Regal Funds ‘linked’ to sudden fall in Syrah Resources price
ABR
EXCLUSIVE ANDREW MAIN12:00AM JUNE 13, 2015
Regal Funds Management, the Sydney-based boutique being examined by regulator ASIC over a mystery share trade in 2013, appears to have been linked to an unusual and sudden drop in the price of mining junior Syrah Resources in early 2013.Syrah is a Melbourne-based explorer with a very promising graphite and vanadium play in Mozambique, whose share price fell by more than 43 per cent in a few days in late March and early April in that year.The corporate regulator’s investigation is believed be centered on whether there was a plan to push down the price of Syrah. Regal, a multi-award-winning fund manager with a top reputation among investors, is believed at the time to have been unable to lift its holding because of the tight share register.Regal has declined to comment on the nature of the probe.Regal’s hedge fund, the Australian Long-Short Fund, is understood to have been short-selling the stock at that time in big quantities, taking Syrah’s share price down from $3.00 to $1.70 over eight trading days, without actual news to move the stock.The drop caused shareholders to lose more than $30 million in capitalisation. The share price has since recovered to just under $4.As one anguished shareholder commented in a chatroom at the time: “This is absolutely crazy stuff. There is absolutely no indication that anything has changed with the size/quality and value of Syrah’s graphite/vanadium holdings. If I understand correctly from another site it seems that the share price crash is happening as consequence of short sellers attempting to profit from a series of mini warrant positions.’’ASIC is not commenting, as it’s involved in an investigation; nor is Regal for the same reason. The Weekend Australian has established a connection between the Regal fund’s short sales and the fact that Credit Suisse Australia had at the time issued a series of long “mini” warrants on Syrah.Short-selling shares is not illegal, but ASIC will be investigating around possible collusion or market manipulation. There is no suggestion of wrongdoing by Regal or Credit Suisse.“Mini” warrants were a form of share option devised by Royal Bank of Scotland and subsequently listed on ASX by other banks in 2010 and 2011 as a way to offer retail investors greater exposure to shares for the same outlay. Credit Suisse has ceased to offer them.New & improved business newsletter. They were safer for retail investors than contracts for difference in that a stop-loss arrangement stopped the buyer losing more than their initial investment. However, they were usually only issued against blue chip shares, because of their risk of creating exactly the same price distortion in small stocks that ASIC appears to be investigating.But in 2012 Credit Suisse issued mini warrants on Syrah, a relatively small and particularly illiquid stock. Credit Suisse has long been Syrah’s broker and has been close to Regal, a keen buyer of Syrah stock. It will be up to ASIC to find evidence of collusion before there is any suggestion of illegal activity.One possible motive for collusion is that when institutional investors want to secure a position in small illiquid stocks. A quick way to achieve liquidity is to scare some existing holders into selling, by forcing the price down.A further twist in the mini-warrants structure was that if the price of the underlying share, in this case Syrah, fell below a predetermined stop-loss level, the holder of the warrant was forced to pay up within 48 hours the full market price of the share if they wanted to retain ownership.If they could not find the funds to acquire the shares, then Credit Suisse resumed control and had to find a buyer for the shares. That happened in this instance, as Regal was a willing buyer.The combination of actions by Regal and Credit Suisse appears to have had such a dramatic effect on the price of the stock, forcing it down by more that 40 per cent in just days, that within three months the exchange operator ASX formally clamped down on anyone issuing mini warrants on any stock outside the S&P/ASX200. And not long after that episode, Credit Suisse announced with minimal fanfare that it was unwinding all the positions it had in those mini warrants and was shutting its participation in the trade down entirely.Before it did so, there had been loud calls to close the “mini” business down. On April 24 of that year, no more than a fortnight after the Syrah price lurch, the directors of Australian-listed Canadian explorer Atrum Coal announced they were “strongly opposed to the issue of mini warrants on small or mid-cap mining companies as they have the potential to distort an orderly market”.And no wonder. Between March 28 and April 18 of that year, within 12 trading days their stock price halved from $1.02 to 52.5c, again on no news. Again, the price subsequently recovered but when small stocks start falling sharply, investors get nervous, sell, then potentially suffer deep losses.Which is exactly what happened. Many small shareholders were unable to find the funds for the exercise price on the warrants at short notice so the investment bank bought the shares.In the case of the Syrah mini warrants, Regal was prepared to take every single share on offer, at a bargain price around $2 each. It was about to do as much but another boutique fund manager, Harbour Capital, complained to Credit Suisse and was allocated some of the Syrah shares shaken loose by the 35 per cent drop in the share price. Credit Suisse has declined to comment.Regal announced to its investors on June 1 this year it had been summoned to a hearing by ASIC, after two of its directors had resigned on legal advice on May 22.Regal was founded in 2004 by Andrew King and its chief investment officer is his brother Philip King, who has strenuously denied any wrongdoing.The King brothers are now the only two members of the Regal board in the wake of the resignations in last month of David Lees and Chuak Chan, who represent 30 per cent shareholder Westpac Bank. Regal remains the third biggest shareholder in Syrah at 8.65 per cent. Ironically, the redemption of funds from Regal last week by the BT Wrap platform, in reaction to news of the ASIC inquiry, has forced Regal to sell just over 2 million Syrah shares, forcing the price down by 15 per cent from $4.35 to $3.69. BT Wrap is owned by Westpac. Syrah shares have since bounced back up to $3.99.
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