The ASX, a true criminal underworld (Image via Pixabay)

Benjamin John Pauley concludes his two-part exposé on ethics within Australia''s stock exchange. If you missed part one, you can read it right here.

WHEN PRISONS are managed well, non-dangerous prisoners are safe and the dangerous prisoners have a lot of incentive to behave themselves. Mine wasn’t managed well and there was a lot of violence. Officers would penalise smaller prisoners for minor offences, but let the major players off. I left the job when I was verbally abused by the most threatening prisoner inside. I am not a hero and I let the abuse pass over me. I reported the incident expecting he would be charged, but instead the prisoner was let off.

A dangerous situation was unfolding because the staff were not doing the job of penalising the biggest criminals, either out of fear of maybe it was something more sinister like corruption. So I left.

I now invest in the stock market for a living, but exactly the same thing is happening. Those who are committing the biggest crimes are getting let off by our regulator ASIC and occasionall ASIC will penalise someone for a minor incident. Why doesn’t ASIC investigate and charge these investment banks for manipulating prices and insider trading? Is it because nobody has reported to them the truth about what is going on?

Quite the contrary. People have been reporting very good information about these crimes to ASIC for years.

The following is a classic example of how price manipulation and insider trading can work together to destroy a share price.

RCR Tomlinson is an engineering and infrastructure company, in which my uncle has held stock for 30 years. In April, the share price was $3. It fell quickly to $2. Anyone who trades shares knows there is a high chance of an adverse announcement coming when the shares fall from $3 to $2, which, sure enough, it did. A capital raising was announced. Shareholders were offered the chance to buy more shares at $1. The share price quickly fell down to near that price and it is currently $1.075. One only has to look at the announcements during that time from $3 to $2 to suspect that manipulation and insider trading was the main cause for the fall in price.

The announcements that occurred during that time were changes in substantial interests and nearly all of them were from UBS Bank. There are eight announcements for UBS increasing and decreasing their holdings. If you open an increase announcement you can see, even though they have increased their holdings, they have not just been buying but selling, too. In fact, they have bought and sold continuously in just a few days. A lot of the selling is short selling, as well, so they are borrowing shares to sell it down. It''s just madness how this kind of manipulation is allowed. People like my uncle just don’t know what’s going on.

The capital raising offer is first given to shareholders at $1 but there are perhaps many who can’t afford to put more money in. So, whoever doesn’t purchase new shares will then pass on this opportunity to the underwriters of the capital raising and the underwriter will happily pay $1 for these new shares. The underwriter, in this case, is another investment bank, Macquarie Bank.

It has been reported to ASIC for a long time that the underwriters of a capital raising have inside information months in advance and if the share price falls suddenly before the capital raising then we need to look at who is making it fall. In RCR’s case, it was UBS.

The question arose in my mind — is it possible that Macquarie told UBS about it so that a) UBS could short sell it and make money; and b) Macquarie could pick up shares at a cheaper price?

This same question arose a few years earlier, when exactly the same thing happened with Origin Energy. In that case, UBS was the underwriter. I checked the short selling and found in both cases of Origin and RCR, there was an extremely high anomaly in the few days before the capital raising announcement. I reported the Origin example and ASIC didn’t look into it.

I don’t bother anymore.

This example of RCR shows how manipulation can benefit underwriters of a capital raising and also short sellers. There doesn''t have to be a capital raising for them to make money, though. They can manipulate it down, watch people sell out in a panic and then buy back in when they decide its time to stop manipulating. As a regular retail shareholder, you don''t know what to do because they are the ones who know if bad financial news is coming or not.

I wanted to try and find evidence that investment banks are colluding with each other because it seemed obvious to me. I started analysing the top 20 shareholder lists for different companies over consecutive years.

I started with a company called Devine Ltd because I knew it very well and knew it was being manipulated down in price. I believed the below table showed a pattern.

 

Devine Ltd

2016 % of shares

2017 % of shares

HSBC

1.55

1.5

JP Morgan

3.46

3.77

Citicorp (Citigroup)

0.61

0.22

National (NAB)

0

0.28

Total                              5.62                       5.77

 

It did seem to present a picture of collusion because the holdings of the individual banks fluctuated but the total between the four remained roughly the same. I tried again. This time with a company that had gone into administration — a sandalwood tree grower called Quintis. I got the same thing.

 

Quintis

2015 % of shares

2016 % of shares

HSBC

12.79

20.07

JP Morgan

12.73

8.5

Citicorp (Citigroup)

3.4

3.25

National (NAB)

5.04

0

Total                             33.96                      31.82

 

I then decided to analyse it in a more systematic way. I made a table for every 50th company listed on the ASX. This gave me 44 companies. Through trial and error, I included three more banks — UBS, RBC and BNP Paribas. There were a few exceptions, but I found remarkably similar patterns.

I started sending it out to journalists, academics and politicians, discovering there is a lot of misunderstanding and ignorance of the manipulation and collusion. It's true that these banks are custodians, holding funds for others, but as I showed in Dick Smith and RCR, these banks have their own holdings in there as well. What I need is a statistician to prove that there is something significant going on here.

The usual online way to report misconduct to ASIC doesn’t work and many can testify to that. Instead, I posted 29 copies to all the senior executives of ASIC. That was seven weeks ago and I have not got a single reply from any one of them.

I included questions like: 

‘Who is running the dark pools, who is lending out stock for shorting, who are the high-frequency traders?’

And more importantly:

‘Why are bankers who have first access to company financial information allowed to hide behind other investors holdings and not disclose their own holdings and movements?’

I will continue to wait for ASIC''s answers and dream of a fair and transparent ASX.

Ben Pauley obtained a degree in Natural Resource Management from the University of WA, before going to work for three years in the WA prison service. He left that job to pursue a career investing in the stock market. You can contact him at devinechanges2018@gmail.com

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