdings.[31] The indictment alleged that the defendants were able to realize $392,651 from the difference at which they bought the security and then sold it at the inflated “pumped” price.[32] The prosecution claimed the defendants were able to realize at least $114 million in total from their schemes and brought securities fraud charges under Title 18.[33]
Although the prosecution pointed to the defendants’ statements saying they were “robbing…idiots of their money,” the defendants’ motion to dismiss was granted without prejudice.[34] The United States District Court for the Southern District of Texas, (“Southern District of Texas”), reasoned that the prosecution failed to adequately allege an intent to deprive their victims of property as to their reading of Ciminelli.[35] Since the allegations in Constantinescu relied on the defendants’ misinformation and not that they aimed to deprive their victims of property, the prosecution impermissibly relied on the right to control theory.[36]
The defendants argued that depriving victims of money was incidental to their goals and not their intent, the Southern District of Texas agreed and reasoned that the indictment failed to state a claim for securities fraud under Title 18.[37] Even though the intent to deceive was adequately pled, the claim fatally lacked the intent to deprive.[38] Constantinescu could lead to growing concerns for prosecutors’ inability to convict seemingly obvious bad-faith actors.[39]
2. United States v. Tournant
United States v. Tournant also interpreted Ciminelli but reached a different conclusion for the defendants.[40] In Tournant, the defendant advertised high-return, low-risk investments, but misrepresented the actual amount of risk involved.[41] The defendant oversaw a high-profile investment fund and represented that the fund had safeguards that “would protect the portfolios in an ‘extreme crash’.”[42] However, the fund was devastated at the onset of the Covid pandemic and lost over $7 billion in market value.[43]
The defendant was charged with wire fraud under Title 18, which required “money or property as the object of the scheme.”[44] The defendant argued that the prosecution failed to allege a scheme to defraud under the statute since the money was willingly given to the defendant to invest.[45] The United States District Court for the Southern District of New York, (“Southern District of New York”), disagreed saying that the defendant’s misrepresentations induced the victims to invest with the defendant’s company, therefore reaching the defendant’s goals of racking up high fees.[46] By depriving the victims of the use of their money, even if momentarily, the defendant had perpetrated a scheme to defraud.[47]
D. Andrew Left
Andrew Left is a well-known stock commentator and member of Citron Research, a media platform that publishes stock information.[48] Left is facing a criminal indictment in the United States District Court for the Central District of California (“Central District of California”) and a civil complaint from the Securities and Exchange Commission (“SEC”).[49] Among other charges, Left is charged with securities fraud under 18 U.S.C 1348(1).[50] Under this specific statute the government would have to prove Left not only intended to defraud but that he also intended to obtain the victims’ money.[51]
The indictment alleges Left made fraudulent representations to his audience and concealed his dealings with third parties such as hedge funds.[52] Left is also accused of giving third parties advance notice of publications and accepting payments for manipulating stocks in favor of third parties despite his assertions that there was never compensation paid to him from hedge funds.[53] These payments would be disguised as payments for research or consulting services.[54]
Allegedly, Left used Citron Research and public media campaigns to produce commentary to manipulate share prices and then traded the shares in a manner inconsistent with his representations.[55] For example, Left took a short position in Roku, then tweeted that the stock was “uninvestable.”[56] Left then closed his short position when the share price dropped and realized $700,000.[57] Left later tweeted that Citron Research was watching Roku “from the side”, which implied that he had not taken a position in Roku.[58]
III. Discussion
A. Interpreting Constantinescu
While the Southern District of Texas in Constantinescu is correct in denying the prosecution’s reliance on the right to control theory, they are shortsighted in failing to connect the intent to deceive with the intent to deprive the victims.[59] The Southern District of Texas noted that the harm to the victims was “incidental” because it was not the object of the scheme and the victims relinquished their money to the control of the stock market rather than to the defendants.[60]
This understanding is flawed because if the defendants had perpetrated a pump-and-dump scheme then it would be difficult to argue that they were not depriving their victims of property. The Southern District of Texas states that defendants “did not obtain something of value from the entity to be deceived,” but by inducing others to purchase stocks at artificially inflated prices and then selling their positions, defendants are directly, and not incidentally, profiteering from their victims.[61] It is not the fluctuation of the stock market or correct predictions that makes the scheme profitable, but the artificial inflations.[62]
