The Annual RiskMetrics Corporate Governance conference met in Melbourne yesterday, with attendees obtaining some eye-opening information about the otherwise misunderstood world of securities lending and short-selling of shares.

As Fairfax’s Michael West noted, according to data collected by UK-based Data Explorers, Macquarie Bank is the most-shorted stock on the ASX with more than 20 percent of Macquarie’s capitalisation being sold short. Part of the popularly of Macquarie to bears could be the lead taken by New York hedge fund manager, Jim Chanos. Chanos, who famously short-sold Enron before it slumped (based on information gleaned from its public filings), noted last May that Macquarie’s “underlying economics … are flawed”.

Interestingly, while the bears are hugging Macquarie, according to RiskMetrics, they are slightly less enthusiastic about shorting the troubled ABC Learning Centres, despite the claims of embattled CEO, Eddy Groves. After ABC Learning Centres announced their disastrous half-year report on 25 March its shares tanked from $3.70 to $1.50.

Soon after, CEO Eddy Groves effectively accused hedge funds of conducting a bear raid on the stock, telling Lateline: “if we let this continue happening to, I think, great Australian company which are international, I just think it’s a sad day for Australia.”

However, according to Data Explorer, while ABC is the eighth most shorted stock on the ASX, over the past twelve months, there was no discernable change in the number of ABC securities which were on loan. For the past year figures indicate that around 13 percent of ABC stock was lent to investors, with the utilization rate of the loans stock remaining relatively constant. In simple terms, the data indicates that hedge funds didn’t band together to attack ABC Learning as Groves claimed. The number of ABC shares which were sold short in February wasn’t much greater than the number which had been sold short over the past year.

While foreign hedge funds were a convenient scapegoat for Groves, it appears that those who caused ABC’s share price to plummet from $3.70 to a low of $1.15 were ABC shareholders who had lost faith in Groves and ABC’s grand US expansion.

If you don’t believe the data — ABC’s share price tells a similar story. More than two months after the initial announcement (and long after the alleged bear raid), ABC scrip has dwindled to only $1.36 per share on the back of a renegotiated US sale and terrible local results. Can’t blame the hedge funds for that Eddy.

Shareholder class actions still not the answer. Also at the RiskMetrics Governance conference, Rob Ferguson, executive chairman of litigation funding firm, IMF, launched a passionate defence of what some believe are indefensible – shareholder class actions. Ferguson, the former CEO of Banker’s Trust Australia, claimed that class actions (usually relating to inadequate disclosure) “imposes a cost of wrongdoing on the wrongdoer” and that the threat of a class action suit “put[s] the onus on shareholders not to hire [poor] management.”

While Ferguson can be excused for holding such views, as his firm profits from such actions, to claim that all but a few very exceptional large shareholders have any input in the hiring of executives is a bold claim. Further, as Crikey has noted in the past, class actions generally involve one group of innocent shareholders suing another group of innocent shareholders (with the only winners being the lawyers).

While making management more accountable for timely disclosure is certainly a worth goal, a better way to achieve that is to follow through and financial penalise executives personally for disclosure failures. Using expensive and inefficient litigation is hardly an ideal means of enforcing corporations laws.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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