Ben Pauley
Murdoch, Australia
MAR 30, 2020 —
To learn any art properly you need a good teacher and in my case I had my father Gerry. Gerry began investing at the young age of 17 with a lump sump from his father he could do whatever he wanted with. Most people would have bought a car or put a deposit on a house but Gerry instead bought some shares on the ASX. He lost the lot. He lost every single cent of the money he invested because he bought shares at the wrong time. The Poseidon bubble was a stock market bubble in which the price of Australian mining shares soared in late 1969 after the Poseidon Nickel discovery, then crashed in early 1970 taking Gerry’s money with it.
For Gerry this was not a disaster but a good learning experience. He kept learning the game with small amounts of money. With a mathematics degree and a programming background he was able to hone his craft over a few years. He created the website Gerry Pauley’s Australian Stocks and Shares which won an award in the early days of internet for best financial site. Hot Copper had only just started but his site was more popular. In the first few years of his website, he made 50% returns on his own stock choices and the number of his followers was increasing. Then ASIC forced him to get a financial license which he refused so his site was closed down.
After his father died, Gerry received enough inheritance which allowed him to invest full time for a profession. This is how I remember my father as I was growing up, spending blocks of time analysing financial reports and then trading when the timing was right. As a result of the time and effort he invested, he earnt on average 20% returns over 25 years. It wouldn’t be easy to find a professional fund manager who replicated those returns. He invested properly and honestly and the capital he invested was used to grow companies. There was nothing dubious or grey about his investing strategy, he didn’t make his money from insider trading or manipulating prices.
His way of investing was according to the rules, and back then the stockmarket functioned much differently. Back then, it actually performed the function it was designed for. Shareholders of emerging companies, and in companies fighting back from set backs could expect to be rewarded if the companies they were invested in were successful. That is no longer the case.
Even the introduction of algorithmic trading should not have affected him if it was regulated properly.. Maybe he would have lost out a few dollars here and there but it would have been immaterial. As algorithms flooded the ASX the real value of stocks became lost and price setting became the new money winner for the hedge funds and investment banks. As price setting became more and more dominant, other dishonesty set in and directors started to become a part of the manipulation. On top of manipulating prices which was already extremely lucrative, a new goal for the manipulators emerged - total disenfranchisement of shareholders.
Even before algorithms had emerged Gerry had seen this method used. Gerry owned shares in the ASX listed company Kaefer which was a smaller Australian version of the bigger German company also called Kaefer. This Australian Kaefer received most of its profits from engineering work with BHP. Wanting to flush out the shareholders, the directors of Kaefer announced it had lost its contract with BHP. An extraordinary announcement followed. Despite the company being in sound financial health shareholders were offered a choice by the directors, either they must accept a takeover by the German Kaefer at an extremely low price or the company would be placed in voluntary administration. It was suggested that with the loss of the BHP contract the company could not survive without its German parent and majority shareholder.
Not wanting to go down without a fight, Gerry wrote to shareholders and after teaming up with a few others they fought the board. Shareholders rejected the takeover and the company was placed in voluntary administration.
Gerry was fortunate enough to be in contact with one of the creditors who allowed him to represent them at the creditors meeting. Gerry discovered at the meeting that the proper procedure was not being followed and the administrators were not trying to attract the highest bidder for the assets and rather a deal was in place to sell all the assets at a firesale price to the German Kaefer. Gerry started asking too many probing questions in the meeting so Kaefer paid that creditor that allowed him to represent them. Since the creditor was paid out Gerry could not attend any more creditor meetings.
After the creditor meetings Gerry and his long term corporate lawyer friend Gordon Elkington challenged Kaefer through the takeovers panel. The purpose of the takeover panel is to safeguard shareholders against dishonest takeovers but it is just another body that is failing miserably. Panel members are all appointed at the Finance Ministers dicretion. They represent the Big End of Town and not the mum and dad shareholders.
Turnbull didn’t last long as PM but his Finance Minister appointment had long lasting effects. Turnbull appointed Kelly O’Dwyer the wife of Jon Mant - an Executive Director at UBS to Financial Services Minister. O'Dwyer appointed a number of panel members who have links to her husband. She appointed members from UBS, Credit Suisse, DeutscheBank and Citigroup - the main investment banks manipulating stocks on the ASX. O’Dwyer appointed Kelvin Barry from UBS, Michelle Jablko from UBS, Stephanie Charles from Credit Suisse, Hohn O’Sullivan from Credit Suisse and Alex Cartel from Deutche Bank, to name a few.
When the Takeover Panel is the last hurdle manipulators must go through to snatch a company, having the Panel members on your side is a valuable asset. The last thing they want is shareholders to complain and a takeover being declared as unacceptable.
When the Takeover Panel received the application from Gerry Pauley and Gordon Elkington they took one look at it and rejected it with the following reason. “The Panel’s jurisdiction does not extend to regulating the affairs of companies in administration. Any alleged impropriety in the conduct of a company administration is a matter for ASIC and/or the courts”. Now does that sound like a cop out or what? Why wouldn't they make an assessment and recommend that ASIC follow up? Instead, they chose to sit on their hands. They have been sitting on their hands pretty much ever since, with an occasional case attracting interest which has provided an impression that the system works.
As Gerry’s Kaefer investment turned ugly a new precedent was being set on the ASX. The regulators were becoming more corrupt and there were fewer safeguards for investors. In the end before dementia took Gerry’s capacity to think clearly, predatory tactics robbed him of huge sums of money in companies like Dick Smith, RCR, Arrium and Slater & Gordon.
As the circle of regulatory capture widened, Gerry noticed an organisation that was built to protect shareholder rights, The Australian Shareholders Association (ASA) was also losing its way. Many years prior Gerry formed his own branch of the ASA in the southern suburbs of Perth and for many years held the role of treasurer. He was often called on to submit policy suggestions to ASIC on behalf of the ASA.
When algorithms started controlling the market Gerry could see what was taking place at a superficial level. He was using IRESS the trading platform and he could see that prices were being manipulated. Although he didn’t go to the depth to prove it, it was plain as day to him that stocks were being manipulated. He initially made some requests for greater transparency from ASIC and when these were ignored he put in an official submission on behalf of the ASA for greater regulation of algorithmic trading around 2012 - the same year Alan Kohler reported to Australians that parasites were feeding at the heart of the ASX. The submission was ignored and now we stand 8 years later with a stock market more rigged than any casino.
Now when I see a Kaefer car drive past or when I walk past the huge new Kaefer building in the city I wonder just how much that Kaefer investment would be worth today.
contact Ben - [email protected]
