Trump vs Law Firms & Short-Seller Andrew Left's Trial

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2:03You might remember President Trump's executive orders punishing four law firms with connections to his perceived political enemies, trying to restrict their lawyers access to government buildings to cancel their clients' government contracts and to revoke their lawyers' security clearances. Four lower courts struck down the orders as unconstitutional. And if today's oral arguments at the D.C. Circuit are any indication, the federal appeals court will hand another win to the law firms. My guest is former federal prosecutor James Pierce, senior counsel at the Washington Litigation Group. What's at stake in this case before the D.C.

2:48Circuit Court? I mean, I think concisely put, it was whether the current administration could attack law firms, essentially retaliate against law firms based on the president's conclusion that those law firms had sort of almost provided safe harbor to individuals the president considered to be his adversaries. And so beyond that, beyond just the four law firms involved, I think there was a much broader concern about the chilling effect on the legal profession. And then even beyond the idea of the legal profession, as one of the briefs in the case, I think squarely teed up the ability of courts to get the best, most zealous advocacy that they could in court cases, which, of course, affects all of us who may at some point in our lives need legal representation.

3:34Was the law firm's argument essentially based on the First Amendment? Yes. I mean, there's a little bit of a caveat I should provide here. The law firm's argument was that these executive orders targeted them in violation of the First Amendment as well as the Sixth Amendment, which provides a right to counsel and separation of powers concerns. The focus of the argument today was actually not as much on a lot of the parts of the executive orders that restricted access to federal contracting or access to federal buildings. A lot of it was on the stripping of security clearances, which, again, is, I think, a consequence of First Amendment retaliatory targeting.

4:16But there was a lot of question about what role, if any, do courts have in reviewing sort of a justiciability question, reviewing a president's determination of whether individuals should get access to or should hold security clearances. The law firms were represented by Paul Clement, former solicitor general. I mean, what was his basic argument and how was it received? He began his argument by making what I thought was the rhetorically powerful point that the executive orders violate, quote, the better part of the Bill of Rights, alluding to what I have already mentioned, the First Amendment, the Sixth Amendment right to counsel separation of powers.

4:52And there weren't a lot of questions until toward the end of his argument, because a lot of the focus was on the operation of security clearances again, which I actually took to be a good sign for Paul Clement and for the law firms that he's representing, because it suggests to me that the appellate judges had many of the same reservations that led the district court judges to rule for the law firms. But we're focusing on a much more narrow question, which is the security clearance question. Doesn't mean for sure that the panel will rule for the law firms. But if I were the law firms and if I were Paul Clement, I would feel pretty good coming out of the argument today.

5:27What was the government's response? And when it comes to national security, isn't that usually an executive branch function? Yes. So the government had consistently said the determination of whether any individuals, let alone whether they're lawyers at a law firm, of whether that individual can hold a security clearance is a decision that is entrusted entirely to the executive branch and more specifically to the president. And the president can do that for whatever reason or, frankly, for no reason at all. And there were hypotheticals that the government got that were things like, look, if the president said, I don't trust Chinese Americans, Asian Americans, African Americans.

6:07And even though I don't think that these individuals would jeopardize classified information, I just don't like them. And therefore, I determined they cannot have security clearances. Could courts really have no way to get involved? And the government's answer was, yes, courts have nothing to say there because questions of national security are entirely entrusted to the president. Now, that's, I think, a quite troubling answer for a lot of reasons and one that Paul Clement pushed back on. But at the end of the day, the government had very little to say on a lot of the other parts of the executive order, like, again, the restrictions on federal contracting, the restrictions on access to federal buildings.

6:47It was a brief argument to say, look, law firms are just involved in business and business type of relationships don't implicate the First Amendment. But that occupied a very small part of the government's argument today in its brief. And candidly, I don't think the government quite had its heart in it. And I would not expect it to prevail on those grounds. Was there a question of whether the executive orders were retaliatory in nature? The government didn't outright concede that the orders were retaliatory. And the way this sort of took shape in terms of how the case was argued is that the executive orders consisted of five sections.

