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Jake Van Der Kamp

In a statement announcing the tribunal's ruling [on hedge fund Tiger Asia Management], the Securities and Futures Commission said: "This heralds a sterner approach in respect of protective measures provided under our law. The SFC will track down and take action against wrongdoers wherever in the world they may lurk."
Business, October 10
 
Let me tell you where they lurk as the story here is a little different from how the SFC presents it in these George Bush-style tones of indignation.
We start with the traditional way of underwriting the introduction of a new company to the stock market. It is a true underwriting. The sponsors publish a prospectus, set a price for the shares, undertake to buy the shares if the investing public will not and are paid an underwriting fee for taking this risk.
But this is not how it is done in today's brave new world. The sponsors still want the underwriting fee but they do not want the underwriting risk.
They have thus removed it. They sell the new issue before they publish the prospectus and sign the underwriting agreement, changing the price during the process if they have to do so to make sure the shares can all be sold to third parties.
Similarly, the traditional way that a company already listed on the market raises more money is through a rights issue. Existing shareholders are allocated new shares in proportion to the number of shares they already hold and can sell their allocations on the market in nil paid form if they do not wish to subscribe.
It is clean, absolutely fair to everyone involved and simple to arrange and administer.
But sponsors in today's brave new world hate rights issues. They cannot win favours by allocating the shares to their favourite clients and they cannot charge their usual outrageous fees on anything so simple. They thus invariably steer their clients away from rights issues.
In the brave new world sponsors also manipulate share prices to make their offerings succeed. Their favourite technique is called the greenshoe, an arrangement by which they can call on the company at the issue price for about 15 per cent more shares than are formally in the offer.
Supposedly, hah-hah, this allows them to satisfy excess demand should the issue be wildly popular.
But in practice what they do is sell that 15 per cent short immediately. If the price on the market subsequently goes down they can cover their short position, thus supporting the share price and they make money. Alternatively, if the price goes up, they cover their shorts from the greenshoe and lose no money.
It is straight share price manipulation, which is a crime, but securities regulators around the world, our SFC included, just wink at it. They are as much part of the brave new world as the sponsors are. There is no tracking down of wrongdoers here.
What this brave new world in which underwriting is not underwriting also requires is that preferred clients who are invited to buy an issue are given preferential information not available to others. The chosen must be given reason to buy.
This is what happened in the Tiger Asia case, except that things then did not go the brave new way. Tiger Asia took the view on an issue of mainland bank shares that what they had been told gave them reasons to sell the stock, not buy it, and sell they did.
Insider dealing, screamed our SFC.
How so? If it truly was inside information then it would have been illegal either to buy or sell. Inside information cannot be used in any investment decision, either buy or sell. All buyers of those bank shares should also have been done for dealing on inside information.
But, of course, what Tiger Asia really did was upset the money-making ways of the brave new world. Riskless underwriting profits depend crucially on share price manipulation and dealing on inside information.
The sad fact is that our SFC, an agency we set up to ensure a level playing field in investment, has betrayed us to the brave new world's ways of tilting that playing field. Where some wrongdoers lurk it will never venture.
What hypocrisy.
jake.vanderkamp@scmp.com


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Despite claims of strict enforcement, our securities regulator blatantly allows share price manipulation in the brave new world of underwriting


Let me tell you where they lurk as the story here is a little different from how the SFC presents it in these George Bush-style tones of indignation.


Expresses the views, ideas and conclusions of the author. (Eg. Enough of Crazy Rich Asians, think of crazy poor Hongkongers.)


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Jake's View

Jake's View | SFC turns a blind eye to the real wrongdoers

Despite claims of strict enforcement, our securities regulator blatantly allows share price manipulation in the brave new world of underwriting