Andrew Left Found Guilty in Case That Spooked Short Sellers

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1:54This is one of the most read stories on the Bloomberg Terminal in the past day. It crossed late yesterday. We got more details on it overnight. It's about the famed short seller Andrew Left. He faces the possibility of decades behind bars. He was found guilty of using disingenuous social media posts to manipulate stocks. In a landmark case, it threatens to chill a broader trading strategy that's just loathed by corporate executives. We've got Eric Larson with us. He's U.S. legal reporter for Bloomberg News. He joins us from Los Angeles. Eric, just remind us who Andrew Left is, what Citron Research made a name doing.

2:27Sure. As you said, he grew a big following on Twitter, actually, where he got so many followers tracking everything he was saying about companies that he was researching through his Citron research. He made some good calls back in the day on a few companies that gained him extra followers. And really, this group that was following him is who he tried to manipulate here, according to the Justice Department. So you mentioned this trading strategies that's loathed by companies. It has to do with building a short position on a company and then trashing it in a research report or tweets in Mr. Left's case.

3:03And so the government said that Mr. Left went a little beyond just doing that. So it's a really, like you said, it's a landmark case. And the short selling industry is really wondering what it means. You know, I always find it interesting, Eric, because I think about people can like a stock, talk it up, put out research, right? But when we get into short selling, everybody gets a little bit hinky about that particular side of the trade. Is it a legal term? Yeah, it is. It's hinky go on the Bloomberg Journal. All right, check with Eric. Go ahead. I was going to say that word didn't come up at trial.

3:39So what is it that he did, though? Like if he, you know, talked it down and then was trading accordingly, but was he not trading? Did the trading not match up with what he was saying? I guess essentially. Well, that's exactly what it gets at. It wasn't just his shorts that were on trial here, some of his long bets as well. But the point that the government was making was that he was trading opposite, essentially, of what he was saying on Twitter and in his reports about companies. You know, more than a dozen companies were central to this, including Twitter itself, Facebook, NVIDIA even. And these were companies that he talked about a lot in this time span between 2018 and 2023 is what was central to this case.

4:23And he made$20 million in profits betting around some of these specific reports and tweets even that he put out. And the government looked at all of his private communications, his telegram communications, his emails, his texts to show a pattern of arranging specific trades right to time with his tweets and his reports that were opposite of essentially what he was saying. So that's where the manipulation came in. It goes a little farther than just trading around your own report that you put out as a short seller. But it was a novel case. The prosecution had to explain it to this jury. And the defense really tried to pick it apart and say that Mr.

5:04Left had done nothing wrong. And ultimately, of course, he was found guilty. One of the elements of this that I want to talk to you about, Eric, and I brought it up on our editorial call this morning, is what some of the experts quoted in your piece say about the effects this could have on short sellers. And Carol and I have talked about this in the past. This came up a few years ago because Elon Musk was really, he's battled short sellers for years. And there are people out there who say short sellers serve a really important part of efficient markets in terms of bringing information to light.

5:36And I'm curious what the folks who are at the business schools or the accounting professors who study short selling and its effect on markets, think about a case such as this. Yeah, I've spoken to several since this verdict and actually even before the trial who said that this would just have a chilling effect if he were convicted. And the reason being that there's a really lightly regulated industry, right? I mean, there's not any rules specifically around a short seller trading around their own research reports and that sort of thing. And that's an argument that Mr. Left made at trial, and the government didn't really challenge him on that.

6:12But the question now is whether or not this verdict is resulting essentially in new regulations via jury verdict that aren't really clear where's the line. And all of that is just going to have a further chilling effect on the industry, which started after Mr. Left was indicted a couple of years ago. They already started to beef up their disclaimers and things like that. But without a real clear line about where, you know, why the jury specifically found the way it did, you know, they're not regulators. So it's really up in the air right now, like what this means exactly for the industry. He could still fight this?

6:49Absolutely. I spoke to him outside of the courtroom minutes after he was convicted. He hinted at an appeal saying that this wasn't the end of the road. You know, his lawyer also asked for a mistrial based on something funny that happened in court or unusual, I should say. So there's going to be a couple of different ways that they're going to challenge this. And of course, anything is possible on appeal. OK, I want to talk audit immunity. This is a story that I know has come up on our radar today. And I'm curious, U.S. officials are continuing with an agreement that bars the government from probing past tax filings from President Donald Trump and his businesses.

