Mike Gorenstein, CEO of the cannabis company Cronos Group, was the first witness called in the securities fraud trial of Andrew Left — and gave a glimpse of what it’s like to be the target of activist short selling.
Prosecutors allege Left used his platform to deceive retail investors and manipulate the market to earn a quick buck — and that Cronos was one of the companies pulled into Left’s plan. The feds contend that Left said one thing about the stocks of over 20 companies and then took a contrary action after the market moved based on his statements, raking in more than $20 million in the process.
Taking the stand on Tuesday, Gorenstein described how Cronos was thrown into chaos on August 30, 2018, after Left’s Citron Research published and tweeted a negative report. The tweet, which said Cronos was “ALL HYPE with possible securities fraud,” was displayed in court. In another tweet, Citron Research said that Left was shorting the stock.
The Citron report accused Cronos of deceiving investors and set a target stock price of $3.50 — far below the $11.50 at which the stock was trading when the tweet was sent.
Cronos’ share price quickly plummeted.
Gorenstein said he was inundated with hundreds of messages from people asking what was going on.
“It was panic selling,” he said, adding he had to go into “damage control mode” and was scrambling to assure investors, regulators, and employees who worried they might be working for a fraudulent company.
The CEO said when he read the report, he didn’t understand why the stock reacted the way it did or how the report “made any sense.” The prosecution also questioned the validity of the Citron report, casting doubt on several of its claims and saying Left never contacted Cronos to get answers that might’ve addressed some of his concerns.
Prosecutors said shortly after the tweet — around 24 minutes, according to the indictment — Left started closing out his short position.
Later that day, Left also appeared on CNBC’s “Fast Money” to deride the stock as overvalued, a clip of which was played and dissected in court.
Prosecutors said that during the interview, Left said he’d closed out a “small size” of his Cronos short position that day; in reality, they allege, by the time of the TV appearance, he’d already closed out over 60% of the positions he held prior to the first tweet.
Left’s defense team defended the Citron report in their cross-examination, saying Cronos’ share price had more than doubled in a two-week period before the report and that Left had spotted a stock bubble.
Eric Rosen, Left’s lawyer, said Cronos’ share price is lower now than the target price set in the report and that a retail investor who listened to Left by selling their shares or not purchasing them would be in a “far better position today.”
The Los Angeles trial is being closely watched because of Left’s prominence — from his bets on GameStop to his frequent appearances on financial TV news shows — and because of the question of what exactly short-sellers can and can’t do without running afoul of the law.
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Opening statements: fraud or legal trading?
“He’s a big deal.”
That’s how federal prosecutors described Left in their opening statement, seeking to portray him as an influential celebrity who profited from deceiving “ordinary investors.”
Left’s legal team, in its opening statement, contended that prosecutors are trying to paint something innocent as nefarious criminal activity.
“He tells the public what he believes — the truth — and then he trades on the truth to make a profit,” Adam Fee, one of Left’s lawyers, told the jurors. “It’s not fraud. That’s trading.”
The prosecution said that over the course of the trial, it will prove that Left engaged in a plan to manipulate the market and that he relied on his influential website, TV appearances, and large Twitter following to do so.
“He manipulated the market by targeting ordinary investors with misleading tweets,” said assistant US attorney Andrew Roach. Hammering down on the theme before a jury that contained such ordinary investors, Roach said Left’s crime was “using tweets to deceive everyday investors to make easy money in the stock market.”
“He’s a big deal, and because he’s a big deal, people pay attention to what he says,” Roach said. “He could send the price of a stock tumbling with just a single tweet.”
The prosecution outlined several examples that would come up in trial, including public statements and trades Left made on companies like Tesla and Nvidia. They said his go-to move was to “target a stock owned by everyday retail investors, tweet, and trade the opposite.”
The defense said Left’s track record showed his public statements about the stocks at issue in the case were often right. Fee noted Tesla and Nvidia as examples, saying Left recommended buying those stocks eight years ago.
“All of us should’ve listened to Andrew Left,” he said of Left’s power to move retail investors. “He does have influence, because he earned it.”
Fee argued that the advantageous timing of Left’s trades was not a crime.
“It is not fraud just because Mr. Left traded more quickly than the prosecutors would’ve liked,” he said.
Because the case involves complex financial issues, the lawyers took pains to explain to jurors how Left’s trades worked. Binders given to the jurors included a glossary of financial terms.
If convicted of the top charges, Left, 55, could face up to 25 years in prison.
