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 exposed one of AIM’s most significant structural faults; do you really own the shares you’ve purchased? The secretive role of market makers in the function of AIM is not widely understood or appreciated. Few private investors realise just how much power and control this furtive group wields over physical stock and, therefore, share prices. During the New World controversy the London Stock Exchange proved itself ineffectual in enforcing its own rulebook, which is meant to oversee the actions of market makers and protect the legal rights of shareholders. Below I share some correspondence I had with major retail broker Share Centre, six weeks ago. This helps demonstrate how certain City firms directly interfered with the legal rights of New World’s shareholders, while the London Stock Exchange stood idly by.
I plan to follow up this piece with some commentary, but the unedited xchange with Share Centre is worth reading.I’ve highlighted in bold the most important point, towards the end.
Journalist request – Ben Turney
Further to our conversation, please see the article I published today about Barclays Stockbrokers having disposed of its clients stock without permission.
I have now been led to believe by a customer of Share Centre's that Share Centre too might have done something similar.
The customer in question purchased 821,073 shares in New World Oil & Gas through you between 12 September 2013 and 14 October 2014. This customer now wishes to join the New World Oil & Gas shareholder action group (link below):
However, having put a request in to get his shares rematerialised into certificated form your customer has been told this is not possible because according to one of your team leaders;
“The share pool we use is short of them”
The customer has had 400,000 of his shares rematerialised into certificated form, leaving an outstanding balance of over 400,000 shares.
Given that this customer is a long-term holder of New World Oil & Gas please can you now explain;
1) How it is possible that Share Centre has been able to dispose of a client's stock, without his permission?
2) Where in your terms of business it allows Share Centre to dispose of clients' stock in such a manner?
The Share Centre has not disposed of client’s stock and in order to explain why the situation you have described has come about, I would like to explain the various ways in which shares can be held.
The first two options above are not practical to use from a stockbrokers point of view, as in order to settle any sales you make, we would need you to send the shares to us before we can then transfer the ownership to the buyer, which is extremely difficult to do when we only have a limited amount of time to settle the transaction. Purchases, whilst easier than sales, also cause extra administration to obtain the certificate or transfer the shares electronically into the individual customers name. This also eliminates the possibility of buying and selling the same holding on the same day, as we would have to wait for the purchase to settle before the sale can be placed.
Using a segregated nominee account is easier from a settlement of transactions point of view, however buying and selling on the same day would still not be possible as your own shares have to settle first. Whilst this then also causes slightly more administration than a pooled account, the main disadvantage is from a cost perspective; each segregated nominee account would incur setup costs, along with ongoing transaction charges, which would invariably be passed on in some form to the underlying client.
Any shares purchased in an account held with us are held in a ‘pooled nominee account’ under the name of Share Nominees Limited, a bare trustee nominee company. Unlike shares held directly in the individual’s name, it is far easier for us to settle any sales and purchases you make as we hold the shares. In addition, it allows us to use any shares held to settle any other transactions, rather than using a specific client’s holding, meaning clients can buy and sell on the same day; for the vast majority of occasions, this causes no issues at all as the number of people trading a particular investment are far outweighed by those who are just holding the investment. This is referenced in our Terms of Business, paragraph 5.10, which can be found on our website here: https://www.share.com/Global/Forms/tsc_tob.pdf
However, as in this case, if some clients sell their holdings before we have received the shares that other clients have purchased, we can potentially be left with not enough settled shares to cover all the shares our clients beneficially own. I should point out we are legally obliged to settle any transactions that we have entered into (such as a sale or purchase), as are the counterparty we have bought or sold from. On a very small number of occasions (our team have not seen this in over eight years), more likely with a fairly illiquid stock, the initial buyer or seller in the chain of transactions cannot fulfil their obligations immediately, which causes a knock-on effect for everyone else in the chain being unable to settle their transactions. This is similar to a chain of house purchases where the bottom of the chain have a problem with their mortgage, which prevents the top of the chain receiving the money they are due from selling their house.
New World Oil & Gas Plc shares are currently experiencing difficulties with the settlement of transactions, which is something the London Stock Exchange are aware of and have raised directly with the company to resolve. Whilst we expect our unsettled items to settle in due course, which will then enable us to obtain a certificate for the customers’ shares, it could take some time for this to happen, especially with the Open Offer still outstanding.
We appreciate that this is far from ideal, and we wish there was something we would be able to do to speed up the settlement of the outstanding items, however, until the counterparty at the start of the chain are able to resolve their issues there is very little we can do.
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