Friday, July 13, 2012

Laker's missing commandment: Thou shalt not be stupid

The corporate watchdog has flagged a crackdown on complex financial products that could breach the spirit of the law.

The Australian Securities and Investments Commission (ASIC) is chairing a global push to crack down on risky products which can potentially be used to get around takeover regulations.

Listen to my analysis broadcast this morning on AM.

ASIC is concerned about derivative products, such as contracts for difference, which are retailed widely in Australia.

A common form of these products allows investors to bet on a share price to fall, even without putting down money upfront.

As part of the bigger picture, such derivatives can help facilitate major deals that could involve billions of dollars in proposals which can be made without proper financing.

Now ASIC chairman Greg Medcraft says he is very worried about derivatives.

He is chairing a global taskforce with the French regulator in a bid to get ahead of certain banks which are skirting regulations.

"They are basically manufactured on a global basis by banks, etc, so perhaps there should be some guidance or standards established for the way that the products are actually basically regulated," Mr Medcraft observed.

"You know, one of the things you are trying to do is make sure you have consistent global rules. So, you know, that's what we're looking at."

This scrutiny on derivatives comes as ASIC also takes a very close look at current takeover laws - whether they are outdated, provide proper disclosure or demonstrate that innovation is now outstripping the spirit of the law.

Earlier this week, AM broke the story that ASIC wants to overhaul so-called creep laws, where a corporate raider can use a loophole to gradually up their stake in a company without paying a premium.

That was a thinly veiled swipe at Gina Rinehart and James Packer in relation to Fairfax Media and Echo Entertainment respectively.

However, when it comes to preventing crippling losses, the corporate and banking regulators say there is only so much they can do and they certainly do not have any laws to outlaw bad decisions or, indeed, stupidity.

Both ASIC and the banking and insurance regulator APRA (the Australian Prudential Regulation Authority) say many of the poor decisions that have sent companies bust or hurt investors badly come down to decisions made on company boards.

ASIC's Greg Medcraft made the point that directors should at least be able to understand a balance sheet to fulfil their duties in monitoring the business.

APRA's chairman John Laker told a conference hosted by The Economist magazine in Sydney yesterday that boards need to take more responsibility, but he cannot do much about highly paid stupid people.

"I've been in a lot of discussions about the role of regulation where the word board doesn't get mentioned and it should," he said.

"That is the starting point for this financial system, not the regulator. So we can't regulate against reckless behaviour. 

"We can certainly do our best to intrude, to identify and to modify it, but show me a piece of paper that says thou shalt not be stupid. I'd love the regulation but, you know, that won't help me at all."

Wednesday, July 11, 2012

ASIC pursuit of David Jones mystery bidder "continuing".

By Business editor Peter Ryan

The corporate watchdog says it's still investigating the recent bizarre takeover bid for the David Jones department store.

The surprise offer from an unknown private equity company in Britain saw the David Jones share price rocket almost twenty percent only to plunge when the bid was withdrawn.

The chairman of the Australian Securities & Investments Commission Greg Medcraft told AM that discussions are under way with regulators in other countries to determine the identity and
whereabouts of EB Private Equity and its alleged founder John Edgar.

"We're liaising with UK authorities and continuing our investigation," Mr Medcraft said.

"When we have situations like this there are a number of courses of action we take. First of all, it's working with our fellow regulators in other jurisdictions and also looking at price activity is clearly something we look at."

Mr Medcraft said ASIC was working to update rules on continuous disclosure after the release of the $1.6 billion mystery offer caused market mayhem and sparked concerns the DJs share price was being manipulated.

"We will work with ASX to look to update disclosure laws. It has been clear for some time that the guidance needs to be updated particularly with the impact of social media and making sure social media doesn't send the wrong price signals to the market," Mr Medcraft said.

A review of disclosure rules could centre on whether to call a trading halt if a company is not satisfied that price signals to the market were not accurate.

The regulator has confirmed it's scrutinising share trades on the day to determine who stood to make a windfall from the unsubstantiated bid which could still turn out to be a hoax.

So does ASIC think the DJ's bid was a hoax? Mr Medcraft was coy in his reply.

"All I say we are continuing to investigate. I can't really say any more than that."

However, Mr Medcraft admitted the bid came as a shock to the market, while pledging to refine rules for chaning times.

"I think the market was surprised. We saw what happened. You're shaped by experience and now we have to make sure we are shaped by experience and we need to learn from that to ensure it doesn't happen again," Mr Medcraft said.

ASIC is also confronting the widening use of social media and its use as a tool in sending viral messages that could contain price signals.

"Social media is now a fact of life and that in itself will shape change."

Corporate cop seeks to overhaul "creep" rules to stop "takeovers by stealth"

By Business editor Peter Ryan

The current corporate manoeuvres by Gina Rinehart and James Packer have attracted the attention of the corporate watchdog.

The Australian Securities & Investments Commission is moving to tighten or close legal loopholes used by the multi billionaires to increase their stakes in Fairfax Media and Echo Entertainment.

Listen to my interview with the ASIC boss broadcast this morning on AM.