7:30It's another story that you worked on, a little bit of a hard pivot from talking about this insider or this rather this short selling prosecution. What can you tell us about the relationship between that one point eight billion dollar fund and audit immunity that President Trump could receive? Well, I think everyone can agree it's it's all been highly unusual. President Trump's ten billion dollar lawsuit against the IRS was unusual in itself. And then this$1.8 billion fund was also pretty unheard of, especially since it wasn't approved by a court or judge or anything like that. So the fact that this audit angle is still surviving after the settlement or the fund was dropped is pretty interesting.

8:19Of course, it's a big scoop by my legal colleague, Chris Strom. And I think that it just shows the extent to which this lawsuit had become a vehicle for Trump to get different things that he wanted from the government that he leads. So it is it is very unusual. I think that we can see we will continue to see legal challenges around this. A lot of different groups have a filing in court saying Trump's guaranteed to drop this fund isn't enough. They want something formal in court about it. And I think we'll see something similar with the audit angle. All right. Well, we'll see ultimately right where all this lands.

8:59Eric, thanks so much. As Tim mentioned earlier, especially that story about Andrew left that Eric has on the Bloomberg. It is among our most read. Eric Larson, U.S. legal reporter here at Bloomberg News. Stay with us. More from Bloomberg Businessweek Daily coming up after this.

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11:12months only. Then full price plan options available. Taxes and fees extra. See full terms at mintmobile.com. You're listening to the Bloomberg Business Week Daily Podcast. Catch us live weekday afternoons from 2 to 5 p.m. Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business App or watch us live on YouTube. Carol, I think it's fair to say we talk to a lot of folks who are bullish on AI. Yes, a lot of people, but a lot of people have skin in the game, too. Yeah, they do. You don't have to look far to see how investors in the public and private markets are viewing this stuff, OpenAI and Anthropic, fetching close to a trillion dollar valuations in the private markets before they even IPO.

11:49In terms of bullish guys, Ed Zitron is not one of those guys. He thinks, quote, AI doesn't have an ROI, which is actually the title of his sub stack today. Ed is the CEO of Easy Primary Research, also the host of the Better Offline podcast. He also writes the Where's Your Ed At newsletter. Journalists know him, too, as a tech PR guy, but increasingly he's become known as a prominent skeptic of artificial intelligence. Ed joins us here in the Bloomberg Interactive Brokers Studio. Welcome. It's good to have you on the program. Very happy to be here. Usually you're behind the scenes, so this is pretty cool.

12:22Oh, I love it, though. I live for the microphone. Well, what are we getting? I don't want to say we. What are the bulls out there getting wrong about AI? Because you've made no secret that you don't see any there there. Yeah. So I think people are conflating a semiconductor rally with an underlying successful business, which doesn't really exist. Anthropik's current revenue growth, which is deeply questionable in the fact that they leaked profitability, manipulated by Elon Musk, of course, their growth is coming because people cannot measure how much an AI task actually costs. And a couple months ago, Anthropik started charging their enterprise customers the actual token rates.

12:58What this has led to is suddenly businesses are going, oh, how much money are we spending? Uber's see, I think it was Uber's COO, Andrew McDonald said that they are having trouble justifying by the AI spend based on the actual return that one could actually measure it. So you've got a thing where you can't measure the costs and you can't measure the return on investment. What do you call that? You call it a thing without an ROI. Isn't it though safe to say, Ed, like I think about this, I agree that there is going to be, when there's any new technology, there's a lot of money thrown at something, right?

13:32A hot new idea, whatever it is. And that ultimately, like we've talked with some experts in the AI world, they're saying all of these large language models, not everything's going to exist because right now it doesn't cost you anything to use it. But at some point there will be a cost and people will start to select what they want to play with. And so is it a case of right now, I mean, at some point there will be some winners, some losers, and we'll see some things filter their way out and that there will be some return on investment for some of the larger players when it comes to AI? Do you not see some winners and losers in this or some winners in this?

14:09I think the winner is Jensen Huang and the winner is the construction firms who have got prepaid for all the data center construction. Maybe Sam Altman and Dario Amadei have become billionaires through this. But when it comes to the actual businesses, you can't find anyone who can measure the ROI because you can't do it. So when it comes down to the model companies themselves, they're horrifyingly, horrifyingly unprofitable. I think OpenAI lost like 20-something billion dollars last year. Anthropik's probably not far behind this. And we don't have access to their books. Of course, of course. But once they file for an IPO...

