Echo and the truck-sized hole in disclosure law

National Australia Bank has 'confessed' that it too, is now a substantial shareholder in Echo Entertainment.

National Australia Bank has 'confessed' that it too, is now a substantial shareholder in Echo Entertainment.

NATIONAL Australia Bank has ''confessed'' that it, too, is now a substantial shareholder in Sydney casino owner Echo Entertainment - seemingly as a result of James Packer's convoluted not-quite-share-buying arrangements.

While NAB would be expected to hold an indirect stake in Echo shares through its MLC funds management operation, the bulk of the exposure is directly through the bank under securities lending arrangements.

NAB has used securities registered in the name of its National Nominees, but owned by half a dozen industry superannuation funds, to lend to a variety of investment banks including Deutsche Bank, which has the back-to-back arrangement to provide Packer's Crown with its desired 9.21 per cent of Echo.

It is safe to assume that NAB belatedly came to the realisation that perhaps it ought to file something because it crossed the 5 per cent threshold last Thursday, and the legal requirement is to file such notices ASAP - but not later than two business days.

That clock ran out on Monday night, whereas NAB's filing did not make the ASX announcements platform until after lunch yesterday. A technical foul, but Insider assumes that a conservative and highly reputable bank such as NAB has impeccable reporting systems that would normally flag when it need to make a compliance statement with ASX.

Like Deutsche's voluminous filing of interest in Echo that began last Friday and finished on Monday, NAB's disclosure was correct, but not particularly illuminating for existing and would-be investors in Echo Entertainment Group.

And that, after all, is the problem with all that is occurring in Echo.

Deutsche Bank's deal with Crown legitimately drives a truck through gaping hole of disclosure laws that are supposed to ensure investors are aware of potential change of control events.

The problem lies not with enterprising investment bankers, but laws that are failing to capture the sophistication of financial markets.

Successive federal governments have had the issue flagged to them since 2005, when equity derivative deals made headlines. Coincidentally, one of those was BHP Billiton which again via Deutsche accumulated 4.9 per cent of WMC ahead of a takeover offer.

An attempted quick fix, not legislated until 2007, gave the Takeovers Panel power to work out exactly what constituted a substantial shareholding, although it chose to limit that definition to ''change of control'' events.

To Insider's simple mind, these equity derivatives deals are merely a modern form of what used to be called ''warehousing'' - the practice of buying shares ahead of a bid, but parking them in a host of nominee hands so they could not be noticed.

That enabled predators to creep up on their targets without giving the defenders time to raise the drawbridge, which is a fair enough tactic, but what about the poor mugs who sold shares to them not knowing they were probably selling too cheaply because there was a bid around the corner?

Social detrimentJAMES Packer's pursuit of Echo Entertainment raises an interesting question about social detriment.

While the threat of unwanted development of Sydney's Barangaroo precinct is no doubt heartfelt for locals, getting control of Echo delivers Packer not just Star's NSW licence, he also gets three casinos in Queensland - Gold Coast, Brisbane and Townsville.

And do not expect Rod Sims and the Australian Competition and Consumer Commission to ride in. After all, casinos only exist by virtue of limited state monopoly licences so Sims and the ACCC team are hardly going to waste their time trying to prove Crown's acquisitions would lead to a lessening of gambling competition around the country. Even if it did, so what?

That is social rather than economic policy, and Canberra is already struggling just to get support for ways of protecting individual gamblers from their own addictions. Gambling is not in any way an essential service or product, like petrol or grocery prices.

Fortis in Kazakhstan FORTIS Mining and its muffed attempts to become an explorer-cum-potash miner in Kazakhstan are almost worthy of a film script.

It is hard to believe that a company that was a new float success story this time last year has been suspended from trading since November because the corporate watchdog reckons it had prospectus deficiencies that it is yet to iron out.

Even more confusing for investors must be that they thought they approved the necessary changes to get the potash deals across the line at last year's annual meeting, but now face an extraordinary gathering in late April to sign off on additional financing arrangements and ''other related matters''.

The original backers of Fortis, Frank Cannavo and Jitto Arulampalam, have ceded board control (Cannavo lost his executive role and then was announced between Christmas and new year as having ''agreed to resign ? with immediate effect ? to pursue other opportunities'').

Along the way there seems to have been a problem in getting good title to the Kazakhstan prospects because of some unspecified breach with the vendors. That tends to happen when an Australian company has done a deal to buy a Hong Kong company that is owned by British Virgin Islands-registered interests, via Panama, and through another entity incorporated in Turkey.

Maybe one day Fortis shareholders will be told why the deal had to be done that way - and who the heck is getting the millions of dollars and shares their company is forking over.

insider@fairfaxmedia.com.au

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