On the news today, ASIC is cracking down on share manipulation. Just about time..!! It's been really frustrating to invest on the ASX lately. Market manipulators are running wildly in the market, in addition to so many false rumours, short sellings and possibly insider tradings.
It is understood that ASIC has sent off 'please explain' letters to at least 10 broking houses, including UBS, Merrill Lynch and Austock.
ASIC's crackdown on share manipulation
Bryan Frith March 12, 2008
THE most effective way for ASIC to demonstrate that it is serious about cracking down on parties deliberately spreading false rumours to manipulate share prices would be to find a test case to take to court quickly.
Of course, that's easily said and much more difficult to do. There's the small matter of finding sufficient evidence to win a conviction.
It's further complicated by the fact that some of the parties said to be rigging the market in this way -- hedge funds and others -- are located offshore, outside the jurisdiction of ASIC, and don't have any assets or operations in Australia. They may be reluctant to co-operate with any inquiries from ASIC.
Nevertheless, ASIC has signalled that it means business. Last week, the corporate regulator warned that it was paying increased attention to the circulation of false rumours to push down the price of a company's securities and noted that such behaviour could constitute a criminal offence, punishable by imprisonment.
At the same time, ASIC and the ASX also reminded market participants of their requirement to disclose when they shorted stock and used borrowed securities to cover the transaction.
Yesterday, ASIC advised that it had taken things a step further. The regulator confirmed that its inquiries had extended to making formal requests for information from a number of market participants about trading in "certain securities" in past weeks.
The inquiries relate to conduct that could involve spreading false or misleading rumours, or predatory trading that could amount to market manipulation or insider trading.
In an attempt to cope with the jurisdictional issues, ASIC is seeking the co-operation of its fellow regulators in offshore markets -- the Securities Exchange Commission in the US, the Financial Services Authority in Britain and the Securities and Futures Commission in Hong Kong.
ASIC won't identify to whom it is talking or what securities are involved but, as disclosed yesterday, complaints have been made to ASIC over heavy shorting of shares in Ed Bateman's Primary Health Care, accompanied by adverse false rumours about the company.
Primary is in the midst of a massive $1.2 billion entitlements offer at $5.40 a share, which will double the company's market capitalisation. The objective appears to be to push Primary's share price below the issue price for the new shares to increase the likelihood of a shortfall. That would create the perception of an overhang of shares and depress the Primary share price.
The ploy has been working. Primary's share price plummeted 22 per cent in the space of seven trading days, from $6.44 to $5.07 -- well below the $5.40 entitlement issue price.
Primary's share price rallied somewhat yesterday, after disclosure of the possible market manipulation, closing 8c higher at $5.18, but still below the issue price. Applications for the retail component close tomorrow.
Challenger Financial Services is another company that has complained to ASIC about heavy shorting of the company's securities, accompanied by adverse false rumours.
Challenger's share price fell sharply last week amid speculation that large shareholders may be forced by margin calls to sell shares in the company. On Monday, colourful Sydney criminal lawyer Chris Murphy disclosed that he had sold 15 million shares for $25 million, but denied he had been subject to a margin call.
Challenger has sought to dampen the speculation by stating that it had several years ago banned directors, senior executives and staff from taking out margin loans over Challenger securities.
Several weeks ago, rumours circulated that Challenger had a large amount of debt due and payable, but it turned out that Challenger had never had any dealings with the purported bank lender. Challenger's share price fell about 10 per cent as a result of that episode.
Late last month, when Challenger was preparing to release its half-year results, a rumour circulated that the company was in dispute with its auditors over the carrying value of assets on the balance sheet.
However, Challenger's audit committee at the time had already been given a clean draft audit opinion. The audit is not finalised until the accounts are approved by the board and signed. The accounts were duly signed and there was no change to the audit opinion.
That rumour also coincided with a material fall in Challenger's share price.
There are suggestions that in both those instances the rumours were spread by an overseas-based hedge fund that was said to have a material short position in Challenger. Moreover, it had no corporate entity, no assets and no employees in Australia.
One major investment bank has done some analysis to try to ascertain the extent of shorting of major Australian financial stocks in the local market.
On the bank's reckoning, since January 1, 407 million shares in ANZ Bank, or 21 per cent of the capital, have been short sold.
For Babcock & Brown, the figures are 186 million shares (63 per cent), Challenger 186 million shares (31 per cent), Suncorp 190 million shares (20 per cent), QBE 252 million shares (28 per cent), Macquarie Group 152 million shares (55 per cent), Westpac 378 million shares (20 per cent), NAB 385 million shares (23 per cent) and St George 128 million shares (23 per cent).
There's no way of knowing how many of those shares have been covered and what is the outstanding level of shorts, but there must be strong suspicion that in at least a number of those stocks the outstanding short position is more than 10 per cent of the capital. If so, that would contravene the Corporations Act.
MFS's catch 22
STRAITENED financial services group MFS continues to keep its shareholders in the dark as to when it plans to release its results for the December half-year, but it's understood that, as yet, it has not obtained an extension of time from ASIC in which to lodge the report.
The ASX requires half-yearly reports to be lodged within two months of the balance date, so
MFS is already failing to comply with that rule. The Corporations Act requires half-yearly reports to be lodged within 75 days after the end of the period, which means the statutory deadline is this Friday.
Non-compliance is a strict liability offence, which means that the reasons don't matter -- if it's late, it's an offence, and the penalty is a fine of up to $2750 or six months jail, or both.
MFS, whose shares have been suspended from quotation since January 23, originally intended to release its half-yearly results on February 21, but the day before it announced that it wouldn't be doing so.
On February 27, MFS said it had applied to ASIC for an extension of time and would be in a better position to inform the market as to the likely timing of the release once it had received feedback from ASIC on the application, and after further discussions with its auditor, KPMG.
Since then, nothing more has been heard from MFS on this matter.
In the interim, MFS has continued with what appears to be an orderly liquidation of assets, without shareholders having any say in the matter.
In recent weeks it has sold 65 per cent of its Stella tourism arm for $410 million, Sydney's Park Hyatt hotel for $205 million, Domain Aged Care for a profit of $43 million and repayment of $50million of loans, and the remaining interest in Gersh Investments for $20 million.
The sales have enabled MFS to repay most of its short-term debt, which should mean there is no valid reason to continue the suspension.
However, the ASX normally suspends trading in the shares of companies that are late with their half-yearly reports, so it's unlikely to lift the suspension until the results are released. Catch 22.
bfrith@acenet.com.auhttp://www.theaustralian.news.com.au/story/0,25197,23359398-16941,00.html