Jan 14, 2013

One set of rules for the powerful, another for coal activists

The coal hoaxer has stung ASIC out of its timidity and lethargy. It seems there's one set of rules for the wealthy and powerful, and another for coal activists living in a forest.

Adam Schwab — Business director and commentator

Adam Schwab

Business director and commentator

It's hard to tell which reaction has been more inappropriate to the Jonathan Moylan-Whitehaven Coal hoax. Was it the Australian Securities and Investments Commission, Australia's usually timid corporate regulator, which allowed scores of executives and directors to walk away from smouldering companies, or the financial media, who not only perpetuated the hoax, but completely fail to understand the effects? Then there are concerns that Moylan’s prank may have damaged the "integrity" of the market. Leaving aside the fact that sharemarkets have never had much integrity anyway (anyone who doubts that need only look at the share price of companies prior to "confidential" takeover announcements being made) -- those who actually lost money as a result of the Moylan hoax were both foolish and greedy. Anyone who sells shares in a company within a couple of hours based on an announcement by a bank is not an investor, but a speculator, or more aptly put, a gambler. In this regard, it is interesting to note Warren Buffett's comments last month where he opined that sharemarkets have turned into a "casino game". Not only were Whitehaven shareholders who sold their shares based on the hoax announcement gamblers, but they were foolish gamblers. Investors with any sense would immediately check the ASX website (where all official company announcements are made) after reading a release -- to check both its authenticity and the company’s response (for example, in a real instance of a bank withdrawing finance, Whitehaven may have also announced that it had obtained another financier). In addition, banks would virtually never issue a press release declaring that they are pulling a loan -- it’s not great for business. But those facts haven’t stopped the media from casting Moylan as a Bond-esque villain, operating from his forest hideaway north of Sydney. The fact that Moylan also didn’t profit, nor did he seek to profit, from his actions appears to have been largely forgotten. The conduct of Australia’s regulator, ASIC, which appears to have finally been stung into action after years of lethargy, has been even more bemusing. Within days of the hoax, ASIC officers had raided Moylan’s forest campsite, seizing his laptop and a mobile phone. While the publishing of misleading information is not to be condoned, it appears that ASIC’s reaction to Moylan’s alleged crimes is somewhat heavy-handed, especially when compared to ASIC’s complete belligerence during and since the global financial crisis. My book, Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed, detailed numerous instances where large, ASX-listed companies provided misleading information to shareholders. In those instances, executives at these companies (unlike Moylan) personally benefited from their illicit actions -- most commonly in the form of remuneration and bonuses, but also in the sale of shares at inflated prices. This was especially the case for Allco Finance Group, ABC Learning Centres and MFS -- three high-profile GFC-era collapses.
"In ASIC’s eyes, it appears a hoax letter which is discovered within a few hours is worse than running a complex scheme to mislead and defraud investors ..."
ASIC has never taken any criminal action against any director of the collapsed Allco Finance Group, including multi-millionaire former directors like David Coe and Gordon Fell. In 2006, Allco provided financial statements to investors which were incorrect (they were restated by Allco a month later). However, a far worse error was made the following year when Allco told shareholders that it had current liabilities of $193 million -- a mere five months later Allco would confess that its actual current liabilities were $2.3 billion. The following year Coe and Fell arranged for the sale of Rubicon (which they owned) to Allco for more than $70 million in cash. Within weeks, Rubicon’s auditor claimed that the trusts may not be able to continue as going concerns (a fact that Coe and Fell forgot to mention to Allco shareholders). Finally, Allco would provide a $52 million "line of credit" to a trust owned by Allco executives including Coe as the company was sinking towards insolvency -- those funds would never be repaid. Unlike Moylan, Coe and Fell remain very wealthy men. Fell’s wife purchased a $27 million harbourside property shortly before Allco’s collapse, while Coe sold a harbourside property for $47.5 million and continues to maintain various lucrative interests such as a stake in the Sports and Entertainment Limited business. ASIC has never laid a single civil or criminal charge against David Coe, Gordon Fell, or any executive or director of Allco. Nor did ASIC ever take any criminal action against Eddy Groves (or other directors of ABC Learning Centres) over allegations that the company maintained what appeared to be a Ponzi scheme. The scheme involved ABC booking payments from developers as revenue, when in reality, the payments were actually coming from ABC. ABC’s treatment of developer payments would allow it to report far higher profits than was actually the case. ASIC would eventually charge Groves with a relatively minor offence involving the purchase of childcare centres from another ABC director, but those charges were quietly dropped last year. In ASIC’s eyes, it appears a hoax letter which is discovered within a few hours is worse than running a complex scheme to mislead and defraud investors and lead to losses of hundreds of millions of dollars. ASIC also didn’t feel it appropriate to bring criminal charges against any executive or director of MFS (it launched civil action in 2009, but nothing appears to have progressed in several years). This was despite MFS reporting to shareholders in 2007 that it made a profit of $184.9 million, had virtually no short-term liabilities and had net assets of $1.54 billion. Those figures would appear somewhat optimistic, given the company was placed in administration nine months later. Those misleading financial results would allow MFS to justify a multi-million dollar bonus payment to founder and CEO, Michael King. The actions of MFS directors would appear to have done far more to "damage the integrity" of the ASX than the issue of a fake press release which was never posted on the ASX website. The Whitehaven hoax has shown clearly that there are certain rules for the wealthy and powerful, and a completely different set of rules for coal activists living in a forest.

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6 thoughts on “One set of rules for the powerful, another for coal activists

  1. dazza

    Financial institutes are too big to fail, AND too big for jail!

  2. Mike Flanagan

    If Moylan is to be hung drawn and quartered by the Authorites that supervise the ‘casino’ then ASIC should read Merv King’s departing comments and the HSBC report on Climate Change in relation to stranded assets.
    There are a number of CEO’s, Board warmers and ‘market’ operators that need to have their public statements reviewed and accounted for under the same microscopic eye.

  3. David Hand

    It is vital that announcements that may affect share prices be communicated openly and quickly to protect investors. It is also vital that such announcements are valid and correct and not made up.

    Therefore the issue is only and entirely one for the regulators. How a false announcement was accepted as fact and circulated in the media simply shows up the lax controls and systems that should protect people.

    Moylan may well have been in the wrong to do what he did but the fact that he got as far as affecting the share price of Whitehaven isn’t his fault.

  4. Tim Keegan

    The wealthy and powerful will always be with us.

  5. Marty

    No, Tim, they’ll always be against us.

  6. ralph

    Don’t make me laugh: ”As a nation we have to be seen as a place where there is an orderly market in operation or overseas investors will get nervous,” says Craig Drummond, the Australian head of Bank of America Merrill Lynch.

    ”We are already battling against a high dollar, which is a risk for overseas investors. That’s why the regulators, it would seem, are taking firm action [against Moylan’s hoax].

    ”If our regulators are seen to prevaricate, then overseas investors will have one more reason to be nervous about Australia.”

    In 2002, Merrill Lynch settled for a fine of $100 million for publishing misleading research. As part of the agreement with the New York attorney general and other state securities regulators, Merrill Lynch agreed to increase research disclosure and work to decouple research from investment banking.

    On August 3, 2009, Bank of America agreed to pay a $33 million fine, without admission or denial of charges, to the U.S. Securities and Exchange Commission (SEC) over the non-disclosure of an agreement to pay up to $5.8 billion of bonuses at Merrill.

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