ASIC investigates malicious market rumours

Australia’s corporate watchdog has issued a “please explain” to several individuals about their connection with false rumours circulated on markets in order to undermine the share prices of targeted companies.

Late last week the Australian Securities and Investments Commission said it had received complaints that misleading information was deliberately being spread about listed companies “to artificially provoke sales of securities and to reduce their market price”.

And now ASIC has made a formal request for information from a number of people who engaged in share-trading in recent weeks in an attempt to shed light on whether misleading conduct or predatory trading has occurred that could amount to market manipulation or insider trading.

ASIC has refused to reveal the identities of the individuals, but it appears they could be located both here and overseas, with the regulator planning to contact authorities in the US, Britain and Hong Kong as part of its inquiries.

Under the Corporations Act it is an offence to knowingly or negligently spread false information in order to cause shares prices to drop. People found guilty of such conduct could be fined up to $220,000 or sentenced to five years in jail.

The rise of cashed-up hedge funds, which in some cases are able to use their market power to force shares in particular companies lower, has created an environment where rumours can be potent, EL&C Baillieu senior research analyst Ivor Reis says.

“Rumours are routine in all markets, but what’s different in this bear market is the impact they are having on individual shares because of short selling by hedge funds. In previous markets there wasn’t so much money in hedge funds devoted to short selling and trying to pick the next company to go down,” Reis says.

This hedge fund activity has made fund managers more nervous in the current downturn than previously, he says. “Fund managers are more likely to adopt a cut-and-run policy on stocks. If they hear a bad rumour or a bad piece of news they are much more likely to shoot first and ask questions later.”

Michael Heffernan, a senior adviser with Austock, who has over 20 years experience of finance and securities markets, says this is the first time he has heard of action of this nature taking place.

“Rumours are grist for the mill for the markets, but if there is market manipulation or people forming cartels to drive stocks down, that would be something new to me,” he says.

Heffernan says rumour mongering could also be particularly dangerous at the moment because of a rise in the number of margin loans – which if triggered can cause rapid selling of stock.

“I think more people have got margin loans than ever before, and that’s what’s causing the problem at the moment,” Heffernan says.

The collapse of Eddy Groves’s ABC Learning Centre’s share price has been blamed on short selling, market rumours and the perils of margin lending.

ASIC has refused to release any details of the companies claimed to have been targeted by the rumours, or the number, identity or location of the people from whom further information is being sought.