Hong Kong courts on dangerous ground in a battle over free speech

Defamation lawsuit has consequences for investors as well as free speech in Hong Kong

PUBLISHED : Saturday, 16 December, 2017, 11:18pm
UPDATED : Sunday, 17 December, 2017, 12:42am

A Hong Kong court has issued its first ban on a short-seller from releasing further negative reports on a mainland company in which it has holdings.

Business, December 15

I think our courts are treading on dangerous ground here, but let’s first set out how they may be right to tread dangerously on this occasion.

If there is good reason to believe that professional short-seller Emerson Analytics is acting maliciously by continuing to publish libellous research reports on the listed China Hongqiao Group, even after the company launched a lawsuit for defamation, then there are indeed some grounds for the prohibition.

It will take time for that lawsuit to be heard, and in the meantime the company’s share price could be trashed by continuing negative reports. If the company then wins the lawsuit it may find that it can never be compensated enough for the damage done to it.

And Emerson’s interests could indeed lie in trashing China Hongqiao’s share price. As a professional short seller, it makes its money by spotting overvalued companies with misstated prospects, then shorting the stock, loudly publishing its findings, and buying the shares back at a lower price when the market follows its lead.

Hong Kong court issues first ban on short seller report

So, yes, a shut-up injunction against Emerson may be warranted. But let us say that when the lawsuit is heard, Emerson is proven right in accusing the company of woefully understating its production costs in its accounts.

Will the courts then award Emerson damages for the injustice and loss done to it by the injunction because it was not allowed to engage in its business of making the larger investment community aware of false accounting by a listed company?

Let us bear in mind here that professional short-sellers provide a valuable service to investors. Regulators, for all their chest-beating, have never been much good at stopping investment offences before large numbers of people are fooled.

And we do not have the protection that investors in the United States have of class action lawsuits and contingency fees to pay for them. Our lawyers are opposed and they constitute Hong Kong’s most militant trade union.

Thus, when a professional short-seller spots a bubble and sticks a pin into it, we all have reason to be grateful. They save us money. They keep the market honest.

And if they are wrong in their analysis, not only do they risk defamation suits but they could be caught with a large short position on a rising share price, a very painful experience. Putting out false short-sell reports is not a good way to make money. Try sifting moon dust for blue cheese instead.

There is also another way of looking at this. For every negative short-sell report put out by analysts there are a hundred of the rah-rah variety, particularly with new issues of stock.

Research-based short selling a fine way to expose fraud

If one of these then proves too optimistic about a stock’s prospects and the share price collapses, will the courts entertain a lawsuit against the publishers of the report for losses suffered by disappointed investors? Will they issue a shut-up injunction against the cheerleaders before the lawsuit is heard?

Or will they just say caveat emptor, let the buyer beware? What do you think?

Bear in mind here that ordinary investors can suffer equally from either falsehood. Buying on falsely generated optimism can lose you as much money as selling on falsely generated pessimism. If the falsehood is the offence, should not our courts act against it both ways?

There is also no reason for our courts to show particular favour to corporations in the economy’s interests. The economy is not served if duff companies continue to absorb valuable resources when their ambitions should be restrained or they should even be shut down.

In my opinion, unless there is very sound reason to deem Emerson’s reports malicious in advance of a court hearing to determine whether they are, let free speech prevail.