Harbinger, Caught Unaware, Seems Stock Source for Bears
By ALEX WILSON in Melbourne and LAURA SANTINI in Hong Kong September 4, 2008
Harbinger, a major investor in Australia's mining sector, also owns a large stake in Murchison Metals Ltd.
Fortescue's Short Story
Australian miner Fortescue Metals Group Ltd. has pilloried the short sellers it says have helped drive down its shares 46% since late June.
But the owner of shares used by the short sellers turns out to be Harbinger Capital Partners, a U.S. hedge fund that is Fortescue's second-largest shareholder, people close to the parties say.
Harbinger apparently knew nothing about the shorting, these people said. One of these people said Harbinger is attempting a recall of the shares that were loaned.
Harbinger's role is an irksome twist for both the company and the fund. It also coincides with heightened regulatory scrutiny of short sales in the U.S. and Australia. Corporate executives have lashed out at hedge funds that typically engage in these trades.
A short sale involves selling borrowed shares and waiting for the price to decline, in a bet the shares can be replaced at a lower price. In a statement that didn't identify Harbinger, Fortescue said the investor's custodian had lent out the shares. The identity of Harbinger's custodian is unclear.
The lending of shares by custodians is fairly common in Australia. But the practice has drawn criticism as Australia's benchmark S&P/ASX 200 index has dropped 20% this year. Some Australian pension funds have ordered their custodians to cease any lending of their shares.
Australian lawmakers are proposing rules that would require better disclosure of short sales, part of an effort to overhaul the country's financial regulation. Short selling is under fire from some investors and corporate executives who say lax oversight benefits a few participants with superior access to market information.
In the U.S., the Securities and Exchange Commission says it is cracking down on firms or individuals that illegally spread false rumors.
Fortescue's chief executive, Andrew Forrest, has accused short sellers of market manipulation. Investment bank Babcock & Brown Ltd., which has seen its shares plunge 91% since the beginning of the year, has also said hedge funds have been spreading rumors designed to push down the stock.
On Monday, Fortescue disclosed in an exchange filing that 10% of its shares had been offered in stock loans. The company also said the owner of the shares had advised that the loans were made by its custodian and that it would "immediately rectify the situation."
Unlike short sellers, Harbinger has good reasons to root for Fortescue shares: The fund has been trying to exit from its stake in the company before its investment gains are eroded further in possible future selloffs. The hedge fund began accumulating that stake in 2004 through a privately structured convertible bond.
While Harbinger hasn't disclosed exactly what it paid for the stake, the hedge fund has recorded paper gains of several times its initial outlay.
MMX Price at posting:
$2.07 Sentiment: LT Buy Disclosure: Held
