Hong Kong Stock Exchange

Hong Kong bans short-seller Andrew Left from market for five years

PUBLISHED : Wednesday, 19 October, 2016, 11:41pm
UPDATED : Wednesday, 19 October, 2016, 11:41pm

A Hong Kong tribunal banned US short-seller Andrew Left from trading on the city’s market for five years after publishing “false and/or misleading” claims about a company listed there.

Left must repay HK$1.6 million in trading profits, pay about HK$4 million in legal expenses, and will face criminal prosecution if he breaks Hong Kong rules again, the Market Misconduct Tribunal said Wednesday. 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 implications for freedom of opinion in the wake of Left’s case, and argue that the ruling could strangle negative commentary about the city’s markets. In March, a separate 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 in May, dropped 20 per cent on June 21, 2012, when Left published his note claiming that the company used accounting tricks to mask insolvency. Evergrande, based in the Chinese city of Guangzhou, denied the claims.

Analysis of Chinese companies’ accounts can sometimes be challenging 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.

Francis Comtois, a lawyer representing Left, said he is considering an appeal and declined to comment further.

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 may generate losses for retail investors, said Andrew Sullivan, managing director for sales trading at Haitong International Securities Group in Hong Kong.

“At the end of the day 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.”

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 October 21 2015, Citron accused Valeant of an Enron-like strategy of recording fake sales. The company’s shares are down more than 80 per cent since and it has been embroiled in an accounting scandal that saw it 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 per cent since the note’s August 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 per cent in that period. In February, Left said he saw Gap Inc. heading below US$20 a share within six months. Though it fell below US$20 for about a month from mid-May, the stock otherwise stayed above that level, and closed Tuesday at US$25.91.