The regulator is seeking to overhaul so-called "creep" provisions where corporate raiders can ramp up their shareholdings by three percentage points every six months once they surpass 19.9 percent without paying a premium for a formal takeover bid.

ASIC's chairman Greg Medcraft told AM that the legal but destablising use of "creep" tactics by corporate raiders needed to be overhauled.

"I think that the current creep provisions are an anachronism. It is basically allowing takeover by stealth which I think is inconsistent with the takeover law in terms of making sure that when there is a change of control and there is a premium to be paid that all parties can share in that," Mr Medcraft said.

Responding to a question on whether Mrs Rinehart or Mr Packer needed to make formal takover offers rather than using "creep" loopholes, Mr Medcraft said:

"I think there is probably a need to clarify the issue of takeover law. Perhaps we need to think about the UK provision which is put up or shut up. Basically, if you are going to make a takeover offer, it has actually got to be very clear and very committed."

Mr Medcraft did not name Mrs Rinehart or Mr Packer directly.

However, he made it clear that the regulator is concerned about recent boardroom battles where the respective chairmen at Fairfax Media and Echo Entertainment have been subjected to high profile personal attacks.

"Where there are means other than legal or other means used to take control of a board, then I believe that needs to be looked at in terms of the spirit of the takeover laws," Mr Medcraft said.

"We are all about making sure that markets are fair and efficient and particularly that they are fair, orderly and transparent. If any of those principles are compromised then clearly we (ASIC) have an interest."

ASIC has written to Treasury requesting that "creep" provisions need to be reviewed by the government, with the view of reducing gradual ownership to one percentage point per six months rather than the current three percentage points.

ASIC is also advocating a possible adoption of British takeover rules where the "put up or shut up" rule is enforced.

"The situation in the UK is that if you make an offer it has to be clear and it has to be committed. It can't be ambiguous or highly conditional so it has actually got to be a clear and committed takeover and if its not and if you don't deliver on it, then there are consequences."

ASIC has become increasingly concerned about takeover bids after the bizarre takeover bid for David Jones which caused wild sharemarket swings.

Twitter: @peter_f_ryan

Monday, July 9, 2012

Hastie early exit advice ignored, says report. Claim that Deloitte urged board to consider employee dismissal issues a year ago.

By Business editor Peter Ryan

A draft report into the collapse of the Hastie Group's Middle East operations says a proposal made last year for a "managed wind-down" was ignored.

Listen to the report from this morning's edition of AM.

According to the report, the accounting firm Deloitte recommended a "controlled closure" and warned that employee dismissal issues needed to be considered.

The review - conducted by remaining Hastie managers on the ground - slams the Hastie board for mishandling the company's exit which has left a thousand local labouring staff without entitlements.

The executive summary obtained by AM reveals that Hastie appointed Deloitte to provide proposals on reducing its exposure in the Middle East, well before the group's 44 companies collapsed in May.

Deloitte told the Hastie board on August 17 last year that there was an opportunity to exit the Middle East and to ensure employee matters were handled appropriately.

The report says the Deloitte recommendation "clearly highlighted that a managed wind-down required a controlled closure of the Middle East businesses and that there were employee issues to be considered."

"This advice was disregarded by the Hastie Board, their banking syndicate and authorised senior management in the UAE and Hastie have subsequently completely mismanaged their exit from the Middle East."

Charles Lever, a former Hastie executive manager who authored the report, says Hastie bungled an opportunity for a clean exit that protected staff and creditors.

"They took it upon their own remit to close the business down without having taken into account what Deloittes had obviously advised them and what we and other people from the Middle East management had advised them was necessary," Mr Lever told AM.

"The people providing the food to the labour camps refused to provide food. The labourers didn't get paid from May, and that of course causes them problem in terms of getting funds back to their families, whether it be in Bangladesh, the Philippines, India or even if it's western expats getting back to their family."

The ultimate collapse of Hastie in the UAE left around a thousand labourers out of work, and while some have been redeployed, none have received their termination entitlements as required under law. The collapse initially claimed 2,700 jobs in Australia although many workers have now been redeployed.

Local managers in the UAE were left to deal with distressed employees after A$3 million was drained from Hastie's Dubai bank account days before administrators were appointed on May 28.

Post-dated cheques, written before the collapse, are starting to bounce opening the prospect of arrest and imprisonment for staff.

Already, one former senior manager, Gavin Appleby, has fled to Norway to avoid arrest after he had signed a number of cheques.
The report also slams a decision by the administrator PPB Advisory to allow a senior Hastie executive, Gary Allen, to flee the UAE with the equivalant of A$100,000 which was an emergency fund meant to cover staff payments.

Joint administrator and PPB partner Craig Crosbie has defended the decision to allow the emergency funds to be taken.

"PPB Advisory was happy to make available company funds to Hastie International management who required the funds for expenses on the condition it was properly accounted for," Mr Crosbie said in a written statement.

"We left it up to the general manager to make a judgment as to how the funds would be used."

PPB says it had no involvement in Hastie affairs prior to its appointment and could not comment on claims that advice from Deloitte had been ignored.

PPB has previously said it is working to manage "a complex situation" but is constrained because the Middle East is not covered by Australian law.

Twitter: @peter_f_ryan