SEC tough on Market abuse whilst the FCA do FCA

To quote from an article by Oscar Williams-Grut in the Independent, 16^th March 2015

Britain’s financial regulator is facing mounting pressure to reveal details of its investigation into a “deeply worrying” allegation of market abuse that left hundreds of retail investors with huge losses.

Vince Cable, the Business Secretary, and Andrew Tyrie, chairman of the Treasury Select Committee, have written to the Financial Conduct Authority (FCA) calling for information on its response to the share price collapse of the insurance outsourcer Quindell (LON:QPP) last April. A number of other MPs and hundreds of investors have also petitioned the watchdog.

The former secretary of state Peter Hain has also written to the regulator, and this week submitted two questions to the Treasury on the matter. He told The Independent: “It is scandalous that thousands of Britons who invested in Quindell, many of whom put their life savings into this company, have seen the value of their shares plummet. The FCA has failed these investors abysmally and continues to duck its responsibilities, with the Chancellor unwilling to intervene.”

For full transcript of the article:

http://www.independent.co.uk/news/business/news/mps-question-fca-over-insurance-outsourcer-quindells-share-dive-10109928.html

The FCA response is very predictably mute and it is very appropriate that pressure is applied in Parliament to get answers from the financial regulator which is funded by the very organisations it is supposed to police.

“Shorting” the practice of selling shares in companies where you don’t need to actually own the shares is not against market rules, but there is evidence that such a practice is used as a tool to manipulate the market in a company’s share. This is certainly not compliant with market rules.

There are instances in the US where the SEC has secured convictions where they have proven that the actor(s) purpose was to manipulate the share price by intentionally disseminating false rumour allied with short selling.

So why do Quindell shareholders allege market abuse? To answer this question we need to make a comparison to the US precedents.

In layman’s terms their experience tells us that if one or more parties take short positions in a company with “Sound fundamentals” and if this is accompanied by a campaign of mis-information, then there is cause to believe that the intention is to manipulate the market..

So what of the case of Quindell. The facts are as follows:

• Three offshore hedge funds took short positions in Quindell on 24th April 2014. One was hiding its identity using Cayman Islands shell company. A little suspicious you could say.
• The same day an anonymous US research company issued a report with numerous negative allegations on Quindell. The report proved to be a fabrication of innuendo and untruths.
• On April 24^th a social media campaign erupted spreading negative messages about Quindell
• This was sadly, supported by several elements of the UK based media, including a feature article in the Sunday Times on April 27^th. Remarkable timing.
• The effect on the share price was dramatic, with circa 1 billion being wiped off the value of the company in 1 day. This was solely due to the panic generated in the market.
• The campaign of mis-information continued through 2014 with accusations such as:
  • The company would run out of cash by Christmas 2014
  • The company was about to lose a major contract
  • The company had committed fraud
  • The company was worth zero and was going bust

Now the reason I describe this as mis-information is that the none of this has proved true.

• We also witnessed discussions on social media by the “detractors” claiming inside information from within the company and its broker. That in itself is contrary to market regulations.

The consequences were that the share price continued to slide as the negative information poisoned investors’ confidence in the company

So let’s come back to the acid test to the question: Is this legitimate shorting of a company who has “real issues”, or is it an orchestrated campaign to  drive the share price down for financial gain by the shorting syndicate?

To answer this question we need to evaluate the current company position based on known facts.

Today we know that Quindell is in talks with Slater and Gordon to dispose of one of its operating divisions. We have been told by Quindell that discussions are ongoing and that various options have been discussed; one of which values the business unit being sold at between 800-900M. S&G have carried out due diligence so they clearly see no issues in the business. This shows that the entire business has an indicative worth of something like 1 to 1.5B.

Quidell have also been questioned on their accounting practice; specifically the topic of accrued income. Although the Auditors KPMG raised no issues on this; the board of directors commissioned PwC to provide a second opinion. So far there has been no official feedback released, although the report is complete. Clearly Quindell would have been obliged to notify the markets if anything had been found that would be price sensitive. They have not made any such announcements so it is unlikely there will be any major impacts.

In addition to the above, there has been no update on the “Trading Update” the company gave on 12^th Jan 2015. This stated robust trading in all divisions and made reference to revenue and earnings being dependant on the PWC review. It also reported net Cash inflow of 13M for H2 2014 and that cash was sufficient to deliver on management’s current plans. If there had been any change, then the company would have been obliged to notify the market.

This would indicate that the 2014 results will be roughly in line with the forecasts and that the cash position remains satisfactory.

