Hong Kong’s Market Misconduct Tribunal has punished Andrew Left of Citron for market manipulation in connection with his short report on China Evergrande. Left had alleged that the company was insolvent and had engaged in fraud.
The Tribunal banned Left from trading on the Hong Kong Stock Exchange for five years and ordered him to turn over the HK$ 1.6 million he made by shorting the stock. He was also given a cease and desist order that warns he could face criminal charges if he does it again.
Short sellers play an important role in financial markets. I liken them to the hyenas of the markets, preying on the sick and weak, while improving the overall health of the herd. They are also the buyers of last resort, providing liquidity to investors in troubled stocks as they cover positions.
The action against Left follows the eviction of an analyst with a sell recommendation from a company briefing.
I have long argued that many short sellers use the “kitchen sink” approach to their research – throwing many unsupported allegations at companies in hopes that something sticks. Often we have seen short seller attacks that fail to prove accurate, yet other problems arise during the investigation that bring down the company. Some attacks fail to be proven, often leading to depressed stock prices. Long investors are particularly frustrated in these situations, since the short sellers usually profit from unproved allegations, yet long investors often pay a long term price.
The Hong Kong action against Left should trouble all investors. Hong Kong has shown it is too willing to target negative research, while often enabling fraud through weak regulation. The Hong Kong Stock Exchange has been too willing to allow companies accused of fraud to suspend trading in shares for extended periods, which punishes short sellers by preventing them from closing positions, punishes investors by locking up their investment, while protecting management of fraudulent companies.
I am unaware of Hong Kong regulators pursing similar cases against long research that engages in unproven acclamations of the future of companies.
Hong Kong seriously needs to reform its security regulation. Proposals have been put forward to move market regulation away from the Hong Kong Stock Exchange, and to create an independent regulator for the audit profession. Both of these proposals should move forward quickly, but as might be expected, face opposition from those who would be regulated.