In a surprising twist, the U.S. Securities and Exchange Commission (SEC) has charged short seller Citron Research and its founder, Andrew Left, for their involvement in a $20 million scheme to defraud investors using false and misleading statements.

According to the complaint, Left used the Citron website and its associated social media accounts to recommend taking short or long positions in 23 companies, noting that the positions were consistent with the positions that him and his firm had. As a well-known short seller, Citron was able to move the market with its recommendations with an average move of over 12% following a recommendation. These recommendations would often come with a price target.

After these recommendations were made, Citron would go against the recommendation. It would buy stock after recommending to sell and sell stock after recommending to buy.

“Andrew Left took advantage of his readers. He built their trust and induced them to trade on false pretenses so that he could quickly reverse direction and profit from the price moves following his reports,” said SEC Los Angeles Regional Office Director Kate Zoladz.

SEC Charges Citron Research and Andrew Left with Federal Security Law Violations

In one example, Left issued a $65 price target for a recommended stock. However, he began selling once the stock reached $28 per share.

The SEC has also alleged that Citron tried to make it seem like it was an independent research firm that did not receive compensation from third parties. However, the firm had compensation agreements with hedge funds, such as Anson Funds Management.

The SEC’s complaint seeks disgorgement, a penny stock bar for Left and civil monetary penalties against Left and Citron, among other remedies.

Separately, the U.S. Department of Justice’s Fraud Section has charged Left with one count of engaging in a securities fraud scheme, 17 counts of securities fraud and “one count of making false statements to federal investigators.”

The securities fraud scheme charge carries a maximum penalty of 25 years in prison while the securities fraud charges would result in a maximum of 20 years in prison for each count. The false statement charge adds another maximum penalty of five years in prison. Left has not yet been convicted for these charges.

On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.