So is the company a “Basket case” as alleged by the Short syndicate? definitely not. This is reflected in the share price which has climbed from a low of 0.24 to 1.20 (March 2015). Investor confidence is still shaky as the “Shorting” activity is still active.

When the S&G activity concludes and the 2014 results are confirmed, it will be no surprise if the share price recovers to a level approaching the pre April 2014 levels.

If this happens we surely must conclude that there is a case to answer with regard to “market abuse” and I for one will be wanting answers from the FCA.

A small number of private investors who have retained or increased their investment during the past year will be well rewarded. On the other hand it is too late for others who sold out and lost money based on what may yet be proven to be market manipulation.

An what of Quindell; undoubtedly this short attack has had an impact if only in terms of Management distraction. It could also have impacted on its speed of entry into new markets. The signs are it will recover and push on after what may be proved to be an attack by greedy and unscrupulous hedge funds.

Note: Quindell is not the only UK company that has been subject to such activity. Several other fast growing and successful AIM listed companies have the same experience. It seems the UK is a popular “Hunting Ground” for foreign hedge funds; probably due to the weak regulation.

The FCA (Financial Corruption Appeasement?)

The FCA continue to Look the other way as UK citizens including Pensioners see their investments destroyed by foreign Hedge Funds
using illegal market manipulation.

I know that there have been several complaints to the FCA about orchestrated market manipulation of UK shares.
A good case study is LON:QPP where an attack started in April 22nd 2014 and continues even today.

In the case of Quindell; private investors and funds where UK citizens have their Pensions have seen the value of their investments reduced by about 80%.

Was this due to the poor performance of the company? NO

Was this due to orchestrated manipulation of the share price? YES

In the case of Quindell the evidence was clear and it was collated and sent to members of Parliament. The Treasury select committee saw enough to write directly to Martin Wheatley, Chief Executive of the FCA. They particularly wanted to know why the FCA had not imposed a temporary ban on “Short Selling” Quindell on 22nd April 2014 when the share price dropped by 40% from it’s opening price.

The reply tellingly did not come from Wheatley, but on December 9th a reply was received from Marc Teasdale, Acting Director of Market Oversight.Marc’s title of Market Oversight is very apt as he he seems to have missed the bulk of the evidence pointing to market abuse. That is quite an “Oversight”

Quote MT ” On 22nd April 2014 the FCA became aware of the sharp decline in the share price of QPP” Really how perceptive. But I know that in the previous week the FCA had received written complaints from investors who told them that an orchestrated attack on the share was about to happen. So Marc what about a little “Foresight”.

So why did people know this was about to happen? Because orchestrated manipulation of a share follows a pattern.
Firstly the hedge funds start taking their short positions (not always declared) and then the negative media and social media starts.
This then leads up to the opening attack where the hedge funds sell heavily into the market causing a collapse in the share price.
This is accompanied by a blitz of negative media and in the case of Quindell revolved around the “so called analyst” report from
GCR; which although proven to be a pack of lies spooked investors into selling. The tactics form the parties are quite clear; “Distort and Short” and create a negative sentiment.

Quote MT “This decline (in QPP share price) was caused by a combination of parties taking short positions and by shareholders
selling shares in the market” Again Marc is very perceptive, but his oversight is the analysis of why this happened. i.e The root cause.

He omitted omitted to mention the small matter of the hedge funds and the part they played in manipulating the market to cause this situation.
I wont quote any more from Marc Teasdale’s letter as those familiar with the famed television show “Yes Prime Minister” can guess what the contents would be.

Since April 2014 the further phases of the manipulation of the QPP share price have continued. The same pattern prevails of spreading
mis-information through press and social media accompanied by short selling by the Hedge funds.
We know that the hedge funds involved pay no UK tax, even the UK based fund Ennismore are tax domiciled in Ireland.
We know many UK citizens have lost money including their Pension funds.

So what about the FCA? They know what is happening but they make no attempt to stop this criminality and you really have to ask why.
The government seems powerless to act, or at least that is what they would have you to believe Could it be something to do with the
fact that Tory party funding is reliant from contributions from Hedge Funds?
All parties in Westminster are more than aware of this corruption in the markets, but none have really raised the red flag and I suspect
they will not do so until it becomes politically convenient.
This is election year so we should all ask these questions of our parliamentary representatives.

Prediction for QPP: As of today the manipulation of the share price continues as the hedge funds try to squeeze the last drop of
“Tax free” profits. By April the share price recovery will be underway as the full year results will prove the sound fundamentals. But the fundamentals were never an issue, they were just a fabrication to drive the manipulation of the share price.

The manipulators will move on to another target and make make more un-taxed income at the expense of UK PLC and it’s citizens.

