Sydney hedge fund VGI Partners’ campaign against the $2.9 billion ASX-listed company Corporate Travel Management, which began last October, is the first high-profile case involving a credible local investor and a major local company.
That fight is getting ugly, with reports this week Corporate Travel has threatened VGI with possible legal action and has requested it hand over documents, including correspondence with journalists and advisers, used in its campaign. The move has raised eyebrows in the local investment community.
«Anything that restricts free speech restricts the efficiency of the markets,’ says Jack Lowenstein, the co-chief investment officer of Morphic Asset Management, which has no stake in Corporate Travel.
«Generally it is a further red flag if you see a company threatening to sue a respectable investment management house for publishing its views,» he said.
Morphic takes both long and short positions, ie bets on rising and falling share prices, and Lowenstein, a former journalist, acknowledges that short selling campaigns, particularly ones executed anonymously, can and do cause substantial damage.
«You don’t want ‘rumourtrage’,» he says. «During the global financial crisis, when you saw financial institutions that were fundamentally sound being attacked by short sellers to make money in the short term, that was particularly worrying.»
In times like those, a decline in a company share price can be catastrophic, he says.
«A fall in the share price can result in a run on deposits, and make an untrue story true. From a regulatory point of view, and as a citizen, you don’t want to see that happen.»
Yet that not what’s going on with VGI and Corporate Travel. VGI has been very public about its intentions and released its report to its investors on a Sunday when the market was not trading.
Fortunately, anonymous activist short selling campaigns — disseminated on Twitter and through stock message boards via pseudonym accounts — are so far not a big factor in the local market.
That’s not the case overseas, where the tactic has been highly effective, and damaging.\
«What is playing out in America, which he haven’t seen here, is [anonymous] short sellers concocting stories which crush the share price, and then class action lawsuits against the company for not telling investors what the short sellers alleged,» says Lowenstein.
An activist attack (particularly an anonymous one) creates a nightmare scenario for a targeted company. Don’t respond, and you risk claims — and potential class action lawsuits — for failing to keep investors informed. Do respond and you amplify claims that may be false, and are likely to hurt your share price. «It is a really hard decision for boards to make,» says Lowenstein.
For its part, Corporate Travel responded in detail to VGI’s claims a couple of days after the hedge fund went public with its assertions.
Four months on, and the Corporate Travel share price is back above pre-VGI attack levels, following a set of strong half-year results, while VGI is reportedly underwater on its trade. And VGI (rather than Corporate Travel, at this stage) appears to be at most risk of a class action lawsuit.
Big shorts, big stories
An under-discussed aspect of the modern short activism phenomenon is the media’s role in them . High-profile attacks on companies have become a self-fulfilling prophecy: the news of a short campaign by an investor with a track record can itself trigger wild share price gyrations.
And media outlets (particularly specialist financial ones) operating in an intensely competitive environment can ill afford to ignore a big story that is moving the market.
«Is the news the substance of the claim, or that the claim is being made?,» says Lowenstein. «If you don’t publish it, somebody else will do, so you [the media] are in a difficult position, too.»
Yet journalists must be mindful of the short-sellers’ motivations, and apply scrutiny to any claims they are amplifying.
Credible short sellers and investigative journalists do have somewhat aligned interests — short sellers seek to make a profit by exposing fraud and malfeasance, which lines up with the goals of investigative journalists to expose wrongdoing. And plenty of times, high-profile claims made by short sellers have been been investigated by media outlets and found to be true.
But risks remain for everyone involved.
Just this week, German authorities took action against a Financial Times journalist for a possible breach of securities laws. The FT had broken a string of stories alleging fraud at a company that has been targeted by short sellers. The paper has dismissed the regulator’s claims as baseless and false.
«What is your obligation as a journalist then to investigate the claims [having reported them]?» wonders Lowenstein. «It’s definitely secondary, but it might not be zero.»
John McDuling is a business, media and technology writer for The Sydney Morning Herald and The Age.