The corporate regulator has been accused of double standards after taking aim at what it calls “short and distort” campaigns run by short-sellers, who profit when share prices fall.
To the dismay of company directors, the Australian Securities and Investments Commission (Asic) has previously been regarded as friendly or neutral towards short-sellers.
But in a statement released on Tuesday, Asic claimed that short-sellers were “making false or misleading statements” and “using overly emotive or inflammatory language to distort the facts” in order to drive share prices down.
It called on short-sellers to release their reports while the market was closed so that companies had time to prepare a response, fact-check their reports with target companies and “avoid overly emotive, intemperate or imprecise language”.
Companies that were targeted by short-reports should go into a trading halt and “respond comprehensively”, Asic said.
Tim Murray, the managing partner of short-seller J Capital Research, said Asic was privileging good news about companies over bad.
“What Asic is saying is corporates can put out press releases and sell-side analysis-positive reports during trading hours but negative reports only outside trading hours,” he said.
“There is asymmetry in treatment of positive and negative reporting. Investors need time to digest positive information as much as they do negative. Positive press releases by corporates are often without detail and cause the stock to increase significantly.
“With these ill-considered guidelines Asic is behaving like the German regulators in response to criticism of Wirecard,” he said.
Wirecard, a German payments processing company that had offices in Australia, collapsed in June last year after accounting firm EY discovered a €1.9bn (A$3m) black hole in its accounts.
Short-sellers Zatarra Research first attacked Wirecard in 2016, accusing the company of “wide-scale corruption and corporate fraud” – allegations the company denied.
Rather than look into the allegations, the German regulator, Bafin, instead launched an investigation into Zatarra.
In a statement, Zatarra’s successor, Viceroy Research, said Asic’s new information sheet seemed well-intentioned but was misguided.
“The world saw recently what happens when a regulator takes sides in the market; Bafin’s handling of the Wirecard fiasco significantly harmed investor confidence in the markets and their regulation,” it said.
“Regulating our investigations with license requirements, and discussions with perpetrators of fraud, will detract short-sellers and the valuable information they provide to Asic.
“The suggestion that authors ‘fact check with the target entity’ is laughably naive in its assumption that every targeted company is a tragically misunderstood ‘good guy’.
“The crux of many reports is that management have made false and misleading statements; they are unlikely to be honest when short-report authors come knocking. More likely, these ‘fact checks’ will result in pre-emptive legal action and other coercion.”
Murray said Asic was “signalling to corporates they should list in Australia if they want to avoid market scrutiny”.
The regulator wrongly assumed that “all companies are good actors” when the collapse of insurer HIH in 2001 and 2018’s banking royal commission showed that was not the case, he said.
He said there would be many risks for J Capital if it contacted research targets before publication.
“Some companies will use this as an opportunity to action an emergency plan to counter short-attacks such as announcing a share buyback in advance or the day of publication,” he said.
“We have found this a common tactic of unethical companies.”
He said Asic’s new guidance might also conflict with the regulator’s existing advice that research findings should not be “communicated outside the research report provider before the report is provided to clients in the normal course of business”.
“If we contact the corporate in advance, that may be considered selective publishing,” he said.
An Asic spokesman declined to provide any examples of “short and distort” campaigns. He denied the regulator had changed its general position on short-selling.
However, the information sheet issued on Tuesday is believed to be the first time that Asic has ever used the phrase “short and distort” in its official communications.
The move comes after other director-friendly moves by the treasurer, Josh Frydenberg, that include attacking proxy advisers, who give investors advice on how to vote at shareholder meetings, and proposing to water down continuous disclosure rules that force companies to keep investors informed about significant developments that might affect their share prices.