Despite this, the Southern District of Texas is correct in requiring the government to plead that investors suffered actual harm from the deception.[63] Without holding such, prosecutors would continue to rely on the right to control theory, posing the risk of the judiciary impermissibly expanding statutes into protecting interests that they were not designed to protect.[64] However, the case was dismissed without prejudice, allowing the prosecution to re-plead to adequately allege harm to investors.[65]
The facts in Left’s case are similar to Constantinescu.[66] Both cases claimd the defendants used their public influence to artificially manipulate stocks and then traded stocks inconsistently with their public statements.[67] Facially, United States v. Constantinescu seems very friendly to defendants charged with securities fraud under Title 18 because of how it interprets Ciminelli.[68] Since securities fraud schemes like the pump-and-dump are grounded in misinformation rather than an intent to steal directly, defendants could rely on Ciminelli to defeat claims that allege only an intent to deceive claim.[69]
B. Precedent Applied to Left
Like the defendant in Constantinescu, Left faces charges with securities fraud under Title 18, which requires that the defendant be involved in a scheme to obtain money or property with an intent to defraud.[70] To charge Left with securities fraud and avoid the pitfalls of Constantinescu, the prosecution must detail how Left intended to obtain money from investors.[71] If the allegations are true, this task should not be difficult as it is hard to imagine that victims would not have lost money as a result of his scheme.[72] The indictment alleged that Left would give hedge funds advance notice of his reports to trade around them, yet Left publicly denied that he ever gave hedge funds advance notice.[73]
For example, in the allegations regarding Left and Namaste Technologies, a hedge fund was participating in a bought offering of Namaste Technologies and stood to benefit if the share price dropped.[74] The indictment further alleged that the hedge fund contracted with Left to push negative information about Namaste, and Left did, publicly stating that he was going to short it “until it goes to zero.”[75] The share price dropped and Left’s payment from the hedge fund was concealed with sham invoices.[76] If such allegations were true, investors in Namaste would have directly lost money as a result of the market manipulation rather than incidentally.[77] Namaste investors would have seen their share prices drop due to others using inside information.[78] In this example, it would be a mistake in public policy to ascribe any damages to shareholders as the risks of playing the stock market, rather than illegal market manipulation.[79]
To avoid the pitfalls of Title 18 securities fraud charges in Constantinescu, the prosecution must allege with particularity the monetary damage Left allegedly caused his victims.[80] However, it is likely that the prosecution’s case in Constantinescu can be distinguished from the charges Left is facing.[81] In Constantinescu, the prosecution conceded that some of the alleged victims “may have actually made money” and failed to point to concrete evidence of monetary loss by investors.[82] The Southern District of Texas in Constantinescu reasoned that the defendant’s intent to maximize their profit was not an intent to deprive the victims of a traditional property right.[83] While Left intended to maximize his profits, if the allegations are true, it is impossible that he did not deprive his followers of money.[84]
The Central District of California, in Left’s case is more likely to follow Tournant’s understanding of Ciminelli.[85] As seen in Constantinescu, it could be argued that the money obtained by the defendant in Tournant was an incidental result of the misrepresentations and not the intended goal.[86] However, the Southern District of New York in Tournant quickly rejected this reasoning, as the indictment listed specific misrepresentations made to induce and retain investment funds.[87]
If the allegations are true and the Central District of California were to dismiss the case based on Ciminelli, it would represent a large shift in the ability of prosecutors to bring claims of securities fraud under Title 18.[88] Such a misstep in public policy would leave shareholders vulnerable and would lay an especially unfair burden on smaller investors who rely on others for market information.
IV. Conclusion
A limited reading of Ciminelli could lead to problems of under-deterrence in securities fraud schemes.[89] However, due to the nature of most securities fraud cases, it is unlikely that Constantinescu will set a new precedent that prosecutors will be unable to adapt to.[90] If the allegations Andrew Left is facing are true, it would be a misstep in public policy and application of 18 U.S.C. 1348 to allow him to deceive investors due to his gains being from the stock market rather than directly from individuals.[91] Allowing such a defense to stand would represent a flawed reading of securities fraud schemes. Limited readings of the law should not create an opportunity for those who deceive others to profiteer.
[1] Market Manipulation, SEC, https://www.investor.gov/introduction-investing/investing-basics/glossary/market-manipulation#:~:text=Market%20manipulation%20is%20when%20someone,rise%20or%20to%20fall%20dramatically) (last visited Nov. 10, 2024).
[2] Press Release, SEC Charges Andrew Left and Citron Capital for $20 Million Fraud Scheme (July 29, 2024).
https://www.sec.gov/newsroom/press-releases/2024-89.
[3] Indictment at 1, United States v. Left, No. 2:24-cr-00456-TJH (C.D. Cal. Aug. 25, 2024).
[4] Ciminelli v. United States, 598 U.S. 306 (2023).
[5] Id.
