One of the oddities of modern securities regulation is just how much you can get away with if you crush small investors by touting speculative penny stocks and how much heat you attract if you warn them about the dangers of these dubious stock pumps.

That appears to be what happened to a man named Andrew Left, a short-seller of some note. He’s done some great work over the years alerting the market, often on Twitter, about overvalued stocks and public companies that are outright frauds. He then “shorts” them — an investment technique where you borrow shares of the targeted company, and sell them. You make money, sometimes a lot of it, when you repay the borrow with a stock that has collapsed in value. 

Sounds complicated even if it’s not. Short-selling has been around since we’ve had a stock market. Regulators traditionally loved that short-sellers sniffed out stock pumpers — traders who push dubious market fads and unrealistic business models, particularly on unsophisticated investors.

But in the weird stock market of today, Left and people like him are the bad guys, targets of the feds’ crackdown on alleged market abuses. 

GameStop stock was at penny-stock levels and then suddenly exploded on chatroom hype.

Left’s legal odyssey underscores the dysfunction of the modern stock market that has and will make small investors the ultimate “bag holders.”

For the full story, you need to go back to January 2021. COVID was still with us. People were in lockdown mode. Online trading became the bread-and-circuses of the day. First-time investors needed research, and seeking tips on what stocks to buy, legions of them turned to the Internet and Reddit chat rooms for clues.

Let’s just say these aren’t the most reliable places to get your market research. They’re filled with stock touts looking to make a quick buck. That’s when the madness of crowds began. Shares of troubled companies like GameStop and AMC Theatres, trading under the symbols GME and AMC, were at penny-stock levels and then suddenly exploded on chatroom hype.

Average Joe obsession

Small first-time investors became obsessed with these “meme stocks” because they were said to stand for something — a meme that the average Joe can play the stock market game and outwit some pro at a hedge fund. They were oblivious to the more nefarious stuff going on.

At the time it didn’t really matter. The seemingly endless hype drove these stocks so high, it sparked what’s known as a “short squeeze.”

Professional traders like Left and others who considered GME and AMC market roadkill and shorted them were forced to cover their short positions at big losses. One hedge fund, Melvin Capital, collapsed during the melee. Left and his hedge fund, Citron Research, which had warned repeatedly these stocks were trading at insane levels, barely escaped a similar fate.

The little guy won; it was the shorts who became roadkill.

The triumph by these faux underdogs will be the subject of an upcoming movie about the meme mania, perversely titled “Dumb Money.” I haven’t seen it, but a summer feel-good movie showing meme-loving David slaying hedge-fund, stock-shorting Goliath might do well at an AMC Theatre even if it’s not how markets work in the long run.

That’s right, the lousy fundamentals of the companies like GME and AMC will always kick in over time — and did. So did the end of Fed money printing, and government “stimmie” check handouts that went into the markets. The meme party ended with a thud. Today, GME is down more than 80% from its highs; AMC more than 90%.

Not sure how the meme movie deals with these non-trivial details but many small investors clung to GME and AMC through this collapse believing in the social-media pumping and got crushed. These so-called bag holders lost generational wealth, my reporting shows.

Closed Regal and AMC Empire 25 Cinemas in Times Square in New York due to the COVID-19 pandemic on Saturday, October 24, 2020.
Professional traders like Left and others who considered GME and AMC market roadkill and shorted them were forced to cover their short positions at big losses.
Levine-Roberts/Sipa USA

More important question: Where is the regulatory crackdown on the meme-stock crackup? Nowhere, as far as I can tell. In fact, the regulatory attention appears focused on short-sellers — the same market people like Left who warned about the stock-touting meme-stock craze.

Left appears to be public enemy No. 1 in this bizarre crusade. The feds have raided his home looking for evidence; he has a team of lawyers on standby, even though his warning on the meme stocks and much of his other research has been incredibly prescient, the record shows.

Maybe Left did something really bad. Bloomberg recently did a scary profile of his legal limbo, with the feds refusing to say if or when they will pounce and for what. 

Andrew Left
The feds raided Left’s home in search of evidence.

“If people cannot trade stocks and tweet their opinions, then we are losing the freedom of speech that is the fiber of the United States,” he tells me.

The bigger problem: The Department of Justice and the Securites and Exchange Commission appear to be oblivious to how markets work. Without short-selling — and it’s increasingly a dying art because of what happened to Left — you will have a market dominated by the guys in another movie. 

That flick was “The Wolf of Wall Street,” depicting real-life fraudster Jordan Belfort, a stock pumper of a different generation who also cost his victims a lot of money with false promises of untold riches if only they kept buying and holding penny stocks.

The SEC and the DOJ declined to comment.