7:22And the first section of each of the orders, there were four orders against the four different law firms, was basically kind of the setting out of the purpose of why that particular law firm had come into focus for the executive branch and for the president, whether it was associations with Robert Mueller or Andrew Weissman or other individuals deemed political adversaries. And there was some jousting about whether the parts of the executive order that did things like strip security clearances and limit access should or could be read without reference to that first section, the section that kind of laid out what was – it's hard to see anything other than a retaliatory focus.

8:01And so the government was arguing that the courts should sever it out, should consider it, which, again, is not an explicit concession that it was retaliatory. But I think there was certainly the acknowledgement or the recognition underneath it. And the district courts had all consistently found that these were retaliatory orders and that the first section of the executive orders in each of them. The law firms won all four cases in the lower courts. Yes, that's right. But Wilmer Hale, Perkins Coie, Sussman Godfrey, and Jenner and Block, four different judges, all in the District of Columbia. Slight differences in the nature of the injunctions blocking the executive orders, but the law firms prevailed in all four of those cases.

8:42Having lost four times, did the Justice Department change its argument in any way from the lower court arguments? The short answer is no. There was certainly a change in how they emphasized or really what they emphasized, As I mentioned, I think already they really placed a lot more emphasis on security clearances when the case was up on appeal. And then, as you may know, the government noticed an appeal. And then shortly before its appellate brief was due, it had to file the first brief as the as the party lodging the appeal. It actually moved, filed a motion to dismiss the appeal to say it was abandoning its arguments.

9:17And then maybe a day or two later and with some public statements potentially by the president and others in the White House, I think maybe Stephen Miller. government reverse course and said, no, no, just kidding. We actually do want an appeal, which is extremely unusual. I spent over a decade in the Justice Department, and I've never, never heard of anything like that, nor had colleagues that I had spoken with. So to me, that suggested a real lukewarm approach to this appeal. And as I said, no real change in the substance, but some change in the emphasis of the arguments. Practically speaking, if an administration cuts off security clearance of someone, I mean, Are there procedures they have to follow?

9:56Another case argued today of a specific lawyer, an individual named Mark Zade, whose security clearance was revoked, and he was arguing that that too was unlawful, and he prevailed in front of a district court. I only got a chance to hear some of that argument, but channeling some of what came out during the law firm's argument, the judges were more skeptical of a kind of a blanket suspension of security clearances on the basis of association. And that also, I think, led to the hypotheticals about for all Asian Americans, right? But for individualized treatment or individualized assessment, the government in its argument today and in the briefs have talked about how there's a 13-factor test that in the ordinary process is considered, you know, sort of trustworthiness, other aspects.

10:44So there is a process. It's a bit of an open question. And the Mark Zade case will, I think certainly go some ways towards resolving the extent to which courts can second guess an executive branch determination that is done on a at least putatively individualized basis. The panel consisted of two Obama appointees and one Trump appointee. Did it seem like the Trump appointee was more receptive to the government's arguments? Not on the overall outcome. I mean, my sense coming out of the argument, so there were the three judges, Chief Judge Srinivasan, Judge Pillard, and then Judge Rao, Judge Rao being an appointee of President Trump from his first administration.

11:27And Judge Rao did raise some questions about the scope of Paul Clement's arguments, because he was arguing that any time there's a non-individualized determination of security clearances, it should be justiciable. And I think Judge Rao was pushing back on that in some respects. And at another point, Judge Rao asked the government, if we disagree with you on your top line position that the security clearances or the other provisions can be decided by court, you didn't raise any challenge about the scope of the injunction, which to me suggested Judge Rao may have thought the district courts went a bit too far in what they disallowed the executive branch to do.

12:09But then Judge Rao quickly followed up and said, but government, I don't see anywhere in your brief that you have addressed that. And Judge Rao, in other cases, I think has been more favorable towards the current administration. I didn't read her or understand her to be pressing those arguments in the way she has in the past. So I'd be surprised if she might write separately on sort of some particular points. But coming out of argument, I would be surprised if she broke from the other two who did seem quite skeptical of the government's position. So you came away with a definite feeling that the government is going to lose again here.