The curious case of the UNREGULATED Stock Market.

In a previous blog, I said it was hard to believe that “Market Manipulation” was carried out on the UK stock market so openly and unchallenged by the Government and it’s appointed regulators; The Financial Conduct Authority (FCA).
A judgment by European Securities and Market authority (ESMA) has now highlighted that the FCA are not obliged to carry out any investigations into Market Manipulation on AIM, which in effect means that this is an unregulated market.

Several UK companies listed on the AIM market have been the subject of targeted attacks from anonymous Hedge Funds, frequently outside the jurisdiction of UK Law. The recent example of Quindell PLC perfectly illustrates such a situation where it has been revealed that  “Tiger Global” a US based Hedge Fund acting through a Cayman Islands based shell company were orchestrating an attack on the company.
This activity has wiped out about £2 Billion off the company’s market value since April 2014.

The activities began with Tiger and other Hedge funds taking short positions in Quindell; which was a fast growing and high performing company on the junior market. Weeks after this, Gotham Research an anonymous company registered in Delaware US, issued a report attacking Quindell and simultaneously a vitriolic media and social media campaign started aimed at Quindell.
Hours before the Gotham report was issued several abnormally large trades were placed, which resulted in the share price being driven down by over 40% within hours.
The report was rebutted by Quindell and they brought a court case against Gotham for defamation; which they won.

This however was not the end, as the negative press campaign against Quindell continued over the ensuing months accompanied on each occasion by further suspicious trading patterns designed to control the share price in a downward direction.

All this information was documented by the group of Quindell investors with the aid of analytical tools that highlighted the irregular trading patterns.
Hundreds of letters were written to the FCA. The response from the FCA was muted with investors being told that their complaint had been noted, but that they would get no feedback on any investigations that may ensue.
Not being satisfied with this investors took their complaints to Parliament and over 200 MPs were supplied with the evidence and requested to lobby government officials and the FCA. The FCA were swamped in complaints but still were unwilling to act.
By November Quindell’s market capitalisation had reduced by about 90% and the manipulation was continuing. In the meantime Quindell shareholders had taken their evidence of market manipulation to ESMA and after the initial submission they were told that the evidence did warrant consideration and that they would deliver a judgment.
The judgment was delivered in December and was quite shocking. In layman’s terms the judgement was that FCA were not obliged to carry out any investigation concerning Market abuse on the AIM market. For this reason ESMA could not rule that the FCA had acted improperly.

This clearly means that private investors in AIM are investing their pensions and savings in a market that is unregulated. They are investing in a market where manipulation is widespread and goes unpunished. It is to all intents and purposes a casino.

So what is the Governments stance on this? Are they even aware that this is the case?
We can be pretty sure that the FCA are aware of the situation and that would largely explain their inactivity in the case of Quindell.

How does all this stack up with recent Government policy targeted at encouraging investment in AIM. They have eliminated stamp duty, they have increased tax-free investment allowances via NISAs and they have allowed AIM shares to be added to NISAs.
They have in effect encouraged private investors to invest in the AIM market which is exposed to huge risks because of market manipulation.
Unless this regulatory situation is remedied you would have to conclude that investment in AIM is unsuitable for private investors.

Many private investors are already steering clear of AIM having seen their investment destroyed in situations similar to the Quindell example.

However is not just investors who are abandoning AIM, with news of large American Brokers (who were providing NOMAD services) and advice to AIM companies pulling out. Could it be they do not want their reputations tarnished operating in an unregulated market.

You have to wonder about the future of this somewhat “Sleazy” market.    Until such time as action is taken to regulate the AIM market, then Private investors should stay away as their pensions and savings plans are severely at risk.

Journalists either wittingly or unwittingly supporting attacks on UK PLC

We already know that Quindell PLC is subject to what will be soon recognized as one of the most blatant acts of stock market manipulation. We know that Tiger Global cowering behind a Cayman islands shell company have been short selling Quindell Shares thanks to some genuine investigative journalism by the Times.

Amazingly at the same time as the shorting activity commenced another anonymous outfit called Gotham issued a dossier damning Quindell. It was no suprise that all accusations were put to bed and Quindell sued for damages in the UK High court and won.
At the same time as this discredited report was issued; coincidentally a whole plague of negative press about Quindell commenced from a UK-based journalist/Bloggers.
Over the last months as the share price was boosted by good news it seems to be always followed by a barrage of negative press articles. Coincidence maybe? Also could be coincidence that in tandem with the negative press comes suspicious trading patterns aimed at driving the share price downwards.