[6] 18 U.S.C. § 1348.
[7] Id.
[8] Ciminelli, 598 U.S. at 306.
[9] Id. at 309.
[10] Id. at 310.
[11] Id. at 309.
[12] Id.
[13] Id. at 311.
[14] Id.
[15] Id. at 314.
[16] Id. at 312.
[17] Id. at 316.
[18] Id. at 309.
[19] Alternative Basis of Criminal Liability: Securities and Commodities Fraud Under 18 USC § 1348, Willkie Compliance, https://complianceconcourse.willkie.com/resources/insider-trading-us-alternative-basis-criminal-liability-section-1348/ (last visited Nov. 11, 2024).
[20] William Johnston, Discord Stock Case Toss Means Little For Fraud Defendants, Law 360 (Apr. 12, 2024), https://www.birdmarella.com/wp-content/uploads/2024/04/Law360-Discord-Stock-Case-Toss-Means-Little-For-Fraud-Defendants39.pdf.
[21] Indictment, supra note 3, at 2.
[22] United States v. Constantinescu, No. 4:22-CR-00612, 2024 U.S. Dist. LEXIS 49916, (S.D. Tex. Mar. 20, 2024).
[23] Id. at 4.
[24] Lucien Bechard, Atlas Trading Lawsuit (Dismissed), Bullish Bears (Oct. 16, 2024),
https://bullishbears.com/atlas-trading-lawsuit/.
[25] See Constantinescu, 2024 U.S. Dist. LEXIS 49916 at *7.
[26] Id. at 8.
[27] Id.
[28] Indictment, supra note 3, at 17.
[29] Id. at 19.
[30] Id.
[31] Id. at 18.
[32] Id. at 19.
[33] Id. at 2.
[34] See United States v. Constantinescu, No. 4:22-CR-00612, 2024 U.S. Dist. LEXIS 49916, (S.D. Tex. Mar. 20, 2024).
[35] Ciminelli v. United States, 598 U.S. 306 (2023).
[36] See Constantinescu, 2024 U.S. Dist. LEXIS 49916 at *19.
[37] Id.
[38] Id.
[39] Id.
[40] United States v. Tournant, No. 22-CR-276-LTS, 2023 U.S. Dist. LEXIS 222329, (S.D.N.Y. Dec. 13, 2023).
[41] Id. at 29.
[42] Id.
[43] Id. at 2.
[44] Id. at 26.
[45] Id. at 32.
[46] Id. at 44.
[47] Id. at 34.
[48] Indictment, supra note 3, at 2.
[49] Id.
[50] Id.
[51] Alternative Basis of Criminal Liability: Securities and Commodities Fraud Under 18 USC 1348, supra note 19.
[52] Indictment, supra note 3, at 2.
[53] Id. at 32.
[54] Id. at 31.
[55] Id. at 9.
[56] Id. at 19.
[57] Id.
[58] Id.
[59] United States v. Constantinescu, No. 4:22-CR-00612, 2024 U.S. Dist. LEXIS 49916, at *14 (S.D. Tex. Mar. 20, 2024).
[60] Id. at 15-19.
[61] Id. at 16.
[62] Id.
[63] Id. at 19.
[64] Id.
[65] Id.
[66] Id.
[67] Id.; Indictment, supra note 3.
[68] Constantinescu, 2024 U.S. Dist. LEXIS 49916.
[69] Id.
[70] Alternative Basis of Criminal Liability: Securities and Commodities Fraud Under 18 USC 1348, supra note 19.
[71] 18 U.S.C. § 1348.
[72] Indictment, supra note 3.
[73] Id. at 32.
[74] Id.
[75] Id.
[76] Id. at 30.
[77] Id.
[78] Id. at 33.
[79] Id.
[80] 18 U.S.C. § 1348.
[81] United States v. Constantinescu, No. 4:22-CR-00612, 2024 U.S. Dist. LEXIS 49916, (S.D. Tex. Mar. 20, 2024).
[82] Id. at 15.
[83] Id.
[84] Indictment, supra note 3.
[85] United States v. Tournant, No. 22-CR-276-LTS, 2023 U.S. Dist. LEXIS 222329, (S.D.N.Y. Dec. 13, 2023).
[86] Id.
[87] Id. at 29.
[88] Ciminelli v. United States, 598 U.S. 306 (2023).
[89] Id.
[90] United States v. Constantinescu, No. 4:22-CR-00612, 2024 U.S. Dist. LEXIS 49916, (S.D. Tex. Mar. 20, 2024).
[91] Indictment, supra note 3.
Cover Photo by Aron Baker on Flickr.
