ASIC hits flame-throwing short sellers with a soft feather

If companies vulnerable to a short seller attack were hoping that the corporate regulator’s new information sheet would allow them to sleep easy, they should reach for the melatonin or improve their disclosure.

Most activist short sellers have already solved the problem of being caught by the Australian Securities and Investments Commission’s (ASIC) regulatory jurisdiction by issuing their reports from outside Australia, safe in the knowledge that the internet doesn’t respect international borders.

Thus ASIC’s attempts to address the more aggressive activist short attacks on Australian listed companies is something of a Hail Mary and not much of a concession to the anti-short lobby.

Christian Bale as hedge fund maestro Michael Burry in The Big Short. Credit:

And while ASIC would clearly like to curb short selling practices that distort markets, the information sheet it released on Tuesday doesn’t suggest that short selling is bad. Rather the tone of the report suggests that shorts have a role to play in increasing the transparency and information provided to shareholders.

ASIC even notes that some activist short sellers have exposed flawed business models, questionable business or accounting practices, insolvency and fraud in targeted entities.

This will be difficult for some short-targeted companies to hear. The potential to unfairly damage corporate reputations versus the positive role some short sellers play in keeping corporations honest is a divisive issue.

On balance, ASIC has come down in favour of treating even activist short sellers as a positive element in a properly functioning market.

It has issued some practical but unenforceable advice which, if followed, could ameliorate the violent share price responses that often occur on the release of a short report.

These include short reports being published outside stock exchange trading periods, asking the short report’s authors to tone down the provocative language, free the reports of bias and have them contain verifiable information.

It also proposes that best practice would involve the shorts issuing their reports to the target company for fact-checking before publication.

In theory, this seems reasonable. But given target companies generally refute the accuracy of a short report and their allegations, it is hard to believe there would be much common ground.

On balance, ASIC has come down in favour of treating even activist short sellers as a positive element in a properly functioning market.

But ASIC’s suggestion that conflicts of interest should be disclosed definitely has merit - in the same way as analyst broking reports contain disclosures and the corporate media are expected to reveal if they are writing about companies in which they hold shares.

It will be cold comfort for those that have already fallen prey to a short seller attack, but ASIC’s best piece of advice to listed companies is to self-protect.

In other words companies should arm themselves with better disclosure, increased transparency, a bit less spin and a bit more rigour around accounting.

ASIC says its research indicates that activist short selling campaigns tend to target entities with complex and opaque corporate structures and accounting practices, or poor disclosure.

They also disproportionately focus on overvalued companies - which makes sense - although there is little target companies can do about that.

Companies with complex services - some tech companies clearly fall into this category - are also vulnerable because investors cannot adequately assess where the truth sits.

The remedy for these companies is to better explain - as simply as possible - their products and their business model and strategy.

In the meantime, ASIC advises companies that find themselves in short seller’s sights to pause share trading and check the listing rules to ensure the short report has not identified shortfalls in disclosure.

A best practice line of defence would be to comprehensively respond to the accusations made by the short seller.

Thus ASIC has provided something of a practical guide to companies with a laundry list of suggestions.

For the flame-throwing short and distort short sell reports, nothing in ASIC’s latest missive will keep them up at night.

The Market Recap newsletter is a wrap of the day’s trading. Get it each weekday afternoon.