Over the past months Quindell has been portrayed as the villain in all this, but due to the work of private investors hard evidence has been gathered and submitted to both UK and European parliaments. The penny has dropped that yet another scam is being orchestrated in the Financial markets.

But why are journalists persisting with this unprecedented attack on a fast growing UK company. Is it just an easy story or is it more sinister.

Last weeks roll of Dis-Honour
Alan Oscroft – Tuesday, 2 December, 2014
Does Quindell PLC Expose Weaknesses In AIM Regulation?
He questions whether AIM is sufficiently regulated, but clearly insinuating that Private investors had approached the FCA to investigate the company. Incorrect private investors have approached FCA with claims of Market manipulation of the share price by Hedge funds aided and abetted by Journalist/Bloggers ,and possibly brokers.

Tom Winnifrith (The Blagger) – Tuesday, 2nd December, 2014
Referencing an article in National Association of Body Shops (NAB) that was reporting on  a court case in the US. Probably deliberately he issued an article stating that the Quindell business was in Financial difficulty.
NAB recognized their article was inaccurate and withdrew it along with a publisheed apology, but no such response from the blagger.

Another article from the same person last week claimed that Quindell had lost a major contract. This was refuted in an RNS by the company, but again no apology from the blagger. It appears that the truth being that Quindell had won new contracts did not fit the agenda.

Ascher of Insuranceinsider.com – Tuesday,  2nd December, 2014
Regurgitation of the subject of the report issued by Gotham Research on Quindell and referring to Gotham as a “Research company”.
Failed to mention the fact that they are anonymous organisation with no known office address cowering behind the anonymity of the internet.Also failed to mention Quindell sued Gotham and won.

Harriet Dennys in The Telegraph – Weds, 3rd December, 2014
Insinuates that Kevin Ashton the Cannacord analyst for Quindell was the victim in his exit from Cannacord.
“It has since emerged that Mr Ashton exited Canaccord stage left after just three months due to a “very personal dispute” with Quindell founder Rob Terry, after Ashton handed his bosses a dossier of “concerns” on the controversial insurance claims company”.
She fails to mention that the dossier was issued exactly the same time as the discredited Gotham report and that he is mentioned in social media as being a source of information leaks from inside Quindell. He also left his latest employer suddenly with no explanation; so why no follow-up on this?

Simon Duke in Sunday Times – Sunday November 30th, 2014
In his “Rebels without a cause” article, cant resist a swipe at Rob Terry.and says Quindell has lost 90% of its value after an US analyst published a damning dossier questioning profits and cash-flows. That will be the same dossier that the courts ruled to be damaging to Quindell’s reputation and found in the company’s favor. Of course there is no sign of the anonymous analysts, as they have scurried for cover in the sewers of New York. That fact will have been known to Simon some weeks ago so one would question his motive.

 

Tom, Dick & Harry “Why our wealth is being plundered” or “ Shorting explained” an Investor’s Parable

Let me relieve you of your pension.

Every investor in UK prosperity should be aware that their wealth is being plundered by yet another financial scam. Your savings, whether invested in Pensions Funds, Unit Trusts or Self-Selected Shares, are under attack.

To explain how this is happening I need to tell a short story.
My friend Harry has a nice car that he allowed me to borrow for a few days. Whilst out for a drive in the vehicle I bumped into another friend Dick who greatly admired the car and offered me £10,000 for it, which he said was fair value.
Even though I did not own the vehicle I agreed to sell it to Dick and that we would complete the sale in 2 weeks. He knew he had got himself a bargain as the car was probably worth much more.
I returned the car to Harry saying it was a very nice vehicle, but I had detected some serious issues that would mean he would have to spend a lot of money on the car in the near future. I said I could ask an acquaintance of mine called Tom who was in the motor trade, to call by and check the car out.
I briefed Tom on the situation and he agreed to tell Harry (for a small fee of course) that there were indeed, issues and that to fix them would cost circa £2,000. Shortly after Tom had given his “expert opinion” I called Harry who told me that it appeared his car did indeed have some issues that would need expensive repairs.
I told Harry that I had really liked the car and that I would be willing to buy it off him for £8,500 so that he could avoid the repairs. Luckily for me, Harry accepted the offer and I was now able to sell the vehicle to Dick for £10,000 as agreed making a profit of £1,500 on the sale. However I still had to pay £100 pounds to Tom for his “expert advice” but in any event my final profit of £1,400 was not too bad considering. I heard from Dick a few weeks later and he told me he had sold the car for £12,000 and was very happy.

