Yesterday in the NSW Supreme Court Mr Justice David Hammerschlag found that short sellers Bonita Research had issued false statements regarding their target the ASX listed Rural Funds Management Ltd (RFM).The judge went on to describe Bonita's issuance of a report against RFM and its shorting of RFM stock as "misleading" , "deceptive" and premised on information disseminated to the market that was "false".
Reporting the judgement the SMH's Paul Kruger said:
Rural Funds Group achieved a comprehensive legal victory over Texas-based short-seller Bonitas Research on Wednesday, as the NSW Supreme Court found that allegations against the real estate investment trust were "false in material particulars or were materially misleading".
Bonitas sent RFG's share price plunging in August last year after it released a report alleging RFG's accounts included fabricated rental income and claiming the trust was ultimately worthless.
"I am satisfied that they knew or ought reasonably to have known that the statements and information were false in material particulars or were materially misleading. They did not care that they were false," said the judgment from Justice David Hammerschlag.
Hammerschlag seemed to have been particularly offended by the fact that Bonitas did not seek comment from RFM's managers. The AFR reported:"Wiechert (Bonitas founder) is no doubt a sophisticated operator. Yet, as has earlier been said, neither Bonitas nor Wiechert took the trouble to check with or enquire of RFM as to any of the matters which they broadcast. They had an obvious commercial interest in depressing the price. I have no difficulty in concluding that they did not care whether what they were saying was false."
However, Bonitas based their work on RFM's audited financial statements. That the Supreme Court NSW requires researchers and analysts to consult with company managers and directors about what they mean by their representations in their audited financial statements is ridiculous; the investing public are meant to rely on those statements as the final word on a company's health.
Short sellers in particular have an important role to play in price discovery, issuing negative reports in markets where buy-side research dominates. In fact, Bonitas report forced RFM to issue additional statements, which further informed the market.
Hammerschlag's decision will consequently interfere with the free flow of market information, and with market efficiency. It is investors who will pay, in the form of higher costs in the process of price discovery.
The decision is also at odds with what is becoming, here in Australia and overseas, an increasingly automated market.
One wonders what Hammerschlag and his fellow judges at the Supreme Court NSW might make of algorithmic share traders, who can short stocks based on signals which can include financial statement ratios,which can be adjusted accordingly depending on the weight assigned to the credibility or. quality of what has been reported. The programs, as one would expect, do not first invite company managers to tea before executing their cold and merciless trades.
END
Postscript
In his 2014 paper Turner raised the prospect of sell orders executed by algorithmic trading platforms being found to be defamatory publication:
Computer-generated practices such as automated search engines present new challenges that the law will need to meet. An important development in this respect is the emergence of algorithmic share trading. It not only challenges orthodox conceptualisations of shareholders and their behavior, but provokes difficulties in identifying an intention in specific acts of share trading for the purpose of corporate regulation. Justice Beach’s derivation of an intention in Trkulja indicates one way in which company law could develop in regulating the conduct of algorithmic share traders.
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