By the middle of last year the Australian Securities and Investments Commission was on notice of serious issues that would become a factor in market ructions that have cost investors more than $16 billion this year.
In fact it was more than on notice. It knew about fund manager disquiet about poor disclosure surrounding stock lending that was occurring in last year's takeover-fuelled market.
It knew about the fundamental problem of short selling occurring without any disclosure to the market.
And it knew - or should have known - about the fundamentally risky business model pioneered by Tricom.
As the ASX 200 has plummeted - it is down over 17 per cent from the beginning of the financial year and almost 25 per cent from its peak in early November, representing $400 billion in investor wealth - the market has been in thrall to forces that have proved catastrophic for some shareholders.
Starting with RAMS last July, a series of highly geared companies have fallen over or stumbled in the past 12 months as the market adjusts to the effects of a credit crisis stemming from the US mortgage market.
Undisclosed short selling has been blamed in part for the downfall of companies including Centro, Allco, MFS (now known as Octaviar), ABC Learning and, most recently, Babcock & Brown and its satellites.
ASIC has calculated total losses from companies badly affected by the market disruption as $16.6 billion, before Babcock & Brown's fall from grace. This is greater than the $16.5 billion in losses that occurred when companies like Adsteam, Bond Corp, Qintex and Hooker Corp collapsed in 1987, although this year's losses represent a much smaller proportion of household wealth.
No one in the market is running a case that the Australian Securities and Investments Commission should prevent collapses.
But investors are entitled to question the statement by the ASIC chairman, Tony D'Aloisio, that they have benefited from "proper regulation" in relation to stock lending and its near neighbour, short selling.
Ian Ramsay, the director of the Centre for Corporate Law and Securities Regulation within the University of Melbourne says: "They are the market regulator. They need to be close to the market. They need to have good communication with participants in the market. As things like stock lending and margin lending increase, they need to be alert and proactive."
"I think it's fair comment that they have not been in that position." ON January 29 and January 30 stock lending and Tricom were at the heart of a market stoppage that lasted for two days when Tricom failed to settle a huge trade in shares. When Tricom tried to settle the trades, the stock was not available to settle - it was on loan.
Earlier in January Tricom had made a margin call over 20 million Allco shares. That is, Tricom exercised its control over about 6 per cent of the company's shares. This control had never been disclosed to the market.
Stock lending; control of huge blocs of shares that were inadequately disclosed to the market; Tricom and its business - all of these issues were the subject of ASIC inquiries last year.
Last year Tricom played a role in the takeover of the West Australian energy distribution business Alinta, building up a 6.6 per cent stake in April worth $434 million.
The notifications of this substantial holding included a disclosure of 10.5 million shares described as "borrow of securities in Alinta Ltd".
ASIC, to its credit, took notice of this. Or at least, it took notice of the then Australian Financial Review columnist John Durie, who lamented the unclear disclosure.
The resulting ASIC request for improved disclosure from Tricom resulted in something that would become very familiar from the Opes Prime collapse: a Global Master Securities Lending Agreement with Merrill Lynch.
Nor did ASIC rest there, it seems. Several days after Tricom's statement, Merrill Lynch made a statement to the ASX revealing it too was a substantial shareholder in Alinta, with more than 5 per cent of the company. And more than 80 per cent of its 25 million shares were related to stock loans.
Merrill Lynch would later emerge as a big lender to both Tricom and Opes Prime.
But there appears to have been little fundamental success within ASIC in coming to terms with the broader ramifications of issues that were very much alive last year.
It took rampant short-selling courtesy of huge amounts of stock lending for ASIC to take market-wide action on stock lending and disclosure. On March 6 it issued a statement headlined: "ASIC reminds market participants about stock lending disclosure obligations."
This year ASIC has also worked towards Corporations Act changes that address a definitional issue on short selling and prevents some of the rampant undisclosed short selling.
But, similarly, the issue of undisclosed short selling has been around for a long time. And the ASX raised it directly with ASIC last year. ASIC also looked directly at Tricom in the middle of last year.
This year's focus on Tricom led to the exposure of a business model built on loans from banks in which it pledged the stock of retail investors as security for these loans.
It was this new model that allowed it to rapidly build a margin loan book of $2.4 billion. But in a downturn the business model was found to be seriously wanting.
Tricom and its emulators - Opes Prime, Lift Capital and Chimaera Capital - have all been seriously damaged as the sharemarket turned down.
