Share rort? Where's ASIC now, page-6

Several of Australia’s most influential fund managers have begun privately pointing fingers over the possible market manipulation of Slater & Gordon shares, with at least one lodging a formal complaint with the corporate regulator.

The Australian has spoken to fund managers, a securities analyst and a corporate advisory firm, who accused hedge fund VGI Partners of notifying the Australian Securities & Investments Commission about potential issues with the law firm and then tipping off Fairfax Media that the regulator was considering an investigation into the company.

It is understood that Slater & Gordon has also expressed concerns to ASIC about possible market manipulation and the shorting of its stock.

Slater & Gordon has seen more than $1 billion wiped from its market capitalisation since reports emerged in The Australian Financial Review last week that ASIC was considering a probe of its relationship with audit firm Pitcher Partners.

The fund managers claim VGI worked in concert with investment group Perpetual, and offered a series of questions to a securities analyst at a major investment bank to ask during a Slater & Gordon briefing to add further doubts over the company’s books. The Australian has chosen not to identify the analyst. When contacted by The Australian on Monday, VGI declined to comment.

But hours later VGI partner Douglas Tynan told the Financial Review there was “more than one cockroach in the kitchen” at Slater & Gordon and called into question the entirety of the law firm’s work in progress accounting. VGI also admitted to shorting Slater & Gordon shares.

A Perpetual spokeswoman ruled out the possibility that any of its employees had encouraged ASIC to launch a probe into Slater & Gordon’s auditing. The spokeswoman also said that no Perpetual employees had discussed an ASIC probe with Fairfax Media.

VGI, with $600 million under management, maintains offices on Phillip Street, Sydney and on Madison Avenue in New York. The hedge fund, led by former Caledonia executive Robert Luciano, has substantial investments in US stocks, with holdings in NYSE-listed firms including Mastercard, futures exchange company CME, and real estate services firm Realogy.

One major fund, with almost $60bn under management, has already lodged a complaint with ASIC, while another, with more than $10bn under management, is considering lodging its own complaint. Both declined to be named.

“Tragically, ASIC, and the Financial Review have all been unwittingly complicit,” the fund manager said.
“What looks like has happened is some unscrupulous hedge fund investors have contacted ASIC, raised concerns with them about Slater & Gordon’s accounting, which are completely unfounded, and this has prompted ASIC to contact Pitcher Partners.”

Last Wednesday, on the morning of Slater & Gordon’s long-planned investor update, the Financial Review reported that sources had said ASIC was “considering its options” in relation to Slater & Gordon’s accounting. The fund managers alleged a leak to the media by VGI even before ASIC had decided on any probe, forcing the regulator’s hand.

Slater & Gordon last week said it had yet to be directly contacted by ASIC, but had proactively approached the regulator and asked for any issues to be raised as “expeditiously” as possible.
“They went and dropped that fact to the Financial Review and they timed it beautifully for it to come out on the Slater & Gordon investor day on Wednesday,” the fund manager said. In the past week Slater & Gordon shares have fallen 45 per cent since Wednesday, including 25 per cent on Monday this week.
“The Financial Review may have some sensational market reporters or it could be the hedge fund guys pointing it out, I know what my money’s on. Tens of millions of dollars made by the shorters, and it’s the ordinary investors that have lost out, it’s clearly market manipulation and insider trading.”

ASIC declined to comment on “operational matters” but said its market surveillance system allowed the regulator to identify the source of every equity market trade in Australia. “ASIC has the powers and resources to detect and act on misconduct where identified and we routinely examine trading and will pursue issues or market manipulation where identified,” a spokesman said.

ASIC figures show the number of Slater & Gordon shares held under a short position has been steadily building over the past month, peaking at 8 per cent of its total shares on issue.
Pursuing complaints about market manipulation could be complicated by Slater & Gordon’s admission on Monday that it had already identified a consolidation error in its British accounts for the 18 months between its acquisition of Russell Jones and Walker in 2012 and the end of 2013.

Slater & Gordon’s British operations are audited by Baker Tilly, an affiliate of Pitcher Partners. The company said there was no difference in net cash provided by operating activities, and there would be no impact on current performance. Last week the firm upgraded its revenue target for the financial year to $520m.

However, the debacle has left many analysts wary, with UBS analyst Jack Briggs saying the accounting issue “reinforced concerns over the relationship between revenue recognition and cashflow”. UBS did not change its earnings forecast, but yesterday lowered its price target from $7.90 to $3.70.

Quindell, which sold its professional services division to Slater & Gordon in March, has had well-publicised issues with accounting for its so-called work in progress cases.

But lingering concerns about scandal-ridden Quindell were bound to affect Slater & Gordon, according to some analysts. Quindell shares remain suspended from the London Stock Exchange’s secondary Alternative Investments Market, with a British Financial Conduct Authority probe under way alongside an internal company investigation.

In a note to clients, Wilson HTM analyst George **riel said a “unique confluence of events had combined to enable Slater & Gordon to become the plaything of intractable short-selling hedge funds”.
“Slater & Gordon has come to the attention of international short-selling hedge funds following the acquisition of Quindell in the UK,” Mr **riel said. “These international funds are experienced in running targeted short-selling campaigns, even if the premise of the shorting campaign is invalid, the funds can still make money on their short positions as companies require time to provide the performance required to rebut short funds’ assertions.”

One fund manager said: “Clearly they had their short positions in place before they set this rumourtrage in action and to fully cement their short selling during the (investor) meeting, they planted some very aggressive negative questioning from an analyst.

ASIC rarely takes action over rumourtrage, although in 2009 it banned a trader working for Linwar Securities for spreading false rumours about the financial health of Macquarie Group’s cash management division. ASIC banned shorting of Macquarie stock four days after the offence.