12:42I did come out with that feeling. I could see, as I said, Judge Rao writing separately on some particular points. I actually think that there's a good chance that all three of them end up voting to uphold the district court's rulings for the law firms. Thanks so much for joining me today. That's James Pierce of the Washington Litigation Group, coming up next on the Bloomberg Law Show. A prominent player in the world of short-selling activists is on trial in Los Angeles for market manipulation. I'm June Grosso, and this is Bloomberg. So there's a lot of noise about AI, but time's too tight for more promises.

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14:48Andrew Left is one of the most prominent players in the world of short-selling activists, sometimes called the bounty hunter of Wall Street. With his viral posts and reports often claiming firms are overvalued or engaged in fraud and hyping his positions with frequent appearances on financial TV shows. But now Left is appearing in a courtroom in Los Angeles where he's being tried for using explosive social media posts about dozens of companies to illegally move their stock and make a quick profit. The 55-year-old denies misleading investors. My guest is securities law expert James Park, a professor at UCLA Law School.

15:33Jim, give us a picture of who Andrew Left is. He started out by publishing research reports on companies through his platform Citrin Research, often making negative recommendations. I think he's mainly known for correctly identifying problems at a company called Valiant Pharmaceuticals, which you may remember from a while ago, a company that engaged in questionable practices with respect to recognizing sales. And so, you know, he published a report identifying some of the questionable practices. He also came up, interestingly, in the GameStop saga from a few years ago, where he had taken a short position, I believe, in the company.

16:17And retail investors basically rallied on Reddit to squeeze the shorts. And so those are a couple places where he's come up. And, you know, with those successes, he's gained a high profile. You know, he makes recommendations with respect to companies, emails them out, has an online platform, is using social media a lot, is frequently invited on various shows and has a lot of media appearances. And so he's somebody with a higher profile than most folks who are doing research and, you know, taking short positions potentially in companies. The government is accusing him of manipulating the stock market.

16:57Tell us about the charges here. He was indicted for various counts of securities fraud, manipulation, and fraud more generally. The manipulation argument is that he would basically establish positions in a stock, whether it was long or short, issue a recommendation with respect to that position, which he would disseminate to the public, presumably, according to the prosecutors, with the intent to either inflate or deflate the stock, given his high profile, and then he would quickly reverse his position. And I think the argument there is that that shows he did not believe his recommendation, that he was issuing these recommendations to artificially manipulate the price of these stocks, and that his actions, which often came very soon after the recommendation, indicated that he did not sincerely believe his recommendation that you should buy the stock or sell the stock because he was doing the reverse.

18:02And there might have been a dozen or so of these transactions, maybe more that the prosecutors allege he profited by around$20 million through this market manipulation. So in the opening statements, the prosecutor said he said whatever he had to, whether it was accurate or not, to get a market reaction, because that's what he was looking for, to generate a market reaction, to generate panic. Whereas Leff's attorney said that he genuinely believed in his stock calls. Quote, he tells the public what he believes, the truth, and then he trades on the truth to make a profit. It's not fraud, that's trading.

18:40I mean, does the prosecution have to prove that he didn't believe what he was saying, or more than that? I think that's fair that he didn't believe his opinions, the opinions that he issued, opinions can be false, that if you do not believe in the opinion, then it's false. And that can be the basis for securities fraud claim. And, you know, I think that's essentially what the prosecution has to show with a high level of certainty, because it is a criminal case beyond a reasonable doubt that, you know, he intentionally issued information that he knew was not true. And he was doing that with the motivation to profit.

19:21That's basically what the prosecution is going to have to show at trial. Is this an aggressive legal theory for the prosecution? Is it an uphill battle for prosecutors to prove this? It's not a commonly prosecuted fact pattern. I think that's fair to say. Do the prosecutors have a very well-developed case? I think they have a lot of evidence, right? They have a lot of evidence about not only his recommendations, of course, which are public, but what he did. And there is some email evidence that could be interpreted in a way that the jury might be able to conclude that he knew that the information was false.