D'Aloisio has said it is not the regulator's responsibility to police business models. "To say that ASIC should have banned the business model is not credible," he said at the Securities and Derivatives Industry Association conference in Melbourne last month.
"ASIC simply does not have the power to dictate which business models companies choose to operate."
Fair enough. But ASIC issues the license for firms such as Tricom and Opes Prime. And, as such, it does have certain responsibilities.
A senior fund manager says: "In that situation you would have thought it would have been within the financial licence regulator's sphere of knowledge to understand what was going on in the stock lending businesses."
Nor was ASIC ignorant of what Tricom was up to, and not just because of its substantial stake in Alinta. There was plenty of market puzzlement as Tricom, a smallish stockbroker, cropped up as a $464 million substantial shareholder in Alinta.
The publicly available information on Tricom's growth in borrowings in the middle of last year was staggering, and there was at least one printed rumour after the sharemarket stumble last August that the broker was facing impending collapse.
ASIC also looked at Tricom because it followed up a report in the Herald about Tricom's Lance Rosenberg and Babcock & Brown's chief executive Phil Green speaking in the same teleconference to an Alinta shareholder during Babcock & Brown's takeover.
Another fund manager - and not a tiddler - says of ASIC's performance: "The problem with ASIC is they are full of people who don't have market savvy. You could have a nuclear bomb ticking in front of them and they would not even recognise it. You need someone there with market savvy who can smell these things out and say, OK, we're going to target that."
It is a view that is shared, in essence, in a survey released in April that was hardly glowing testimony about business views on ASIC's effectiveness.
The worst mark from business, out of 18 overall views on ASIC, was strong disagreement on the proposition: "Is good at identifying and dealing with emerging problems."
Consumers ranked ASIC last on the same statement out of 18 different statements. And ASIC staff ranked ASIC second last on the same statement, out of 18 statements.
To be fair, the survey was conducted after the market became aware of rampant short-selling that plagued Centro, Allco and MFS, and during the uncertainties created by Tricom. But it was conducted before the problems that emerged for ABC Learning, Opes Prime, Lift Capital and Chimaera Capital.
An apparent lack of market savvy. ASIC walking through Tricom last year.
A proper role in the supervision of the market? ASIC is beefing up its market know-how, partly in response to the stakeholder feedback within its strategic review released last month.
As a result, it is trying to get more people with market knowledge into ASIC, focusing on three key areas of market manipulation, insider trading and disclosure. It has also appointed a chief economist, an external advisory panel and introduced market-based teams to improve its ability to pick up issues ahead of time.
D'Aloisio says: "This is because confidence in the integrity of our markets is vital and our objective will be that, when tested in market downturn, not only will our regulatory system be seen as robust, but that ASIC is viewed as a first-rate regulator in handling issues which any downturn is likely to throw up."
This stance has been broadly welcomed.
"They have formed the crack squad to investigate market manipulation and insider trading under Belinda Gibson, [an ASIC commissioner]," says Dean Paatsch, the Asia-Pacific director of RiskMetrics. "I think that's a fantastic move and long overdue."
Erik Mather, the managing director of the corporate governance lobbyist Regnan, also welcomed the focus on improving market know-how. But he adds there is a need for the new hirees to "match the weight of the people they are trying to police".
There are also serious questions about how effectively ASIC has promoted its enforcement role, which has frequently been swathed in deep secrecy as it conducts its investigations.
Based on available information, 30 or so suspected insider trading cases have been referred to ASIC from ASX in each of the past three years. But of the 90-odd referrals, there have been about five successful criminal prosecutions for insider trading.
The former boss of markets supervision at the ASX, Jim Berry, first promoted the idea, in 2003, that the ASX insider-trading referrals be named as they are referred to ASIC.
"My belief is that it would serve the market well if we blandly stated there might have been manipulation," he told BRW in 2003. "If you traded in that security, wouldn't you be entitled to know that there was an inquiry going on?"
Berry, contacted for this story, said he holds to this view. Regnan's Mather adds: "What Jim Berry said we would agree with completely." RAMSAY welcomes the new focus on the market in particular, and the broader goals of ASIC's strategic review in general.
He rates ASIC as a good regulator that has shown signs of substantial improvement in grappling with previous shortcomings.
"There was a perception, if not a reality, that on some important matters ASIC was lacking important data and was not close enough to important developments.
"My assessment is there has been some very good, real progress, but a lot will turn on the quality of the people appointed."
