Hidden accounts, rapacious insolvency tactics, greedy bankers. The pillage of Arrium has been a travesty for shareholders and creditors and begs the question: should short-selling laws be upgraded to save vital industries from financial ruin? Investor and shareholder activist Ben Pauley writes this oped.

The destruction, gouging and resurrection of steelmaker Arrium is tantamount to “legal theft”. In themselves, the short-selling, the over-charging by fee-takers and clandestine corporate dealings surrounding Arrium Ltd may be legal but they amount to a gouging of creditors and shareholders.

Arrium has its roots in BHP (the Big Australian) and was “spun off” in the 1990’s as OneSteel at the same time as rival steelmaker Bluescope.

It is a 100-year-old asset of national strategic importance, particularly in the event of a war and the consequent need to manufacture military hardware locally.

Arrium Australia has 10,000 employees, of which 4,000 are employed in Whyalla and the nearby mines. Its assets are diverse. They include highly profitable mini mills on the east coast, tube and wire mills, recycling plants and the OneSteel Metal Centre national distribution network.

Before it fell into the warm embrace of the voluntary administrators from Korda Mentha in April 2016, Arrium used to have 80,000 shareholders owning 2.94 billion shares before. Creditors were owed $2.8 billion.

Mystery flight of Ansett accounts

The main stated reasons for its collapse into administration (VA) are varied but among the key factors are:

  • the Federal Government failing to protect Australia’s local steel industry by not implementing anti-dumping legislation, allowing our markets to be flooded with cheap, inferior quality, Chinese and other imports,
  • poor decisions at Arrium board and executive level, such as to borrow and purchase the Southern Iron Mine at an overvalued price at the top of the commodity cycle. The mine was soon mothballed.

However, these factors alone should not have caused Arrium to go into administration. A successful capital raising would have caused dilution of the shares and short term share-price decrease but Arrium would at least have had a future.

Short sellers smashed Arrium

The primary reasons Arrium went down are cleverly hidden. The company was effectively short-sold into administration.

In September 2014, when its share price was $0.60, Arrium announced a $754 million capital raising. The capital raising price was $0.48 and, on the first day of trading after the announcement, there were 37,582,199 shares short sold and the share price collapsed to 40c.

When the offer closed, the share price was $0.345. The capital raising had been sabotaged by a combination of short-selling and algorithmic trading.

Why honest investors are losing out on the stock market

Broker trading programs were tuned aggressively to take down prices. It was accomplished the same way countless stocks have had billions of dollars removed from their market capitalisations, that is, algorithms being tuned to make artificial adjustments to prices, relentlessly forcing prices lower.

Factor number two in Arrium’s demise was Arrium management itself.

After the savage attack by short sellers, the Arrium chairman issued an address at the AGM:

“Many of the questions or comments forwarded to me in the lead up to today’s meeting were, understandably, about the share price. Our share price performance has been extremely disappointing.

There are many factors that can influence a company’s share price, but negative sentiment around growth in China including the outlook for iron ore prices, steel over-capacity in Asia, our level of debt and uncertainty around the strategic review outcomes appear to be relevant factors in poor performance”.

The reality was that the “disappointing” share price was almost all to do with predatory short-sellers executing trades that conflict with the laws that govern the markets. That should have been obvious to the chairman.

Banks, corporate undertakers clean up

A related factor concerned the banks who were involved in margin lending. Hapless clients of the banks who purchased Arrium stock on margin (borrowing from margin lenders to finance their trading) found that their shares were, in turn, lent out to short sellers.

It was a bastardly act although perfectly legal, and one which epitomises the corporate greed and lack of ethics that has crept across the financial system. The system, as demonstrated by the Royal Commission into the banks, has become consumed by a culture of unmitigated greed and left to fester under regulatory capture and indifference.

Grim reapers who feast on the dead

Just imagine the uproar if a bank retained such power in the case of a house mortgage loan, that is, they lend the house to someone who they know will vandalise it. It should be illegal for a bank to share knowledge about margin loans they have against stocks with anyone.

Industry super funds were also lending out large volumes of their clients’ shares to short-sellers. Compounding the misery of Arrium shareholders, the iron ore price then fell to $35 a tonne. Arrium was placed into voluntary administration due to its large debt.

The fee-fest

The administrators from Korda Mentha gouged $1 million per week to “save” Arrium. They sold one of Arrium’s prize jewel assets, Moly Cop for $1.6 billion, leaving debt at $1.2 billion.

