By Ben Turney | Wednesday 8 July 2015
Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
The New World Oil & Gas (NEW) forward selling fiasco has been a disaster for the credibility of AIM. So far, every single safeguard that is meant to be in place to protect private investors has failed. Predatory regulated City firms are on the cusp of making millions of pounds of profit from the chaos they have caused, while hundreds of private investors stand to suffer unacceptable and unjust losses. Had the authorities been doing their jobs properly in the first place none of this would have happened, but such is the paucity of regulatory oversight on AIM that the conditions have been primed for this shambolic situation for a long time. Nevertheless, the London Stock Exchange has one last chance to prove itself deserving of its licence for self-regulation of “the world’s most successful growth market”.
Before examining the details of the latest controversy involving New World, it is worth considering the role of its Nomad, Beaumont Cornish, since the company first listed. The AIM method of self-regulation relies on privately hired nominated advisors to perform the role of regulatory overseers. The inherent contradiction of poachers being hired as gamekeepers seems lost on the London Stock Exchange and its AIM Regulation Team. However, in the case of New World had Beaumont Cornish been vaguely interested in doing its job properly, the current situation would never have come about. On 02 June I submitted a detailed complaint to AIM Regulation, concerning Beaumont Cornish. You can read it here and it is worth reflecting on the patent regulatory failures that fostered the forward selling fiasco. It will be interesting to see if Beaumont Cornish retains its license, once the dust settles.
In the meantime and last night, New World announced the result of its placing and open offer. New World received “valid applications” from “eligible shareholders”, defined as “holders of Existing Ordinary Shares on the register of members of the Company at the Record Date”, representing approximately 14.94% of the 3.88billion open offer shares available. The definition applied by New World strongly suggests that it has not directly allocated open offers shares to applications made by holders of unsettled stock. This could prove to be telling.
In its Notice N11/15, the London Stock Exchange declared that all trades in New World, prior to its suspension, had been made “cum entitlement”. In other words, all the holders of unsettled New World stock had the right to participate in the open offer. This could have been disastrous.
Neither the London Stock Exchange nor the UK Listing Authority made clear to private holders of unsettled New World stock how their claims to participate in New World’s open offer would be settled. Would they receive shares directly under the open offer or would they receive shares, through third parties who had subscribed for the misnamed “Clawback” shares in New World’s placement?
The distinction is crucial.
Had it been the former then New World’s placement and open offer would have broken Section 85 of The Financial Services and Markets Act 2000. Had it been the latter, this ran the risk of multiplying the naked short position by 5.534 times.
As far as “solutions” go to this mess, New World’s placement and open offer remains the worst of options. If it didn’t break the law, it certainly allows the “regulated” rule breakers to escape the consequences of their reckless actions, at the expense of shareholders and unwitting holders of unsettled stock. Worse still and the placing and open offer also ran the risk of greatly exacerbating the unprecedented naked short position that the London Stock Exchange had allowed to develop, by not suspending New World on 29 April. If the London Stock Exchange now compounds these errors and admits the new shares to trading, it will set the most awful precedent for the future.
The moral hazard will be clear. Regulated firms on AIM can do whatever they damn well please, flagrantly flout all the rulebooks and fail to deliver their contractual obligations, so long as a pliant, unethical and immoral board of directors is ready and willing to bail them out.
This is why the London Stock Exchange has to act. Fortunately, it has it in its power to draw a line in the sand as to what is and what is not acceptable practice on AIM.
According to New World’s RNS last night “Application has been made to the London Stock Exchange for the total of 3,888,873,028 New Ordinary Shares to be admitted to trading on AIM”. The London Stock Exchange is under no obligation to accept these shares to trading. It is entirely its choice.
In deciding whether or not to admit New World’s new shares to trading this is the timeline the London Stock Exchange should base its decision on;
There is also the example of African Potash (AFPO) to consider. On 27 May, I revealed that this company’s conditional placement also appeared to have been forward sold, concurrently to New World’s. This would have been bad enough, but the fact that Cornhill Capital was that company’s placement agent too indicates a much wider problem. I reported the African Potash case both to the FCA and the London Stock Exchange.
If the London Stock Exchange admits New World’s shares to trading, apart from destroying the last pretense that AIM is an effectively regulated market, it will also sanction obscene rewards to the regulated firms responsible for this mess, to the cost of hundreds of retail investors. Specifically:
What is all the more confusing about the London Stock Exchange’s lack of response to the chaos caused by the forward selling of New World’s unconfirmed placement is that there was a clear precedent for how it should have acted from the Room Service scandal of 2003/04. The similarities between what happened with Room Service and has happened recently with New World are striking. The London Stock Exchange has been fully aware of this since the latest scandal began, but has decided to overlook these details, for reasons only it can explain.
The failure of regulated market participants to settle trades, as they were contractually obliged to do, significantly and detrimentally impacted the lawful rights of hundreds of private investors. Not only were these people denied the right to participate in the vote at New World’s EGM, they also were not able to get their stock rematerialized so that they could join the official shareholder action group. If shareholder rights are to mean anything on AIM, the London Stock Exchange surely cannot allow New World’s placement and open offer shares to be admitted to trading.
Instead, the London Stock Exchange should work closely with the FCA, investigate the circumstances and firms that caused the forward selling controversy and pursue a negotiated settlement for all holders of unsettled stock. This is the only equitable and just solution to this fiasco and it will be interesting to see how well the London Stock Exchange upholds the integrity of its market.
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