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Financial Services
HK watchdog acts against shortseller
From the Financial Times of Mon, 22 Dec 2014 11:43:43 GMT

Citron Research has become the first shortseller to face action from Hong Kong’s watchdog, which alleges the California-based group knowingly made “false and misleading” claims about Evergrande, the Chinese developer.

Hong Kong’s Securities and Futures Commission on Monday started market misconduct tribunal proceedings against Andrew Left, the head of Citron, for claims made in June 2012 that Evergrande was insolvent and had consistently presented false information.

Shortsellers aim to profit from price falls by borrowing shares they do not own in the expectation that they will be able to buy them back more cheaply. Mr Left made HK$1.7m ($219,251) in profit from selling short 4.1m Evergrande shares before he made his claims, the SFC said.

Mr Left declined to comment.

The Hong Kong action comes as shortsellers fall under increasing scrutiny from Asia’s regulators, who have variously probed the veracity of their claims and their methods. This year, Taiwanese regulators pursued Glaucus Research, another California-based shortseller, while India’s watchdog temporarily banned a small Hong Kong hedge fund for what it said was insider trading.

In June 2012 Evergrande plunged as much as 20 per cent on the day Citron released a 57-page report on the group, which is one of China’s largest developers and a household name for its ownership of the Guangzhou Evergrande Football Club.

Evergrande, which is listed in Hong Kong, had a market capitalisation of about $8.6bn when Citron’s report was published online. It closed the day worth $7.6bn.

Citron is one of the better known of a group of China-focused short-sellers that emerged about five years ago and whose biggest scalp came in 2011 with the collapse of Sino-Forest, a $4bn forestry group, after Muddy Waters, another shortseller, questioned its veracity.

But shortsellers have enjoyed patchier success in recent years as companies have fought back and regulators stepped up their scrutiny. Evergrande was one of the first to issue a robust defence, blasting Citron’s claims and using the sort of colourful language employed by the shorts themselves.

Later that year, Temasek, the Singapore investment agency, backed a rights issue from Olam designed to squeeze shorts as well as raise capital after the cocoa-to-cashews trader was attacked by Muddy Waters.

More recently, however, Tianhe Chemicals was attacked by Anonymous Analytics, a group claiming affiliation with the shadowy hacker collective. It published a 55-page rebuttal following a five-week share suspension, but its stock is still half its level before the report was released.

The action by the SFC comes as Hong Kong’s regulator has more widely stepped up its enforcement and oversight — including against market participants based overseas, as Mr Left is. The SFC has limited powers against US citizens but does have the power to block Mr Left from trading in Hong Kong, among other sanctions.

Almost half of all stock trading in Hong Kong is done by investors based offshore.

Last year, the SFC scored a victory when it used the courts to force two US-based hedge fund managers, part of Tiger Asia, to pay investors HK$45m in compensation after they admitted insider trading in the shares of China Construction Bank and Bank of China.

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