- CHANTICLEER
- Apr 2 2018 at 11:00 PM
- Updated Apr 2 2018 at 11:00 PM
Blue Sky attack shows ASIC needs to lift its game
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Soren Aandahl of Glaucus Research and Rob Shand of Blue Sky Alternative Investments are in for an epic battle over Blue Sky's fee-earning assets. David Rowe
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by
Chanticleer
Investors in Blue Sky Alternative Investments will have a stark choice on Tuesday – either believe the company, which says it definitely has $4 billion in audited fee earning assets, or trust the California-based hedge fund Glaucus Research,
who say the real number is $1.5 billion.
A stack of reputations are riding on the back of that $2.5 billion difference in fee-earning assets, including the reputation of the securities regulator which appears to be failing in its job of ensuring the operation of fair, transparent and orderly financial markets.
On the Blue Sky side of this fight there is a long list of respected corporate names that could suffer damage to their reputations if the company is proved wrong and Glaucus is right. These include accounting firms KPMG and EY and property valuers JLL, Savills and Colliers.
The auditors, valuers and the company will be under pressure because Glaucus has, in essence, accused the company of falsifying its accounts by deliberately pumping up asset valuations and by not disclosing relevant negative information to the market.
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Blue Sky CEO Rob Shand made it clear at the weekend in messages to investors that he will fight tooth and nail to defend the company's published fee-earning assets number Supplied
Blue Sky chief executive Rob Shand made it clear at the weekend in messages to investors that he will fight tooth and nail to defend the company's published fee-earning assets number, which is more than $4 billion. Chanticleer understands Shand made a similar claim last Wednesday to the Australian Securities and Investments Commission (ASIC) soon after the 67-page Glaucus report was released.
The reputation of Glaucus and its research director Soren Aandahl could suffer if he is proved wrong and Blue Sky is proved right about the value of Blue Sky's fee-earning assets. Then again, when Glaucus has been proved wrong in the past it has been like water off a duck's back. Nothing sticks to the teflon Glaucus.
Over the past few years the company has failed in its attacks on three companies in Hong Kong, Japan and the United States. It shorted the companies, but the share prices ultimately went up. The companies were Japanese trading house Itochu Corp, Hong Kong real estate investor Fullshare Holdings and US beverage group National Beverage.
In Australia Glaucus is best known for its
successful attack on sandalwood tree grower Quintis, which was placed in administration by its directors on January 22. A day later the Quintis secured bondholders appointed receivers and managers.
Glaucus is one of a special breed of market participants who roam the world attacking companies at a time of their choosing. They do this without being licensed in most of the jurisdictions where they operate. They have found a comfortable regulatory limbo and exploit it to the hilt.
It is clear there are now two separate levels of disclosure and market accountability emerging in the Australian market when it comes to research that can dramatically change market valuations.
On one side of the ledger are the entities domiciled in Australia and engaged in issuing research in Australia about publicly listed companies. They must do so under the strictures of an Australian Financial Services Licence (AFSL).
On the other side of the ledger are hedge funds and activist shareholders targeting companies. Glaucus does not have an AFSL licence and specifically states in the one-page disclaimer attached to its Blue Sky report that "this report and its contents are not intended to be and do not constitute or contain any financial product advice as defined in the Australian Corporations Act 2001".
What is even stranger than the fact that Glaucus is not accountable to any regulator in Australia is that it keeps in close touch with ASIC about its actions, but at no stage during its seven-month research into Blue Sky did it officially contact the company.
Glaucus could find itself in deep water because it is a criminal offence under the Corporations Act to disseminate information that is false and misleading and induces people to buy or sell securities or have the effect of reducing the price of securities.
Glaucus is under no obligation to check any of its analysis or findings with the company. Blue Sky believes the Glaucus report is full of errors, the most egregious of which is its claim that property companies in Australia don't include gearing in the measure of assets under management.
But most property asset managers in Australia do include debt in the calculation of fee-earning assets, including Rural Funds Management.
Chanticleer reckons it is truly bizarre that Glaucus sent a copy of its Blue Sky report to ASIC after it was released around the world and freely available to Australian investors. Glaucus was told by ASIC's market surveillance division to include in its report a disclaimer that the report was "not available to Australian residents".
It beggars belief that ASIC is focused on this sort of ridiculous and meaningless disclosure at the same time as a hedge fund that has built up substantial short positions in a company is deliberately releasing a report designed to smash the market in a company's shares at a time when the shares are trading.
It is true that any Australian analyst can release a critical report about a company. But no ethical or fair-minded investment bank in Australia would allow an analyst with an axe to grind to release an explosive report while shares in the target company were trading.
This goes to the heart of the question about ASIC's duty to ensure there is a fair, transparent and orderly operation of the equity markets in Australia.
Glaucus has built up a reputation for destroying companies it attacks even though its track record is mixed. It can confidently predict that no matter what it says about a company it will have an impact on the share price.
This raises the obvious question: Why is it that Glaucus and other hedge funds attacking companies are not obliged by ASIC to release their reports before trading begins? Why is there not a rule that the market be given time to absorb information as explosive as the information released by Glaucus? We know ASIC would prefer a more considered approach because last Wednesday it advised the ASX and Blue Sky that a trading halt in Blue Sky shares was in the interests of investors.
But, in the time it took the regulator and the market operator to halt trading in the stock, BlueSky shares had fallen 10 per cent. Those holding short positions made about $3 million in the space of 2½ hours when a report "not available to Australian investors" was creaming the market.
Why is Glaucus allowed to have that level of impact on a stock and not be held to the same high standard as other licensed market participants?
What Glaucus does is perfectly legitimate and reasonable. It has called out or revealed poor performing, overvalued and, in some cases, fraudulently run companies.
But it is about time that ASIC and other regulators around the world formulated a set of regulations that specifically address the method of dealing in the market by hedge funds such as Glaucus and other activist investors who attack companies with corporate-style white papers, PowerPoints and lengthy research reports.
We know Glaucus builds short positions to profit from the negative impact of its reports. But we do not know whether the company shares the information with others.
ASIC will inevitably be dragged deeper into the fight between Blue Sky and Glaucus because logic says that if the target company is right about its audited fee-earning assets being $4 billion then it follows Glaucus has released false and misleading information.
The natural progression is that ASIC will be asked by the company to investigate Glaucus for alleged breaches of section 1041 of the Corporations Act, which prohibits market manipulation.
If Glaucus is right, surely ASIC will have to intervene because it could not allow a company to trade if its assets are over valued by $2.5 billion. ASIC won't be able to just sit on the sidelines.