20:03Now, that's up to the jury, And emails have a lot of ways that they can be interpreted. Market manipulation cases are tough, right? It's tough to prove the intent because a lot of the actions that could potentially be manipulative may be motivated by legitimate reason. He may legitimately believe part of his recommendations, some of his recommendations. Maybe he changed his mind, right, very soon after. And so market manipulation is challenging. We talked a few years ago about the Bill Huang case. That's one where I noted that it's hard to establish manipulation, and the prosecution did in that case.

20:46And so I think that the case is novel and interesting because, you know, manipulation is not prosecuted as much as, say, insider trading, for example. It's a little bit more straightforward when I've taken non-public information, I'm an insider, I trade on it. That is usually more straightforward than a situation where somebody is engaging in various trading activity and around recommendations that they've issued. And so I think it's just less common to bring cases like this. So one of the witnesses for the prosecution was the CEO of the cannabis company Kronos Group, Mike Gorenstein. And he testified how Kronos was thrown into chaos after Left's Citron Research published and tweeted a negative report.

21:34The tweet, which said Kronos was, quote, all hype with possible securities fraud. And then the prosecutor said shortly after the tweet, around 24 minutes, according to the indictment, left started closing out his short position. Obviously, left does not have to take the stand in his own defense. No defendant does. But without taking the stand, how will he be able to explain what was going on there in those 24 minutes? I don't know how his operation works, whether he does all the research himself or whether there's somebody else who does that. I think that, you know, ideally he would explain, you know, what was my basis for making this statement about this company?

22:16What did I look at and why did I quickly close out the position? I think that's also a question that could be asked. And it might be difficult to establish that without the person who's making the recommendation taking the stand. Stay with me, Jim. Coming up next on the Bloomberg Law Show, I'll continue this conversation with UCLA law professor James Park. Is this trial a reckoning for short sellers? I'm June Grosso, and you're listening to Bloomberg. Everyone has been there. Your team's feedback is scattered across emails, chats, and sticky notes. It's a mess. But PDF Spaces and Adobe Acrobat gives you one collaborative workspace to streamline every file and comment.

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24:21That's public.com slash market. And paid for by Public Holdings. Brokered services by Public Investing. member FINRA SIPC. Advisory services by Public Advisors, SEC Registered Advisor, crypto services by ZeroHash. All investing involves risk of loss. See complete disclosures at public.com slash disclosures. A trial in Los Angeles is putting a spotlight on the short-selling industry. Andrew 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 any wrongdoing. I've been talking to Professor James Park of UCLA Law School.

25:05Jim, I've been reading some headlines that say, is short selling facing a reckoning, referring to this trial? Do you think it is? I don't think so. You know, some of the transactions were long positions. Now, you know, he is maybe known as a short seller, but he does make long recommendations as well. There's a Facebook transaction where he says it's going to$160 a share, and he sells out at much, much less than that after the price goes up. And so, you know, you might think of it as more perhaps a case involving the use of social media, the use of kind of online recommendations? Is that the place where you could have a bit of a chilling effect?

25:48And so I think you might even think of the case a bit broader than it being about, you know, somebody who is specifically selling companies short and making allegations that the price should go down. I think it's a bit broader than that. It is the combination of, you know, do short sellers sometimes use social media? Sure. I don't know that they do that to the extent that Mr. Left did. And that might be kind of what the case ultimately is about, is that technology has made it difficult to regulate conduct that might manipulate markets. Because before social media, you couldn't move a stock price like this.

26:25But now, you know, there's some individuals who can't. Just the indictment of left sort of spooked the short selling industry. His indictment is the culmination of an investigation of short sellers by criminal prosecutors in D.C. and Los Angeles that started in 2019. So short sellers were aware of the prosecutorial scrutiny. Some of left's biggest competitors have already exited the market. Some came out with more detailed, longer disclaimers. Has the industry cleaned itself up a bit? You know, I think it's tough being a short seller. It's always been tough. Nobody likes you. And, you know, there's long been scrutiny of short sellers and their statements.