By Enda Curran
HONG KONG--Hong Kong's securities regulator has begun its first
legal action against a short seller, targeting the head of a
U.S.-based research firm for issuing a report on Chinese property
developer Evergrande Real Estate Group Ltd. that the watchdog says
was false and misleading.
In a rare instance of a regulator targeting short sellers in
developed markets, the Securities and Futures Commission said in a
filing that a June 2012 report by Citron Research triggered a slump
in Hong Kong-listed Evergrande's share price, allowing the head of
the research firm to make a profit. In short selling, an investor
sells borrowed shares in hopes of buying them back later at a lower
price, pocketing the difference.
The SFC alleges that the report included "false and misleading"
information about Evergrande, such as allegations that the Chinese
real-estate firm was insolvent and presented fraudulent in a report
that gathered widespread attention at the time from investors,
banks and media. The SFC said it will pursue Andrew Left, the head
of Citron Research--known for publishing harsh views on
stocks--through Hong Kong's Market Misconduct Tribunal on
allegations of market misconduct for publishing the report on
Evergrande. The Market Misconduct Tribunal is an independent body
headed by a present or former High Court judge and overseeing
allegations ranging from insider dealing to price rigging.
An email seeking comment from Citron was responded to by Mr.
Left, who declined to comment. Evergrande couldn't immediately be
reached for comment.
Asia has been hit by a flurry of short selling in recent years,
but this is the first instance in which Hong Kong's regulators have
acted against an activist short seller.
On June 21, 2012, the day Citron's report was released,
Evergrande's share price reached a high of 4.52 Hong Kong dollars
(58 U.S. cents) before slumping to HK$3.60. It closed the day at
HK$3.97, down 11.4% from the previous day's closing price. In
contrast, the Hang Seng Index ended down 1.3% that day. Since the
Citron report, Evergrande's share price has fallen 22% to HK$3.10
in midday trade Tuesday.
The SFC alleges that shortly before the report's release, Mr.
Left short sold 4.1 million shares of Evergrande, which he bought
back to make a total realized profit of HK$1.7 million.
Building a case against Mr. Left may be difficult given that
skeptical questioning of companies and taking short positions is
legitimate market conduct in Hong Kong, said David Webb, a
shareholder activist in the city.
"The SFC will need to show that he knew what he was saying was
false or was reckless or negligent," Mr. Webb said.
In the meantime, the regulator's move may have a chilling impact
on short sellers or publishers of independent research that is
critical of companies, Mr. Webb added.
At the time of the Citron report, research analysts at several
brokerages defended Evergrande and the company itself released a
statement highlighting its backing from banks. In a statement
released in June 2012 titled "Eight Famous Investment Banks Support
Evergrande to Dispel Rumors Spread by A Short Seller," Evergrande
said the efforts by these firms helped stabilize its stock and
restore market confidence.
The move by the SFC comes as the regulator beefs up its
investigations staff and pursues cases against brokers and
investors involved in insider trading. The watchdog has also rolled
out a new listing regime, which holds underwriters of new share
offerings criminally liable in the event they knowingly mislead
investors.
Guangzhou-based Evergrande owns a successful soccer team and has
recently been diversifying beyond real estate. In November, it
bought a stake in a Hong Kong-based magazine publisher, adding to
interests in solar energy and bottled water. Analysts, including
Moody's Investors Service, have flagged concerns about the property
developer's high debt levels and a large inventory of
apartments.
In August, the company said net profit rose 46% to 9.49 billion
yuan (US$1.5 billion) in the six months to the end of June compared
with the same period a year earlier.
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