The Securities and Exchange Commission (SEC) recently announced settled charges against Ryan Choi, a previously licensed California Investment Adviser Representative, for negligently engaging in a scheme to defraud readers of Citron Research, an online platform that identified companies as promising short sales or long investment opportunities.
The complaint, filed in the United States District Court for the Central District of California, alleges that Choi violated Section 17(a)(3) of the Securities Act of 1933 in connection with two tweets issued by Citron, which are alleged to have omitted material information.
According to the SEC’s enforcement action, from October 2018 through December 2020, Choi helped prepare some tweets and reports that were published through Citron Research. In December of 2020, in particular, the SEC alleges that Choi worked on the research and content for two buy recommendations, but failed to act reasonably by not conducting adequate research or due diligence on them. These buy recommendations were provided to Citron research and, once it released the tweets publicly, Choi quickly traded and seized on the price increases in which he realized trading profits of over $1.6 million. However, according to the SEC, Choi negligently failed to ensure that his trading was sufficiently disclosed in subject tweets.
Choi, on a neither admit nor deny basis as to charges, agreed to the entry of a final judgment permanently enjoining him from violating Section 17(a)(3) of the Securities Act (a provision that does not require scienter (intent) to legally support the charge, but rather provides that negligent conduct is a sufficient basis), and requiring him to pay a civil penalty of $115,231, disgorgement of $1,647,217, and prejudgment interest of $64,818.
In my view, this case signals a continued, albeit potentially dangerous expansionist approach by the SEC in targeting the short seller community, which it has recently increasingly put under heavy regulatory scrutiny. While there are undoubtedly crooked short sellers out there who issue short reports or publish tweets that either wholly lack a reasonable basis in fact, or are outright fraudulent and designed for the sole purpose to manipulate, there are, however, a number of professional and responsible short sellers who conduct thorough research and have consistently identified fraud in the securities markets for the benefit of the investing public and the integrity of the financial markets. In balancing these realities, the SEC thus must avoid painting its enforcement canvass with too broad a brush when investigating and prosecuting short sellers, lest it recklessly chill a critically important component of the financial markets that operate legally and, in fact, effectively advance the SEC’s statutory objective of keeping the trading markets fair and honest.
Short Seller SEC Investigation Attorney
David Chase, Esq. of the Law Firm of David R. Chase, a former SEC prosecutor, is now an SEC defense attorney and represents short sellers in SEC investigations nationally. David is also a SEC insider trading defense attorney. You may contact him toll-free at: 800-760-0912 or e-mail at: david@davidchaselaw.com, and can visit the Firm’s website for more information and content at: www.davidchaselaw.com.