Then, while Arrium was still in the hands of these administrators, there was a global and local steel cycle boom. This is the point where Arrium should have had its outstanding debt refinanced by the big four banks and then put back in the hands of shareholders.

But would the banks and Korda Mentha have been able to make as much money out of Arrium by pursuing this, the correct course of action, a course of action which would have been to the benefit of shareholders and other creditors?

Instead, the then prime minister Malcolm Turnbull met with the head of England’s GFG Alliance and made a back-room deal. Later that month, Arrium had been sold by the administrators to GFG Alliance at a sale price rumoured to be $700 million.

Earnings before tax and interest (EBITDA) at that time were $400 million per annum. The sale price was not formally publicised.

Secrets and special deals

The administrators were then given a special exemption by the Federal Government to postpone a lodgement of financial returns until November 2018.

The concession meant that no-one really knew the sale details or the likely improved profits that Arrium was making. The corporate regulator, Australian Securities & Investments Commission (ASIC) is in the habit of handing out “relief orders” or exemptions from filing accounts.

These are routinely awarded to administrators and liquidators such as Korda Mentha which, despite their mountainous fees, claim it is too much work to comply with the Corporations Act and lodge financial statements.

The soft underbelly of the regulator

This leaves shareholders and creditors in the dark, and the liquidators, who are now legally running the company are free from public scrutiny.

Two weeks after Arrium was placed in administration, then minister Christopher Pyne placed 50 per cent tariffs on Chinese imported steel and, after Arrium was sold to GFG Alliance, the Australian government began buying steel from Arrium for government projects.

Arrium is yet another classic example of the exchange of wealth which occurs from “mum and dad” investors to advisors and insolvency practitioners, with the ‘mums and dads’ left with nothing.

Double standards

If Arrium management were truly interested in looking after their own shareholders they would have spoken out about the manipulation of the share price. It was obvious that it was taking place. And as is usually the case, ASIC was nowhere to be seen.

This despite Arrium being the only manufacturer of certain roll steel sections in Australia. It had been good enough for the Government to ban short-selling in the banks during the global financial crisis – to protect the banks (particularly Macquarie and Suncorp) – but it was okay for the banks to finance and facilitate the short-selling of Arrium.

What ifs

If the banks and industry super funds didn’t lend stock without the knowledge of the real ‘mums and dads’ owners whose assets were being destroyed in the process, Arrium’s share price could be $3 by now.

If these things didn’t happen, Arrium would probably still be in the hands of its Australian shareholders and they would have done quite well from their investment.

If the Financial Review is right, GFG Alliance now has annual earnings of $450 million to $500 million and it plans to list the Arrium assets back on the ASX.

If these things had not happened however, the insolvency practitioners from Korda Mentha would not have made millions in fees, nor their lawyers, nor the super funds profited from their stock lending fees, nor the banks via their penalty interest and refinancing opportunities, nor the investment bankers.

There is a lot of money riding on insolvency and, after the Tax Office, the first victims to be left high and dry are shareholders. Trade creditors are hard on their heels. The banks, often secured lenders, though not in this case, can get their money back.

Morgan Stanley, the sale advisor who worked with the administrator when Arrium was sold to GFG is in the box seat to do the sharemarket float. After buying the Arrium business for an estimated $700 million in 2017, the estimated price when it re-lists on the ASX is mooted at $3 billion. Expect another fee-fest.

The business is likely to be pitched as a play on the infrastructure construction market with steel from the GFG Alliance network used to build motorways, railways and the like across the country.

GFG Alliance is another offshore company which has done exceedingly well from its corporate incursion Downunder. It is a pity that this has come at the expense of Australia and Arrium shareholders while government and regulators have looked the other way.

What they are about to receive – from the judge


Ben Pauley

Benjamin John Pauley obtained a degree in Natural Resource Management from University of WA before going to work for three years in the WA prison service. He left that job to pursue a career investing in the stock market. Ben believes in equality and holding corporate miscreants to account. You can follow Ben on Twitter @end_share.


Editor’s Note: michaelwest.com.au welcomes debate about short-selling. It is not the house view here that short-selling should be banned. Often, company share prices run far too high and shareholders may suffer greater losses if the heat does not come out of a share price due to over-pricing and mis-pricing. Shorting can therefore lead to market efficiencies – despite the paradox that super funds make money by lending their shares (other people’s shares) to hedge funds aiming to make a profit by knocking the stock price lower. It is our view however that there should be safeguards in place to prevent “the shorts” from pushing a company over the brink into insolvency. Have your say in the Disqus comment section below.

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