Blame the Smurfs: Suspicious trades are fleecing investors

A boy was dragged before the courts this week for stealing two cigarette lighters. He faces a conviction under Queensland’s tough new “naming and shaming” laws.

This was his first offence yet the conviction for theft may stick with the juvenile offender for his entire lifetime.

Meanwhile far greater heists were going down south of the border, thefts in the order of hundreds and millions of dollars worth of cigarette lighters. Yet you can bet nobody will be dragged before the courts for these.

On Monday, a $1.8 billion takeover bid lobbed for Goodman Fielder. In the days leading up to the announcement, Goodman Fielder shares rose sharply, as did trading volumes.

Those who sold were effectively robbed by those who bought; if those who bought had knowledge of the takeover bid, that is.

It is rare for a share price not to jump before a takeover, indeed before any commercially sensitive announcement. Still, notwithstanding this incessant circumstantial evidence, the authorities have long denied that insider trading on the Australian Securities Exchange is rife.

If insider trading is not rife, the only plausible explanation can be that all this suspicious buying before takeover bids must be the work of chipmunks, or possibly Smurfs.

While the pesky critters were cavorting about in Goodman shares just before the takeover bid was announced, they were also picking up a few shares in Horizon Oil and Gas. Horizon’s share price and trading volumes rose sharply last week, just before its merger with Roc Oil was made public.

There had also been some aggressive bidding in the convertible notes, no doubt the work of those conniving chipmunks again, denuding the dumb old humans of their shares.

Ironically, although the humans were blissfully unaware of the commercially sensitive information being bandied about by the chipmunks, they did enjoy some revenge.

Chipmunks who got the early nod in Horizon were soaking up stock last Monday from 33c to 37c as trading volumes quadrupled. When the stock was suspended pending announcement, it was bid at 44c. Alas for the chipmunks, it was not a cash offer from Roc Oil. Instead, it was one of those nil-premium “merger of equals” deals. Shucks.

The Horizon share price sank back down. In Goodman Fielder those crafty chipmunks had far more conviction. Goodman shares had been smashed from 64c to as low as 48c when the company had revealed an earnings downgrade in early April.

That’s when they got set. The stock quickly bounced, then last week steadily marched higher from 52c to 64c amid heavy trading volumes, before the bid by the Asian consortium of Wilmar and First Pacific became public.

We have only covered the ASX equities market here. It would be odd if the chipmunks were not playing about in the options and CFDs markets too.

None are ever dragged before the courts like the Queensland youth who lifted the two cigarette lights though, probably because chipmunks have no legal status or fixed address and cannot therefore be prosecuted.

It is odd, moreover, if the chipmunks fail to hear about, and trade on, any commercially sensitive information.

David Jones was a recent exception. Very few chipmunks saw the takeover bid by Woolworths of South Africa coming. The information was tightly held. The stock did not move before the pubic announcement.

There was some paradox in this because when Myer was in merger talks with David Jones earlier in the year, DJs directors were even buying shares personally. And the two directors who bought also appear to have been privy (or they ought to have been privy) to a trading update – which held positive news – but still bought the stock.

When suspicious trading is demonstrably conducted by human beings with white collars it is apparently not deemed worthy of investigation.

This was also the case with the Hochtief directors on the Leighton Holdings board. Before a trading update was released earlier this year which seems to have been patently positive for the Leighton share price, Hochtief was mopping up Leighton stock under the “creep provisions” of the Corporations Law.

Hochtief soon made bid for Leighton. No action there either. In fairness to the authorities it should be pointed out that making an insider trading conviction stick is notoriously difficult.

Even if the buyer appears to have been obviously aware of information which should be positive for the stock price, he or she can always say that they acquired shares because they thought they were cheap.

Documentary evidence is very uncommon. It is all word of mouth.

Before 2005, when the ASX “went dark” and removed broker identification numbers from share trades, at least it was possible for everybody to see which broking firm had been doing the suspicious trading. Now only ASX and the corporate regulator can see who is doing the trading. At least reinstating broker ID would deliver greater transparency and lend an embarrassment factor to trading “in the know”. It might stop a few unwitting humans from being robbed.