Muddy Waters’ Carson Block calls it the “Left Disclosure,” his name for the legal disclosure the firm puts prominently on its short reports: it aims to begin covering most, or even all, of its position as soon as a report is published.

Activist short sellers began changing their legal disclosures after Andrew Left was indicted for securities fraud in 2024. Muddy Waters’ previous boilerplate said "we intend to begin covering a substantial majority of our short positions.” The revised disclosure adds two words: “possibly all.”

The change highlights one of the issues at the heart of the case against Left, who a federal jury convicted of a securities fraud scheme and 12 securities fraud counts in June. Prosecutors argued that Left misled investors about his trading intentions and positions, including by quickly closing positions after making public statements that they alleged conveyed a different impression. Left had disclosed that he might cover some of his shorts upon publication of his reports. Prosecutors argued he should have disclosed his intention to do so.

“Andrew had a disclaimer, and he said he may transact at any point in time, and he doesn't have a duty to update,” explained Edwin Dorsey, the former publisher of The Bear Cave newsletter who was in the Los Angeles courtroom for most of Left’s recent trial.

“The jury even asked for more information about the disclaimer during the trial. And the prosecution took the view, ‘you're saying you may transact, when you know you will transact and you should say you will transact.’”

Similarly, in her instructions to the jury, U.S. District Judge Virginia A. Phillips noted that Left had engaged in half-truths by not stating that he planned to cover his short. The legal concept of a half-truth comes from a U.S. Supreme Court decision regarding an investor lawsuit against Omnicare that claimed the company “omitted to state [material] facts necessary to make those statements not misleading.”

That instruction has become a particular focus for Block, who argues that the court improperly applied the reasoning behind the Omnicare case to Left.

“The jury instruction that the jury should consider whether Andrew should have disclosed his intention to close positions when he tweeted that he was long or short is highly problematic,” said Block. “It seems to have its roots in the Omnicare case, which held that companies could be liable for ‘half-truths' in their registration statements when they provide statements of opinion without material countervailing facts of which they’re aware.”

He added, “Citron is not an issuer, hasn’t filed a registration statement, and owes no fiduciary duties to FinTwit. I believe this jury instruction is valid grounds for appeal.” ('FinTwit' is shorthand for Financial Twitter.)

Block said coining the term “Left Disclosure” was his way of “voicing a mild protest of the flawed jury instruction by linking our disclosure to the apparent application of the Omnicare holding to Andrew’s case.”

Some allocators say they are waiting to see if Left’s conviction survives an appeal before making any decision as to whether to continue to invest in activist short sellers, given the heightened legal risk they believe the verdict creates for the strategy. Left has indicated his intention to appeal, which he can do after formal sentencing, which is  scheduled for August 31. 

In the meantime, activist short sellers are revising their disclosure statements to make it explicit that they may quickly trade out of positions after publishing their research.

Kerrisdale Capital made a particularly pointed, and somewhat cheeky, disclosure shortly after Left was indicted.

“Prior to this complaint, Kerrisdale’s understanding of securities law was that by not releasing false or misleading information in one’s communications and by disclosing to the public that one is long or short a given security, and therefore biased, that there needed to be no restrictions on one’s trading of the covered security… But, in light of this complaint, and following its logic, perhaps it would help investors to just assume the following: assume we have shorted lots and lots of the stock of the covered Issuer immediately prior to publication, and assume we will buy lots and lots of the stock of the Covered Issuer to cover our short position immediately subsequent to publication.”

Dorsey sees a more fundamental problem with the government’s case. 

“My big takeaway is the government does not like this practice of taking a large position, publishing your research and quickly exiting the position,” Dorsey said.

“That's the issue that came up time and time and time again, how quickly Andrew Left would exit his positions, sometimes within days, sometimes even within hours, sometimes even within minutes. And the government made it clear they do not like this practice.”

And, Dorsey said, “everybody else has engaged in this practice for a long time and has updated their disclaimers to say they continue to engage in this practice.”

Dorsey argued that it is “an injustice where one person's going to go to jail for this practice” while other people can simply refresh their disclaimers and the practice is “totally allowed.”

Dorsey now has a particularly close view of the issue. He recently sold his newsletter to Hunterbrook Media, which produces investigative reports. Its sister company, Hunterbrook Capital, is an activist short fund.