14:40And that's the thing. When we see these S1s, I think it's going to be kind of a massacre. Because I think that people have this view that these companies are becoming more profitable or even have a path to profitability. And they don't have one. But, you know, somebody could say, and Carol, we talk about this all the time, Amazon for years didn't really have profits. Well, that's the thing, though. Now it's a behemoth. And now it's a, you know, then AWS came along. And now it's this juggernaut that, you know, has made a lot of people very wealthy. But the thing with Amazon is between 2003 and 2017, Amazon Web Services, actually all Amazon CapEx, was around$57 billion normalized for inflation.

15:19Between that whole time. In that entire time. and they were cash flow positive in nine. The classic thing with the dot-com reconciliation thing as well, things went poorly, but after that, there was useful infrastructure. No such story exists here. GPUs, AI GPUs specifically, have very few other use cases. And on top of that, if you're talking about incomplete data centers, it's going to cost just as much money to finish them today as it will in 10 years. And similarly, a B200, GB200 rack, MVL72 rack, for example, will cost just as much, if not more, in electricity 10 years from now. There is no pick up and fix this story.

15:55Perhaps there'll be some on-device large language model use, but we are talking in an industry that has absorbed over a trillion dollars in the last three years. The media attention from everyone and these continual stories about the magic of AI. But when you say, hey, is it making any money? They go, oh, no. Oh, we couldn't possibly. We don't do that yet. But don't worry. Uber lost a lot of money. Uber burned about$32 billion, which is less than half of what Anthropic has raised in the last six months. So I think it's safe to say there's a lot of smart investors are in this. Smart companies are in it, right?

16:30Who are, I mean, pick your big hyperscaler. They obviously want to be around for a long time. So I'm just, like, how do you explain their bets on all of this? So I have this theory called the rock-com bubble, which is the hyperscalers are out of hyper-growth ideas We haven't had a new iPhone. We haven't had a new cloud computing We haven't really had a new platform that would turn into the next hundred bit the next Google search or Amazon web services So they thought that large language models were going to be the panacea that they were going to be creators of API growth that they were going to be the new infrastructure play load up the GPUs sell access to everyone the problem is no one checked to make sure any of this was profitable.

17:13And we still don't know if GPU compute is actually margin positive, which is crazy considering the amount of money going into it. And when we look at the companies that actually are selling it, Corwee, for example, they burn billions of dollars, 20-something billion dollars worth of CapEx this year, about the same amount in debt. And their customers are NVIDIA, OpenAI through Google, OpenAI through Microsoft, and Meta, who does not have an AI strategy. It's very strange to let that Twilight Zone episode with the scary child. We're all trying to pretend that Meta actually has a plan here. They don't have one.

17:50So is Apple kind of smart? Because we've talked with our Mark Gurman about this, how they've kind of been relying on Google, right, and Gemini, and not necessarily doing that big spend. And they're not doing any CapEx on. No, exactly. Well, I think what happened with Apple is they released Apple Intelligence, which may be the largest-scale anti-tech radicalization in history. My non-tech friends, I've heard nothing about AI from them. The moment Apple Intelligence comes out, they're like, this is the worst thing I've ever used. And I think that made Apple go, maybe not. Maybe we should take a step back.

18:21But their CapEx is minimal. They're spending about as much in CapEx, ironically, as Amazon was spending on AWS way back when. So I think Apple is cautiously holding back and kind of absorbing the headline after headline, the ridiculous headline of Apple's behind in AI, behind in a losing proposition, more like. We're speaking with Ed Zitron. He's the founder and CEO of Easy Primary Research. He's got the Better Offline podcast. He writes the Where's Your Ed at newsletter. Just so everybody's aware, do you have skin in the game? Are you shorting any of these companies? Do you have a financial interest in what you're talking about?

18:57I invest in words. I love doing the newsletter. I do I think I'm spreader a Spreading a great deal of financial literacy and of how to pull apart the narratives these companies But no I don't because the market is irrational and the market is inherently invested in something that I think is destructive Especially the SpaceX IPO and opening Ionanthropic should not be allowed to go public They are dangerous lossy companies. They're going to be added to indices that will sink 401ks You know, it's interesting that you say this because I got a text from on a group chat today about from a from a friend of mine who's like not happy about the idea that he's as an index fund investor, he's going to be forced to have to buy SpaceX, for example, which is the sort of the subject of yesterday's big take.

