The AustralianBig super funds’ short cuts in the dockBig super...

The Australian
Big super funds’ short cuts in the dock

Big super funds that finance short-selling — especially industry funds that strive to take the higher ground in ethical investing — must surely be wincing at a remarkable story in the courts this week surrounding one of the nastier “short attacks” we have ever seen in Australia.
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Many investors don’t like their super funds lending to shorters because they worry it can be unethical: they find it hard to see why their own super fund wants to finance an activity that can be trying to “short” the very same shares they probably own.For example, it is beyond doubt our major super funds over the last year would have been holding JB Hi-Fi while also lending to shorts who were betting the JB Hi-Fi share price would fall (JB Hi-Fi has been consistently among the most shorted stocks in the market).
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There has always been rumours that short-sellers play various tricks: using media leaks as part of shorting campaigns, exaggerating weaknesses of the target to maximise profits, etc. But we now have a window into what can be a decidedly unsavoury business after a plucky decision by Rural Funds Management to take its enemy — a US short-selling specialist called Bonitas Research — to court. Rural Funds management CEO David Bryant woke up one morning last August to find the Texas-based short fund had issued a damning report on the Australian business, branding it as “worthless”. Now in our volatile and overheated sharemarket, a report like that spreads like wildfire and other investors don’t wait around to see if Bonitas has played by the rules or not — many investors simply sold out. Rural Funds endured a 42 per cent fall in its share price in the aftermath of the report release.
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On Wednesday, Justice David Hammerschlag in the NSW Supreme Court gave Bonitas a beating around the ears that was something to behold. Hammerschlag said the Bonitas report on Rural Funds was “materially misleading” and then he hit them between the eyes with this: “They (Bonitas) never took the trouble to check with or inquire as to any material which they broadcast … I have no difficulty in concluding that they did not care whether what they were saying was false. ”So it turns out that apart from the issues highlighted in that last statement from Hammerschlag, the self-described “activist short-seller” released a scathing report to start a short attack on an ASX-listed company, then instantly bunkered down in Texas. As a precautionary measure, Bonitas fired off an email to their Australian target that revealed the Bonitas researchers had never visited Australia and they were sure the laws of the US would protect them should Rural Funds be so presumptuous as to try to defend itself. Bonitas kept blazing away after the legal loss this week, suggesting the court judgment was “procedurally and substantively infirm”. Meanwhile, Rural Funds’ share price — at $2.05 — has recovered to a point close to where it was the day Bonitas launched its attack. Hammerschlag will announce his decision on damages in the case on March 6. That decision won’t just be news in our market, it will be read by ever short-selling outfit around the world. If the Rural Funds exercise ends up costing Bonitas big money in damages, it will change the numbers for anyone considering a short attack on Australian companies. Or, to be precise it will change how shorters behave in our market — and that would be no bad thing.