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Regulation Amp Governance
Call to close short selling loophole
From the Financial Times of Fri, 21 Nov 2014 18:51:43 GMT

The legal “loophole” that allowed one of the world’s largest hedge funds to make anonymous bets against listed companies must be closed, according to one of the senior European lawmakers who framed the current rules.

Markus Ferber, MEP, who represented the largest block in the European Parliament during the drafting of the EU’s short selling rules said hedge funds’ use of Cayman Island shell companies meant “we will have to rethink the legislation”.

On Thursday, the Financial Times revealed that US hedge fund Tiger Global – a New York fund managing $15bn of assets – had used Cayman incorporated entities to launch high profile but anonymous short selling campaigns against such companies as Nokia, HMV Quindell, HMV and Blinkx.

A short seller borrows shares in a troubled company and sells them in the market hoping they will fall – so they can be bought back more cheaply and returned to the original owner. In effect, the short seller is betting against the company’s shareholders, and European rules require any investor betting more than 0.5 per cent of a company’s shares to disclose its position publicly.

However, Tiger Global avoided disclosure by using generically named Cayman companies to make its filings with regulators.

“At minimum. this looks like a loophole,” Mr Ferber said. “The principal of the act was to avoid this sort of behaviour. If we find loopholes are being used they should be closed, through legislation if necessary.”

Although the use of the anonymous vehicles is within European rules, it has been standard practice for hedge funds to use own their names when disclosing short selling positions.

Tiger Global instead created various Cayman Island entities to short-sell companies. One vehicle, called Roble SL, made tens of millions of dollars in paper profits by betting against UK insurance claims processor Quindell.

Other vehicles with similarly European sounding names, such as “Fresco SRL” and “Fest NV”, were used to take a $200m bet against Nokia, and a short position in shares of retailer HMV before it declared bankruptcy.

Tiger Global, which has made a return of 16 per cent for its investors this year, declined to comment on the trades.

But Sven Giegold, a German Green MEP, said on Friday: “If the European rules allow hedge funds to do this, then the rules need to be changed. Short sellers should be requires to declare their identities, and not use offshore companies in this way.”

However, changes to European short selling rules could cause further friction with the UK, which earlier this year suffered a defeat in Europe’s highest court over an attempt to prevent Brussels having the power to ban short selling.

Some involved in the drafting of the rules suggested the ability to use anonymous offshore shells may have resulted from an accidental omission. “I would say it is an oversight and it is the kind of thing the Parliament by the end of the mandate would have insisted on,” said Sharon Bowles, a former Liberal Democrat MEP and former chair of the European Parliament’s ECON committee.

Greg Ford of Finance Watch, a Brussels lobby group, said: “Short selling is normal in many markets, but market integrity can be harmed if the disclosure rules relating to short positions are circumvented. Position disclosures are also a tool for regulators to monitor the build-up of positions that might, in some circumstances, threaten market stability.”

But one top 10 shareholder in Quindell, Blinkx and Monitise – three of the companies Tiger Global shorted – said it did not did believe the use of anonymous shells exacerbated the companies’ share price falls.

“My view is that shorting is legal and part of the way the market operates,” the investor said. “ It helps liquidity and is completely legal. A good company with good management who knows what they are doing tends not to get shorted.”

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