19:40Everybody should check it out on the Bloomberg Terminal. There's a lot we want to get to with you. We have a couple more minutes. You've got to come back some more with us before you go. What happens if markets you said markets are irrational right now? Now, if markets become efficient, and I think a lot of people think markets are efficient, if markets view this the way that you're viewing this, what are the repercussions of that bubble bursting? I think the majority of gains based on AI success are going away. I think the neoclouds like Iron, CoreWeave, CipherMining, and TerraWolf as well, all of them, perhaps not going to zero, but they're going to be shells of the corporations they used to be.

20:19I actually don't know how call we've survived this. I think NVIDIA is looking for the most aggressive haircut you've ever seen. For example, because they currently are not the way I've, based on research I've done, it looks like it's taking about 6 to 12 months to install a single quarter's worth of GPUs from NVIDIA. They've yet to put out any kind of guidance about this. They clearly know. But if you go and look at Microsoft, for example, none of the data centers that they have announced have broken ground since 2023 have actually been finished. The Fairwater data centers, they've said that that was fully complete.

20:56It's not even half complete. It's one of the strangest things I've seen in history. And I think what it is, is that these companies know that they can get away with it. They know that the SEC scrutiny isn't there. And they also know that the froth is big enough that everyone kind of loses together. It all comes out in the wash when it's proven that there is not a there there. Do you get calls from these companies? No, I don't hear back from Microsoft or OpenAI or any of them. But you reach out? I do. I ask for comment and they just, I guess my email gets lost. Sam Orman, Dario Amadei, there's PR people have mentioned coming on my show, but then they go quiet.

21:30Probably because I'm quite critical of them. They know I'd ask the questions they don't want to answer. Why do you think, I want to poke at something that you mentioned earlier. Why do you think OpenAI and Anthropics shouldn't be allowed to go public? Because they are lossy companies. They do not have a path to profitability. Anthropic, they leaked, or however, that they were profitable. They were profitable in two months when Elon Musk gave them a discount on their compute through SpaceX. Clearly planned leaks. Clearly planned financial engineering. No normal profitable company does things like this.

22:03OpenAI and Anthropic are both horribly unprofitable, and they are not getting better. The information reported a few weeks ago, OpenAI had a negative 122 % non-gap operating margin in the last quarter. But again, just because a company doesn't make money doesn't mean it shouldn't go public. Just because a company is not profitable doesn't mean it shouldn't go public. Let me reframe this then. I don't think these companies will survive. And I think that investors are doing exit liquidity for venture capital. And I think that these are dangerous, unstable companies that face basically no real scrutiny for most of the years of their investment.

22:42You have journalists and analysts who are actively cheering them on. This is a dangerous precedent, and it's a dangerous thing for retail investors who are being conned by this. And I mean the whole ROI conversation. That is a result of most people experiencing AI via subscriptions that are subsidized, meaning you can burn anywhere from$3 to$13.50 for every dollar of your subscription. So people don't know how much this stuff actually costs, and they are investing and believing in it and creating workflows around it based on services they likely cannot afford long-term. Just got 20 seconds here.

23:16So we have a story. Uber has set usage caps on some AI-powered tools used by its staff to manage costs after blowing through its AI budget earlier this year. We're going to increasingly see these stories in your view? Yes, we will. And we've already heard a similar story coming out of Walmart. I think Bloomberg reported yesterday. Ed, thank you so much. Great stuff. Come back soon. I agree, Tim. Great conversation. My pleasure. Thank you. Ed Zitron, CEO of Easy Primary Research, the host of the Better Offline podcast. He writes the Where's Your Ed At newsletter, joining us here in the Bloomberg Interactive Brokers Studio.

23:48This is the Bloomberg Business Week Daily Podcast. Listen live each weekday starting at 2 p.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa. Play Bloomberg 1130. So some of the economic news. It's a big week, actually, for the labor market, but we did get a read today. U.S. job openings jumping in April to the highest level in almost two years, and layoffs fell, adding to signs that the labor market, Tim, remained resilient. Even so, though, there's maybe still some concerns.