Whitehaven a siren call for a host of hoaxes
A fake press release could have big consequences, write Peter Ker and Mark Hawthorne.
WITH his untamed beard, radical politics and makeshift home in the scrub, Jonathan Moylan shapes as an unlikely participant in the pinstriped world of the sharemarket.
His home of the past six months - a bush campsite about 500 kilometres north-west of Sydney - barely has walls, let alone the sort of high-speed technology that dominates modern share trading.
Yet after the 24-year-old managed to wipe more than $300 million off the sharemarket this week using a hoax press release, many professional investors fear they will soon encounter plenty more of his type.
"Right now, somewhere, is a smart kid sitting in an office, working out how he can do the exact same thing to make a buck, and get away with it," says Patrick Trindade, the head of private wealth at Octa Phillip Financial Group.
Trindade's warning neatly illustrates how Moylan did more than shift the share price of Whitehaven Coal with his outrageously effective hoax press release. The anti-coal campaigner spooked an investment community that is well aware of its vulnerability to the sort of market manipulation that has now struck three times in the past six months.
There was agreement that Moylan's hoax - which tricked some investors and media into thinking that Whitehaven had lost a crucial $1.2 billion loan from ANZ Bank - was too damaging to market integrity to be laughed off as a prank.
The hoax sparked a sell-down at about midday on Monday that drove Whitehaven shares down from $3.52 to $3.21 within minutes.
Long after the damage was done, Whitehaven shares were put into a trading halt, and the company subsequently confirmed what the market had already worked out: the press release was a hoax.
Whitehaven shares resumed trading mid-afternoon and quickly recovered most of the lost ground, but the incident left some individual investors nursing losses.
Moylan insists he did not financially gain from his manipulation of the market, saying his motivations lay in highlighting the environmental damage that would occur if ANZ's loan helps Whitehaven to build a new coalmine - as planned - near his camp at Maules Creek.
With similar market hoaxes affecting David Jones and Macmahon Holdings in recent months, one of the nation's most powerful financial executives says there is a growing risk to Australia's reputation abroad.
"As a nation we have to be seen as a place where there is an orderly market in operation or overseas investors will get nervous," says Craig Drummond, the Australian head of Bank of America Merrill Lynch.
"We are already battling against a high dollar, which is a risk for overseas investors. That's why the regulators, it would seem, are taking firm action [against Moylan's hoax].
"If our regulators are seen to prevaricate, then overseas investors will have one more reason to be nervous about Australia."
Amplifying concerns is a fear that similar hoaxes are bound to follow the Whitehaven stunt, and the bourse will be as vulnerable next time as it was to Moylan's antics.
"I don't think we will ever stop this sort of hoax statement. How can you stop someone issuing a press release?" asks Tony de Govrik, the legal affairs director of the Australian Corporate Lawyers Association.
While there was widespread condemnation of the incident, there is anything but consensus over how best to fight the trend for hoaxes to distort markets.
A QC, David Galbally, has called for deceptive and misleading statements to be made offences under the Crimes Act, on top of their existing coverage under the Corporations Act. He says Federal Police would have more success in pursuing cases than investigators from the Australian Investments and Securities Commission.
Neither de Govrik nor David Horsfield - the chief executive of the Stockbrokers Association of Australia - supports that call. Horsfield says ASIC already has the weapons to deter hoaxers. "The prevention is in showing people that if market integrity is damaged then there is a severe penalty for it," he says. "It is important for ASIC to come down on the people involved quite hard . . . If they do that, then that will go a long way to stopping this sort of nonsense."
ASIC struggled to make contact with Moylan in the 24 hours after the hoax. But by Wednesday an ASIC investigator made an unannounced visit to the Leard Forest camp, seizing the laptop and mobile phone used to make the fake release. Moylan has not been charged, but ASIC's inquiries relate to section 1041E of the Corporations Act, which covers misleading and deceptive statements. It can lead to criminal prosecutions and penalties of up to 10 years's jail or fines of $495,000.
De Govrik - who previously worked as ASX's legal services manager - offers some tough love to the investment community, reminding them that hoaxes will flourish in markets where traders relax their standards of research, verification and vigilance.
Cancellation of a $1.2 billion loan would have been financially material to Whitehaven if it were true, and would unquestionably require declaration through the ASX's official platform for market-sensitive announcements.
While the bogus news was reported by some media - including Business Spectator, The Australian Financial Review's website and wire service Australian Associated Press - it was never published through the ASX's official platform. "It is always risky business to trade on information that is received through the internet, blogs or some other fashion that is not a formal release through the ASX," de Govrik says.
The ASX's chief compliance officer, Kevin Lewis, reiterates that point, saying people whose investments are guided by official ASX announcements would have escaped Monday's losses.
"Markets often trade on the basis of rumour, speculation and other unofficial sources of information. Sometimes that information turns out to be correct and sometimes it doesn't," Lewis says. "People who trade on the basis of information that they read online and don't verify with official sources like the ASX market announcements platform should not expect to be able to turn around and say that the information was not correct and therefore 'I should be able to walk away from my trade'.
"You have to differentiate here between investors and traders. Investors hold for the longer-term and aren't generally going to be impacted at all by these types of short-term price spikes," he says.
"The people who are affected are the day-traders and those trading in the short-term. If you are that type of trader, you need to understand the risks you are taking."
Not surprisingly, brokers and institutions are reluctant to accept suggestions the Whitehaven saga was merely a lesson about the principle of "buyer beware".
"People are always going to try to get information first, and once they get it they want to act on it," says Horsfield, who stresses that urge is unlikely to disappear.
Drummond - who sits on the board of the Australian Financial Markets Association and is a member of the Business Council of Australia - says the issue is more complex than the notion of investor vigilance, and the market must function in a way that allows ordinary Australians to participate with confidence and ease.
"We can't have a market that is geared towards the strong, the big institutions, who were more likely to have known that this was a hoax," he says. "We also have to protect those who are, to use the analogy, a little weak or less educated in financial affairs. It's a fact of life that Australians have their superannuation invested in the sharemarket and many are managing their own super.
"To say 'bad luck' when something like this happens doesn't sit well with me."
The media is where many people get their cues for buying and selling stocks, and Lewis says there is a serious need for the fourth estate to reflect upon its role in the Whitehaven saga.
The media is undergoing massive structural change, with print publishers seeking to report news faster than ever before through their online publications.
The demand for more immediate news is growing as the number of people working in newsrooms decreases with falling profits, and Lewis says he fears some publishers are valuing speed over accuracy.
"There is an issue here that the online media outlets need to address. They may be trying to get information out too quickly without subjecting it to the same editorial oversight and verification processes as their print cousins," he says.
While much discussion has focused on the Whitehaven saga being the third hoax to move ASX prices within six months, Lewis points out that such hoaxes are not unique to Australia.
He stresses the bourse remains a secure, highly regulated place to invest. "We have been looking at this issue since we first saw it break across the airwaves and saw the impact it had on Whitehaven's market price," he says. "Where we become aware of incorrect information in the market, our role is to make sure that the company corrects that information in a timely fashion, which we think happened on the day.
"It is always concerning to the ASX if something happens that causes people to lose confidence in our market, and we obviously treat that very seriously. However, I don't believe that people should interpret this incident as meaning that the Australian market is not a safe place to invest."