By Michael West
To the glee of those who have watched their shares get hacked to pieces, the hedge fund short sellers in Babcock & Brown have been savaged this week in an almighty 250% "short squeeze'' amid takeover speculation.
As your average hedge fund is leveraged by at least a factor of five their losses may well have surpassed 1000% in five days. Such are the perils of leverage. And such is the volatility of this market, exacerbated by the ban on short selling.
Volumes are down, volatility is up, confusion abounds and Australia's regulatory reputation has taken something of a hammering, the regulators having not done enough to enforce disclosure in the first place, then having gone too far to rectify the mess.
Is there a takeover predator lurking in the wings for B&B? If there is, the insider traders have cleaned up. The company has debunked the rumour after receiving a "speeding ticket'' from the ASX asking it to explain the surge in its stock price. Not that that rules out a corporate play.
In the present climate though, and in view of B&B's debts and hidden management agreements over its satellites a bid would be unlikely, despite the quality of the underlying assets.
The irony is that a change of control in B&B, were a bid to succeed, would probably void the management agreements and choke B&B's fee flow. A quick death that is. The group derives more than 90% of its income from its satellite stocks. B&B Power and B&B Infrastructure alone tipped in $270 million in fees last year.
But what is a change of control, what does it constitute? Thanks to the regulatory failure to enforce reasonable disclosure we don't know. The management agreements are secret.
Unit holders in the satellites are similarly inconvenienced. If they wished to set themselves adrift from the Babcock mothership, as some do, they might have to shell out millions in penalties, for years. But they don't exactly know either.
In the case of BBP, the 25-year management agreement with the parent another case of supervisory largesse from the Exchange to one of its best clients is briefly disclosed in the PDS, which notes BBP may terminate the management agreement if B&B ceases to hold more than 50% of the issued capital of the manager.
There was a kerfuffle at the ASX general meeting this week when shareholder activist Stephen Mayne locked horns with outgoing chairman Maurice Newman over these and other issues. Mayne was right, although his tilt at the board fell short.
ASX is an admirable company whose management has been first rate in delivering record profits each year to grateful shareholders.
Running a licensed stock market monopoly in the sunlit uplands of the biggest bull market in history is one thing, however, and being the market supervisor in a severe downturn entirely another.
The ASX has appeased its big investment bank clients with waivers and a blind eye for too long to the detriment of shareholder rights. Disclosure has suffered and asset prices have suffered the plight of B&B satellites being a prime example.
Still, the ASX remains in denial. Rejecting accusations of a conflict of interest in being market supervisor and a company run for profit - Newman lashed out at the media for "blind prejudice'' and even had a swing at CBA chief Ralph Norris and QBE chairman John Cloney for stating the obvious about the Exchange's conflict of interest.
He denied ASX had a conflict for starters. A company that supervises itself (ASX is listed on ASX) has a conflict of interest, simple as that. How it is handled is another matter.
He had a big swipe at the media and corporate governance advisory mob Risk Metrics for being too misleading and simplistic in their criticisms and then went all legalistic in rebutting their assorted claims.
"We have been accused of granting waivers to facilitate the listing of entities, by allowing details of management agreements to go undisclosed, when no waivers were granted and the essential content for informed investment decisions is set out in the prospectus,'' Newman said.
Ahem ... when no waivers were granted? This sort of thing is typical of corporate rhetoric whose purpose is to PR-spin a company and its directors out of all responsibility for anything.
The facts are that ASX and corporate watchdog ASIC are prolific issuers of waivers in all sorts of areas from exemptions for companies to trade in their own shares to exemptions from normal disclosure obligations. Investors suffer as a result.
For the ASX's part, it has granted a whole raft of waivers, among them waivers to Listing Rule 6.8 which enable externally-managed entities (such as those promoted by BNB and MQG) to appoint a majority of directors to the board of a satellite.
Newman rejected claims the ASX had not addressed weakness in short-selling rules until the market turmoil this year when "we pushed the relevant authorities for legislative action in mid-2007''.
In fact, when they were approached by governance types pleading for the short-selling rules to be tightened up late last year, the response was that there was no urgency.
"Failure to prevent insider trading'' was another point. "We are the Neighbourhood Watch and ASIC is the policeman,'' was the line here, which was an unfortunate metaphor as Neighbourhood Watch does not benefit from the proceeds of crime. ASX makes revenue from any trading.
True, its role is to detect and refer suspicious activity to ASIC rather than prosecute offenders but if one of its major clients were indulging in suspicious activity ... well, there is that conflict again.
Indeed by introducing a SEATS trading screen black-out on broker identities a couple of years ago something its major investment bank clients wanted ASX merely shut down transparency.
The case for anonymous trading at the time was supposedly to enhance liquidity but it is likely the "reform'' only led to more market manipulation under cover of broker ID darkness.
Incidentally, the CEO of the Exchange at the time was Tony D'Aloisio who got pushed out by large institutions who wanted present CEO Robert Elstone to run the shop when the ASX merged with SFE. Elstone was SFE chief and was applauded as an efficient cost-cutting manager.
D'Aloisio didn't go hungry though. He walked with a $7 million payout and is now chairman of ASIC, which has a mountain of issues of its own.
Then there was the rebuttal of claims by Newman that ASX had failed to monitor director trading compliance. If it were monitoring directors' notices it certainly wasn't kicking up much of a fuss, nor was ASIC doing anything about it.
In 2004, some 123 of the top 200 companies had breached the rules. A study by governance research mob, Regnan, found a similar level of non-compliance last year.
Directors flagrantly and regularly flout the disclosure rules on reporting their own trading and nought is done about it.
When it comes to ASX and ASIC, you wouldn't find a better game of "pass the parcel'' at an ABC Learning child-care centre.
Other points could be made but the message is clear. The current supervisory and regulatory framework will simply not cope with the flood of problems now arising from the marketplace without further damage to market integrity. Nor will the courts.
As a corporate chairman presiding over a wildly profitable monopoly that supervises itself, Newman did a fine job for shareholders. Now, the "new broom'' incoming chairman David Gonski has his work cut out for him restoring regulatory credibility, if in fact it can be done at all.
Make that "supervisory'' credibility, ASX rails at the word "regulatory'' but there's not much of a difference. It makes rules, it can enforce them. It can enforce greater disclosure.
All of these financially-engineered and externally-managed entities are now in dire straits, trading at massive discounts to their directors' valuations. On the issue of allowing their promoters such as Babcock to conceal their management agreements over satellites, ASX contends argues it boldly demands they explain "if not, why not?''
In some cases the promoters claim their disclosure would force them to reveal their intellectual property! What about shareholder rights?
In the world of takeovers there are strict rules when it comes to companies. When it comes to trusts there are all sorts of loopholes.
Besides Gonski, the other major appointment is of former ASIC boss Alan Cameron to the chair of the ASX Market Supervision.
As Cameron makes a living as principal of Cameron Ralph, a firm which advises companies on governance matters, there is a conflict there which should be addressed.
mwest@fairfax.com.au
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