The chief executive of a Canadian cannabis distributor told jurors at the United States criminal trial of Citron Research founder Andrew Left he was stunned when the prominent short-seller issued a report saying the company was overvalued, prompting shares to plunge.
Cronos Group Inc. CEO Mike Gorenstein was the first witness Tuesday in the U.S. government’s case against Left, who is accused of misleading investors by making quick trades after issuing his recommendations. Gorenstein said Left’s report in August 2018 alleged Cronos was misleading investors about its distribution commitments. The CEO said the company had actually disclosed supply agreements, which weren’t a guarantee of sales.
“I never really understood the report,” Gorenstein testified in Los Angeles federal court. “It didn’t make much sense.” He said Left never reached out to the company to verify any of his claims.
The trial, which is expected to last about three weeks, is putting a spotlight on the short selling industry . Left is one of the most prominent players and is accused of using explosive social-media posts about dozens of companies to illegally move their stock and make a quick profit. He denies wrongdoing.
During his opening statement Tuesday, prosecutor Andrew Roach told jurors that Left had become famous and influential with a “pump-and-dump, short-and-distort scheme” that earned him US$20 million over the years.
Defence lawyer Adam Fee argued in his opening statement that Left had earned a reputation over 25 years as a short-seller and trader by publicly disclosing his opinions about companies — something investors had valued because they made money acting on his recommendations.
Gorenstein said Left had mischaracterized statements Cronos had made to investors in 2018.
Prosecutors played a video clip of Left speaking on CNBC after his report on the company, noting that he claimed he was still short and expecting the shares to keep falling at a time when he’d already covered most of his position.
During questioning of Gorenstein, Eric Rosen, another defence lawyer, noted that the US$3.50 target price Left set for Cronos in 2018 was in line with the company’s current value. Cronos shares in New York plunged 28 per cent on the day of the report, but later rebounded and were up 34 per cent for the year. It reached a high of more than US$25 the next year. It’s now trading around US$2.75.
On Wednesday, prosecutors continued to focus on Cronos, with a stock analyst taking the witness stand.
Clients Calling
Martin Landry, managing director at Stifel Nicolaus Canada Inc., told the court that he had a buy rating on Cronos, but that after Left’s report was released, the price dropped and his phone started to ring.
“Clients were calling me asking ‘what is going on, what do you think about it?’” Landry said. “The extent of the share price drop was notable and we don’t see that often.”
He said it looked like Left’s report was put together rapidly.
“It’s rare to see research reports with no opinions on future sales, earnings, which is the crux of our research reports,” Landry said. “If I had known the author of the report had closed his short position it would have been very important. Knowing biases is very important.”