IT IS eight days since a director of no fewer than five London-listed companies was judged to be an insider trader by the Financial Services Authority and fined £25,000, the largest-ever personal fine for market abuse. The FSA found that in March Jo Malins, a well known figure in the close-knit community of small mining companies, twice deliberately bought shares in his employer, Cambrian Mining, of which he was finance director, just hours before it was due to make positive announcements that he knew were likely to boost the share price. He consequently made a paper profit of £6,400.
Mr Malins has done the decent thing (or more likely had the loaded revolver shoved into his unwilling hands) and resigned from the boards of two of those companies, Asia Energy and Cambrian Oil & Gas. He has also been punished, stripped of Cambrian Mining share options that were worth £69,000.
But a week on, he remains on the boards of Cambrian Mining, where the board declined his offer to resign, and two other AIM-listed minnows, Zareba and Mincorp Petroleum, of which he is chairman.
It will be interesting to see whether the London Stock Exchange, which regulates AIM, will allow this state of affairs to continue. Mr Malins, 58 and an experienced private investor and company director, must have known he was breaking the rules. And if he had thought it through, he would have realised he was cheating fellow Cambrian shareholders by buying from them when he knew the price was about to rise.
The LSE has to decide whether he is suitable to remain on the boards of three public companies. To give him his due, he made no attempt to disguise his trades and he co-operated with the FSA to the extent that he voluntarily attended two interviews, albeit giving “inconsistent explanations” for his conduct. The LSE has considerable powers, which it can bring to bear on AIM-listed companies through their “nomads”, nominated advisers. It can publicly censure them, fine them or even ban them from conducting future floats. The nomads to Cambrian Mining, Zareba and Mincorp are respectively Williams de Broë, Smith & Williamson and Nabarro Wells.
London has a serious insider dealing problem. Rare is the bid that lands completely unexpectedly. Most offers are presaged by suspiciously high dealing volumes and a tell-tale run-up in the share price.
This is damaging to the integrity and reputation of the market. Outside investors can have no confidence they are trading on a level playing field with directors and company advisers when this happens so routinely.
AIM, in addition, is facing what is likely to be a difficult year for its image. After the flood of new arrivals on the junior market — nearly 500 floated on AIM this year, raising £6 billion — it is unavoidable that a few bad apples will have got through due diligence. There are almost certain to be a number of AIM failures in the coming months. Add in the apparent fraud at AIM-listed Langbar International, where £365 million has mysteriously gone missing, and the market — a huge success in many ways — is going to be under scrutiny as never before.
All the more reason then to respond robustly and quickly when confronted with a clear-cut case of abuse. So far, however, none of the nomads has seen fit either to insist that Mr Malins immediately steps down as a director or to resign from their client. It is Christmas and senior people are away. These are difficult, awkward decisions. But every day that Mr Malins remains on his three boards risks sending the signal that the LSE doesn’t really take insider dealing seriously.
Nosey uncle
AMERICAN regulators are starting to take a keen, and not always welcome, interest in British firms. The US Securities & Exchange Commission has already angered some London-based hedge fund managers, by insisting that their registration with our own Financial Services Authority is not enough. If they have more than 14 US clients, they must register with the SEC and submit if necessary to awkward questions and even surprise visits.
Now British accounting firms are also discovering the long arm of Uncle Sam. Under new powers introduced by the Sarbanes-Oxley legislation, inspectors from the US Public Accounting Oversight Board have put the work of BDO Stoy Hayward under the microscope and scrutinised the firm’s procedures and quality control.
The compliance costs of doing business in the States are rapidly rising. But it is a market that few can afford to shun.
Will US face a few home truths?
These are unusual times in the US bond market. For the first time in five years, yields on ten-year US Treasuries this week dropped below yields on two-year Treasuries. In the jargon of the trade, the yield curve had become inverted. Normally, investors demand a premium for investing in longer-dated bonds. Not now. An inverted yield curve — which suggests that investors expect short-term interest rates to fall — frequently has presaged a recession. Merrill Lynch describes the yield curve as “perhaps the best economic forecaster of all”.
So should we be worried? Apparently no, or at least not yet. Consumer confidence is actually strengthening. It’s hard to find anyone predicting that America will suffer anything worse than a mere slowdown next year. They argue that the low yields on long bonds are due to technical factors. Pension funds are aggressively chasing long-dated bonds as they try to match assets to long-distant liabilities. Companies are awash with cash, reducing their bond issuance and forcing fixed income investors to buy government bonds instead.
The one unknown, which could tip America into a harsher downturn or recession, is the housing market. Just like here, Americans have been financing their spending by borrowing against the rising value of their homes. Mortgage equity withdrawal has been running at an unsustainable 6-7 per cent of after-tax disposable incomes. Homes are increasingly unaffordable. Buyers are resorting to interest-only loans. The backlog of unsold homes is at a nine-year high. If house prices fall sharply in the United States next year, all bets are off.
Mutual friends
ASTONISHING, but true. It was almost impossible to lose money in mutual funds in 2005. Of 1,709 UK unit trusts and other funds, just nine produced negative returns. Specialist funds for Japan, Latin America and energy delivered stellar returns, while even most bond funds were in positive territory despite a tough year. Alas, small punters weren’t there to enjoy the ride. A piddly net £4.9 billion was invested in funds in 2004 in time to enjoy the ride — less than a third of the money that piled in during the boom year of 2000 and shrivelled.
