Andrew Forrest’s Fortescue Metals yesterday issued a remarkable announcement pioneering something that should become routine for all listed companies; he “outed” a big stock-lender.
It was a simple, two paragraph statement that Fortescue “had been made aware that some 10% of the company’s shares have been the subject of stock loans. The stock loans were made by the owner’s custodian and the owner has since advised the company that it will immediately rectify the situation”.
Forrest has become a campaigner on this subject. Last month he launched a tirade against stock-lenders and short-sellers in Fortescue, describing their actions as “almost criminal”.
But instead of just ranting impotently about it, he hired Sydney-based share register investigators, Orient Capital, to find out what was going on. Orient issued section 672 notices to the custodians and nominee companies requiring them to disclose their beneficial owners and stock loans within 48 hours.
Orient usually does this sort of thing to help with investor relations, so that the right people are invited to investor roadshows. But apparently s.672 notices can just as easily be used to reveal the lending of shares.
It turned out that the custodian for Phil Falcone’s Harbinger Group, which owns 15% of Fortescue, had lent two thirds of his holding, or 10% of Fortescue.
The statement from Fortescue yesterday does not reveal the identity of the lender, nor does it reveal whether the beneficial owner was aware of it. But it’s understood to have been Falcone, and it seems likely he was aware of it.
It is very unusual, but not unheard of, for custodians to lend stock without at least in-principle agreement from their clients. Quite often the agreement is with the ultimate owner, like the super fund, so that the fund manager in between is not aware, but in this case Falcone was the client.
So we don’t know whether the statement from Fortescue that “the owner will immediately rectify the situation” means Falcone didn’t know and will tell his custodians to stop it, or whether he did know and is promising Andrew Forrest that he won’t do it any more.
Either way it’s a victory for Forrest. The shorts will now be squeezed because Falcone will ask for his stock back and Fortescue’s share price will rise, having fallen nearly 40% since hitting a record high in late June.
Last week I attended a boardroom lunch with a group of top 20 company directors and one of the main topics of conversation was stock lending and short selling.
It was generally agreed around the table that the problem is one of disclosure; that they have a right to know who is on their share register, but that stock lending reduces that knowledge.
Now Forrest has shown the way. Just issue s.672 notices to all the custodians demanding to know how much they have lent, and then reveal that to the market.
In my view this should not just be up to the companies themselves. ASIC or the ASX should require all custodians and beneficial owners to regularly reveal the extent of their stock lending.
It is incomprehensible to me, and to the company directors I spoke to last week, that shareholders or their custodians have to reveal themselves on the public share register, and to publicly reveal any beneficial ownership of more than 5&, but that those rules don’t apply to stock lending.
The debate about short selling would quickly be resolved if stock lending simply had to be routinely disclosed. There can be no shorting without lending because that’s how settlement is made within three days of the transaction.
And as Andrew Forrest showed this week, stock-lenders who are outed are likely to be embarrassed and inclined to “immediately rectify the situation”.
This article first appeared on Business Spectator
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