fortescue attacks loans

Fortescue attacks loans

September 3, 2008

FORTESCUE METALS - whose share price has plunged 38 per cent since hitting a record high in late June - has discovered 10 per cent of its stock was unwittingly on loan to short-sellers.

Fortescue's chief executive, Andrew Forrest, last month launched a vicious attack on short-sellers, calling their actions "almost criminal".

At the time, it was unclear how short-sellers could have so much influence over the stock since the top 20 shareholders - led by Mr Forrest with a personal stake of 36 per cent - control 91 per cent of the tightly held company.

The top holders are primarily long-term investors who presumably would be reluctant to lend stock to short-sellers, since the action would decrease the value of their own holdings.

But Fortescue yesterday said a company investigation had made it aware that 10 per cent of its stock was the subject of loans.

"The stock loans were made by the owner's custodian and the owner has since advised the company that it will immediately rectify the situation," Fortescue said.

The Herald understands almost all of the lent shares - constituting about 9 per cent of the company - belonged to one of Mr Forrest's most stalwart backers, New York hedge fund Harbinger Capital Partners.

Harbinger owns more than 15 per cent of Fortescue and has considered selling a portion of the stake - presumably at the highest possible price.

It had little incentive to lend its stock to short-sellers and is understood to have been unaware of the situation before receiving notice from Fortescue yesterday.

The identity of the custodian is unknown, although a register check shows ANZ Nominees holds 8.58 per cent of the stock - worth $1.9 billion - and National Nominees and Citicorp Nominees each hold more than 6 per cent.

If the custodian is found to be ANZ, that could further damage the reputation of its troubled securities lending division, which was caught up in the Opes Prime fiasco.

Last month ANZ's chief executive, Mike Smith, said his bank would quit the equity financing business but would maintain its securities lending division to allow it to continue to lend shares that were backed by cash.

ANZ last night declined to comment on whether it was the custodian of the Fortescue shares in question.

Yesterday, Fortescue shares closed 32 cents higher at $7.95.

http://business.smh.com.au/business/fortescue-attacks-loans-20080902-482b.html