Now if you were Harry and knew all the facts as described above then you would be extremely angry because in essence I have deceived Harry and reduced his wealth by £3,500 pounds. (The difference between the real value of the car £12,000 and what I paid him £8,500) I did it deceitfully and in collusion with others.

Share Price Manipulation Damages Your Wealth

The point of the story is this. Deception of this kind occurs regularly on the stock market and is known as “Shorting”. If you are invested directly in the stock market in Shares or funds or indirectly through personal or company pension schemes your wealth is under attack because of this scandalous practice. Groups (syndicates) acting in a coordinated way (Short Attacks) are driving down the price of shares in companies on the UK stock exchange, with the sole intention of making a profit by means of subterfuge and using automated Sells and Buy orders at levels intended to drive down the share price.

These “Short Syndicates” select companies that are generally “High Performers” and where there is an active market in the shares. There is also a high probability that many people in the UK are invested in these companies indirectly through investment funds or via their pension funds.

The syndicates sell shares that they do not own. Believe it or not, this is possible, as they are able to ‘borrow’ shares from a registered holder of shares, normally a financial institution. “But how would they make money by selling shares that they don’t own?” I hear you ask. At some point they will have to return the shares to the lender and to do this they need to buy back the same amount of shares in the open market. They will make money if they can buy back the shares they sold but now at a much reduced price. The lower the price the more money they will make.
But you may think this is just a gamble which may or may not pay off, and if it were left to the markets, it would certainly be so. But in the case of these syndicates, their tactics involve spreading lies and fabricated half-truths to undermine confidence in the company. This is done in a coordinated way through social media, twitter and blogs, bulletin boards, and somewhat surprisingly, through journalists who are ‘friendly’ to the cause. A Short attack is more often than not accompanied by automated computer trading to distort the market with a barrage of Sell orders at lower and lower prices and Buy orders pitched deliberately low to drive down the price of the company share.
These shorting attacks can go on for many months and investors can be panicked into selling shares based on a sudden drop in price or because they simply want to cut their losses and end the pain and distraction involved in what can be a prolonged attack where the share price is seen to be dropping day after day.

A recent example is that experienced by Quindell PLC (LON:QPP), a company that serves the Insurance industry and counts many household names amongst its customers. Its clients include Aviva, Direct Line, AXA, BUPA, Citroen, Europcar, Legal & General, Prudential, Renault, RAC and Zurich Insurance. Quindell has reported increasing revenues and profits over the last three years and the share price increased, reflecting the success of the company in restructuring the insurance claims process, driving down costs for its Insurance partners and in turn also reducing insurance premiums for their customers.

Shorting Attack Halves Share Price

The Quindell (LON:QPP) share price had been gradually rising when in April this year an unexpected “analyst’s report” was published on a spurious website accompanied by a short announcement on twitter by Gotham City Research, an anonymous group based in Delaware USA. Nearly twenty million Quindell shares had been borrowed in the period leading up to the release of the Gotham report. An hour before the report was published two large Sell orders each for 8.4 million shares were traded with a combined value of nearly £7million worth of Quindell stock. The combination of these two events, a classic “Short Attack”, resulted in the share losing half of its value within a few hours as automated trades quickly took out stop losses on retail investor holdings creating a waterfall effect as the share price fell lower and lower throughout the day. A billion pounds was wiped off the value of the company within a few hours and despite the company refuting all claims in the bogus report, even winning a victory in the High Court against Gotham City Research, six months later the share price is 70% below its value at the time of the Short Attack and many ordinary investors have seen their savings decimated.

We are all affected by this market manipulation, even if we are not directly involved in the markets. Our pension funds and other indirect investments which many rely on for their future security are being eroded to satisfy the greed of these organised syndicates. Coordinated manipulation of the share price is illegal and not supposed to be allowed under Stock Exchange Rules. In the UK a government appointed body, the Financial Conduct Authority (FCA) is supposed to police such activities, but it is not always clear that they are not doing so effectively or possibly are unable to match the sophisticated computer resources of the Shorting syndicates. While evidence of such practices has been monitored by aggrieved shareholders and has been submitted to the FCA, to date they have failed to act.

Shorting and sophisticated manipulation of the markets is no longer an exceptional event but is now a regular occurrence affecting many established companies. You have to ask why the FCA is not acting on this and I have no answer as the FCA, which has a duty to record all Short interests, refuses to say whether or not it is conducting an investigation. In response to investors’ queries the FCA cites client confidentiality and Freedom of information restrictions. One can only suppose that they will not act until there is sufficient pressure from aggrieved investors and the general public to do so.

Remember the “Credit Crunch” was also kept under wraps until that exploded in our faces.