Time to rein in short-sellers

PHOTO: Time to rein in short-sellers

SINGAPORE - The time has surely come to deal with the foreign short-sellers who have been wreaking havoc on the local stock market.

The latest attack came last week and sent the market into a spin, yet the basis of the seller's claims against a locally listed firm did not appear to stand up to much scrutiny.

Short-sellers sell borrowed stocks in the belief that the share price will fall, resulting in a handy profit if their bets prove correct.

But the means some of them use to try to herd other investors into making those bets pay off leave much to be desired.

One worry is that if the problem is allowed to fester, it may embolden them to take on our banks and blue-chips if a financial crisis were to erupt. That would have calamitous consequences.

Take the United States short-seller Glaucus that ambushed Fujian vegetable seller China Minzhong last Monday with a report claiming that the company fabricated sales and payments and overstated its capital expenditure.

It made no secret that it had "shorted" China Minzhong and stood to make a significant gain if the firm's share price fell.

Even the language it used in its report was designed to spread panic, declaring China Minzhong to be "worthless" and predicting that trading of its stock would be halted.

Given the media hype over Glaucus' success in bringing down Hong Kong-listed China Metals Recycling, it is difficult to blame investors for getting caught up in a wave of fear.

They fell for the Glaucus ploy, and in a panic, sent China Minzhong stock crashing by a staggering 48 per cent. But the fact is that Glaucus has a chequered record. US-listed China real estate website play SouFun Holdings, which it attacked in April, has since doubled in price.

True, there are US activist hedge funds that claim to play a vigilante role in the market by uncovering fraud in misbehaving publicly listed firms by taking up "short" positions against them and then publishing damning reports to drive the share price down.

Since they are people who purportedly put their money where their mouth is, this is supposed to give credence to their allegations.

But the fact remains that most of these operators are unregulated, unlicensed research outfits, unlike the professional stock analysts employed by banks and stockbroking outfits, who are subject to a host of tough rules imposed by the Monetary Authority of Singapore (MAS) and the Singapore Exchange.

And while the foreign short-sellers claim that they stand to lose money if their bets turn out to be wrong, it is the wider market that suffers the bigger damage in what some would label as corporate vandalism.

Just look at China Minzhong.

In just 90 minutes of trading, more than $300 million of its market value was wiped out, even before it had a chance to refute the Glaucus allegations.

Sure, a maligned company is entitled to take legal action t

o try to salvage its tattered reputation.

But that will just be a Pyrrhic victory, even if it wins the lawsuit.

This is because short-selling funds operate out of essentially shell companies with few assets worth seizing.

Even suing a foreign short-seller is easier said than done as few, if any, have offices in Singapore.

So if a listed firm commences legal action against them here, it would need the Singapore High Court's permission to serve papers in the country where they are based. Any enforcement is difficult, if not outright impossible, if the wrongdoers are based outside Singapore's jurisdiction.

It leaves anguished investors caught in the whiplash wondering whether justice will ever be served if a foreign short-seller were to wilfully manipulate a stock with flagrant disregard of our securities laws.

Recent instances of short-sellers involve US-based funds, so one question to raise is whether the US regulatory authorities can stand by while such outfits run amok, issuing scurrilous reports that can destroy perfectly good companies even before the veracity of their claims can be proved. Would a similar type of errant behaviour be tolerated in the US?

What the MAS has to do is to examine Glaucus' allegations carefully and determine if any securities laws have been broken - and ask for redress from its US counterpart, if this is indeed the case.

Now surely, the US Securities Exchange and Commission will want to see fair play both inside and outside its border. Can it allow any alleged travesty of justice outside US borders to sully its reputation if the MAS asks it for help?

On our part, efforts should be made to level the playing field.

For a start, let us make it mandatory for all short-sellers to disclose their positions. The current practice of asking them to volunteer the information simply does not wash.

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