While many intelligent and respected business people blamed short-selling for their company’s ills, it appears that short-selling did not have a negative effect on share prices — arguably, recent market falls have been exacerbated by the ban (which resulted in reduced liquidity). Since 21 September 2008, when ASIC, prompted by Kevin Rudd and Wayne Swan, banned short-selling, the All Ordinaries was trading at 4,840. Yesterday it closed at 3,513 — a drop of 27% in less than two months.
Consider the biggest critics of short-selling and the share-price performance of their companies since the ban.
[Babcock CEO] Phil Green believes short selling by hedge funds is a major reason for the dramatic slump in Babcock and Brown’s stock this year and says any ASIC action is long overdue. Green claimed that “it makes it very difficult to really try and run the company in the face of the share price volatility that we are seeing.”
Since then, Green “resigned” as CEO of Babcock and lasted a couple of weeks as a non-executive director. Between 26 September and 12 November 2008, while short-selling was banned, Babcock shares fell from $2.37 to $0.31, a fall of 84%.
Another key critic of short selling was Australia’s former richest man, Andrew “Twiggy” Forrest. Forrest, commenting about the sudden decrease in Fortescue’s share price, claimed that “all these rumours we think are profligated by people we believe have a financial interest in shorting this company … we don’t appreciate it. It is not helpful for the workings of a proper financial system.” (Fortescue’s broker, Southern Cross Equities, allegedly sent clients a note claiming that “FMG shares have been subject to an aggressive and coordinated shorting campaign from a high of $13.15”).
However, as it turns out, short-sellers weren’t the cause of Twiggy’s woes. After the ban was imposed, between 22 September and 18 November, Fortescue fell from $7.15 to $1.61, a fall of 77%. One suspects a slowing Chinese economy and slumping demand for iron ore had more to do with Fortescue’s flailing share price than short-sellers.
Another short-selling critic was outspoken CEO of Transpacific Industries, Terry Peabody. Peabody told Inside Business that short-selling is “a despicable practice, to be honest with you.” During the short-selling ban, Transpacific’s share price has fallen from $7.10 to $3.98 on 18 November.
However, few were as outspoken with regard to the evils of short-selling as the quick-witted folk at ABC Learning Centers. Eddy Groves told Business Spectator that it’s “very difficult for a CEO when you’re trying to run the company as well. Crazy rumours. Stuff that’s just totally untrue. This is a process driven by companies or groups who are trying to continue to force our price down and continue to short stock … June’s results were excellent results. Excellent results.”
Of course, the results weren’t excellent, the company was actually hemorrhaging money. Eight months later and ABC is in receivership, relying on an emergency government cash-injection to allow it to continue to operate. Turns out those rumours didn’t even fully reflect ABC’s perilous state, with critics now alleging that Groves misled investors and bankers for years.
If short-sellers have been guilty of anything, it’s been of going too easy on fast-talking executives, who are very quick to talk up their company’s prospects, but slower to take the blame for the shortcomings. Next time you hear a CEO blame their company’s woes on short-sellers, it would probably be a good idea to short that stock.