Former federal judge says regulators must ‘make an example’ of ‘short and distort’ attackers

Former federal court judge Ray Finkelstein has called on market regulators to make an example of one or two “short and distort” attackers to deter the release of misleading research that has cost Australian shareholders billions of dollars.

Former Justice of the Federal Court, Ray Finkelstein.
Former Justice of the Federal Court, Ray Finkelstein.Credit:Fairfax Photographic

Mr Finkelstein, who served as a judge from 1997 until 2011, said there was no straightforward answer to addressing the problem of “short and distort” raids but said regulators still need to do something significant to protect market integrity.

“If the regulator makes an example of one or two and chases it all the way through to the individuals and forces them to pay, that might act as a deterrent to discourage others who are risk adverse,” he said. “But it is probably never going to stop.”

His comments come as the Australian Securities Exchange said it doesn’t have any power to stop foreign-based activist short sellers that drop reports with sensational claims about local listed companies into a live market without warning.


Short selling – the practice of betting against a share price by borrowing a stock and selling it on the open market with the view of buying it back when the share price falls to make a profit – is a legitimate investment practice that supports smooth market functioning.

However the new, more aggressive “short and distort” attacks are different, and involve research reports containing exaggerated or misleading claims being circulated, often with little notice and during trading hours.

The impact on Australian investors of the short and distort raids was highlighted in research released to The Sydney Morning Herald and The Age by Sydney University Business School this week, which estimated the economic destruction across 18 ASX listed companies by largely foreign based entities was $15.7 billion and cost shareholders $2 billion.

It estimated that that the short term profit to short sellers during the release of the activist research reports was $462 million and of that $21.4 million was generated by new short sales just before or at the release of the report.

In response to this masthead’s story, the ASX said it lacks the power to stop short and distort attacks.

“The ASX doesn’t regulate short selling (it’s a Corps Act matter) nor do we have any power over entities that aren’t listed and subject to our rules (ie activist short sellers),” a spokesman said.

But the exchange operator said it is examining what it can do to stop “ambush” tactics used in the attacks, which are often amplified via social media. “These tactics are employed to cause damage for a commercial reason,” the spokesman said.

The ASX’s preference was for activist reports to be released outside of the market’s trading hours to give the target company a chance to prepare a response. “We would also ask investors to be mindful of the activist’s motives before acting on the report,” he said.

“When short sellers become active, ASX monitors price and volume movement, liaises with the listed company, grants trading pauses and halts to help them manage their disclosure obligations, and encourages them to respond factually and proportionally,” he said.

The corporate regulator ASIC told the Herald and The Age activist short selling was a focus area and a project team was assessing the practice and its impact in Australia and overseas.

It said it was developing guidance on its expectations for activist short sellers and target companies, which would be finalised in 2021.

“For example, ASIC expects short sellers/reporters to release their reports outside of trading hours after engaging with target companies, and to target companies to swiftly respond to activist reports, and, where reports are released during trading hours, to halt trading until a response can be provided,” ASIC said in a statement.

“ASIC has no tolerance for materially false or misleading statements,” it said.

It said it would pursue action for breaches of Australian law where there was sufficient evidence and it was in the public interest.

However, it declined to comment on whether it was investigating the short attack on Rural Funds Group, which suffered a 42 per cent fall in its share price 30 minutes after the release of a report by Texas-based Bonitas calling it a fraud.

Rural Funds Group founder David Bryant took Bonitas to court and won, with the judge finding it engaged in deceptive and misleading conduct and was in breach of the Corporations Act and ASIC Act.

David Bryant, found of Rural Funds Management.
David Bryant, found of Rural Funds Management. Credit:Alex Ellinghausen

Bonitas didn’t defend the proceedings. It wrote to Rural Funds’ lawyers on October 1, 2019 stating it wasn’t going to spend much time familiarizing Rural Funds with US law “as we assume you reviewed those laws before deciding to commence an action in Australia against an entity and person who do not do business there, and never been physically present there.”

It said “Australian courts have no jurisdiction over us, and we will contest the enforcement of any orders or judgments you obtain …

“In light of the recent affirmation of our opinions regarding Rural Fund’s financial precariousness by a reputable and totally independent research firm, Bucephalus Research, we are considering a defamation action in the US against your client,” it warned.

Rural Funds Group was awarded $900,000 in damages but ten months later it is still waiting.

Mr Bryant said Rural Funds Group has more than 15,000 shareholders aged over 70, who were traumatised by the share price rout.

Bucephalus Research responded to questions from this masthead via Twitter, saying it wasn’t a short and distort activist and doesn’t trade stocks. It said it never writes anything it can’t support and doesn’t act in synchronicity with other researchers or investors.

“Negative research tends to get written about companies that have poor disclosure or are perceived to have questionable business models. There is a very easy solution to this, improve your disclosure and address the questions posed.”

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