What the short-sellers may have known
Key investors in 3 penny counters may be linked to price rise and fall
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Key investors in 3 penny counters may be linked to price rise and fall
Goh Eng Yeow, Straits Times
17 December 2013
For short-sellers operating in the big league, the modus operandi has always been to build up a large position in the target stock, then charge into town with guns blazing to tell the world what is wrong with it.
They then walk away with a fat profit if they succeed in panicking investors into believing that there may be something amiss with the company - thanks to the resultant share price plunge.
But in order to succeed in their ploy, they need a big supply of shares to borrow. This is because they sell the borrowed shares first in the hope of buying them back at a cheaper price later on, and make a profit from the difference.
Data from British data provider Markit shows that was the fate suffered by LionGold Corp, which had about 13 per cent of its shares out on loan as of end-August.
This was about the same percentage of shares out on loan at Olam International in November last year before it was attacked by short-seller Muddy Waters.
For both Olam and LionGold, the key question is whether big investors in their companies had pledged their shares as collateral for loans. These pledged shares were then made available by the lender to any trader who might want to “short” the counter for whatever reasons.
Thus, for the two companies, the attacks did not come out of the blue. In LionGold, short-sellers had built up their positions over five months, as the percentage of shares out on loan spiked from about 3 per cent in April to 13 per cent in August.
The same trend was observed at Olam where the shares out on loan jumped from 5 per cent in early May last year to 13.4 per cent seven months later.
Yet, in LionGold’s case, whatever claims it made about the merit of its business model, short-sellers might have found it a no-brainer to want to “short” the counter.
This is because of the intricate manner in which the business dealings of the key players seem to have been tied up together - perhaps a case of putting all the eggs in one basket.
Lawsuits filed in Singapore and London showed that big investors in LionGold, such as Ipco International’s chief executive Quah Su Ling and Blumont’s executive director James Hong, had borrowed heavily from global bank Goldman Sachs, pledging their shareholdings in the counter as well as Asiasons and Blumont as collateral.
The value of their respective loans then multiplied as the prices of the three counters shot up during the year, lifting the level of collateral and therefore the loan amounts. They also used the same investment consultant, Mr William Chan, the CEO and chairman of Stamford Management, to procure their loans from Goldman.
The same trend was repeated at US discount broker Interactive Brokers where eight parties, including Ms Quah and Blumont’s executive chairman Neo Kim Hock, were being pursued for over $79 million in losses.
Interactive Brokers alleged that the parties concerned had used a financial advisory firm, Algo Capital, to buy and sell large blocks of shares in Blumont, LionGold and Asiasons, using the same accounts often on the same day and at the same price to give the impression that the counters were actively traded.
But unlike Muddy Waters, which had to make very prominent and public claims over the counter it was attacking, the trigger for the three counters’ downfall might have come from an unlikely source - the Singapore Exchange (SGX).
On Oct 1, the SGX created a stir by asking Blumont in an unusually detailed query to explain how its market value could have jumped from $508 million to $6.3 billion in nine months.
The SGX said it felt that this could not be sufficiently explained by the company’s spate of acquisitions, the largest of which was $48 million.
For the three counters, it does not matter whether a trader looks to fundamental or technical analysis to try to explain how they performed. Rather, it is more instructive to monitor what the principal players had been up to.