I have previously expressed my highly negative opinion about company executives that informally engage with shareholders through “permitted” 3rd party communications on trading platforms such as HotCopper and Sharetrader Forum. By this, I mean when an (apparently) influential shareholder reaches out to a senior executive, possibly even the CEO or Chairman (in the case of Novogen, it is one and the same) with a series of questions to which a response is received and the “answers” posted with permission on a trading platform.
There are a number of reasons why I despise this kind of irresponsible, cowboy-ish behaviour:
1) Such behaviour sails perilously close to the wind in terms of ASX listing rules. In my opinion, the basic s3.1 continuous disclosure requirements are problematic in this scenario because the concentration and timbre of information, often combined with the glowing sentiments of the “poster” (I’ll get to that in a second) can significantly amplify or distort information that may be contrary or interpretatively different to prior formal disclosures from the company and, as such, a “reasonable person” (this is mostly a low bar on HotCopper) might view the disclosure as having a “material effect”. Particularly if such a disclosure is perceived as receiving the back-up and support of shareholders that are clearly influential enough to elicit such information from a company.
2) Breach of s3.17. In my opinion, there is a potential s3.17 issue when an executive/officer/director of a company discloses information to a shareholder via an email exchange, and this document is then propagated to a shareholder class by a “poster” (i.e. on HotCopper, to ordinary shareholders) with the actual or implied consent of the executive. In other words, the poster is effectively acting in an agency capacity to the company and is conducting an act of information dissemination to ordinary shareholders on the company’s behalf. In such a scenario, it is the company’s regulatory responsibility to provide this communication to the ASX and comply with any rules associated with a disclosure. In the case of Graham Kelly’s most recent engagement in this kind of appalling behaviour, it is even worse – he has allegedly asked a member of the HotCopper forum to serve as an information dissemination channel between shareholders and the company, further cementing the perception (in my view) that a particular shareholder is acting in an agency capacity.
3) The editorial privilege of the “poster” is entirely unregulated by the company. Readers of detailed information that is allegedly passed on from a company executive (with “permission”) have no way of knowing whether the information provided is actual, adulterated or modified, or even embellished in some material way. Moreover it is posted by someone anonymously with no accountability to readers. In fact, in my opinion, it doesn’t even really matter whether the information is transcribed verbatim or not from an email or document exchange, there is effectively an augmentation by virtue of the fact that it is posted by a shareholder with sufficient clout to garner a detailed and slightly sycophantic response from a busy CEO, and who has disclosed that they hold a position/sentiment in the company. If the information provided is designed to propagate a positive sentiment and the poster is a shareholder (possibly even with a “buy” sentiment) this is a massive conflict of interest.
4) Personal opinions can be enunciated without clarity or consequence. When an executive, officer or director of a publicly-traded company makes a formal statement, they are always made on the basis that the individual is representing the company as a legal personality, and it is an approved statement. When a CEO or Chairman makes a statement that is his/her own opinion, and not that of the company, it is standard practice for this to be clarified. In the case of posts made “on behalf” of the company, personalised sentiments – e.g. “Graham believes that what Novogen is doing is going to be transformative in medicine”, while possibly not inconsistent with the overall position of the company, is a personal statement. Such personalised statements are highly emotive and, when combined with informally disclosed but detailed information, have the potential to be inappropriate at best, and misleading at worst.
5) A trading platform does not represent a total share class. It is extremely bad form to release information to a class of shareholders, but to do so in a way where the class – as a whole – doesn’t have the equal opportunity (time, visibility, access) to process the information and determine whether there is market impact. At one extreme, this could be interpreted as an act of shareholder favouritism/oppression (depending on who gets the information and who doesn’t). At another extreme – from ASIC’s vantage – it could be interpreted as failing to execute on the appropriate disclosure rules to enable the market to uniformly determine the impact of the information (formal and correctly timed disclosures, use of trading halts, etc.).
6) No “safe harbour” for forward looking statements. Such disclosures don’t normally contain the typical investor “safe harbour” disclaimer that makes it clear that the information is forward-looking or speculative. Such disclaimers are not merely for the purpose of “covering the ass” of a company, it is also to inform shareholders of the risks and uncertainty of interpreting publicly disseminated information about securities when making personal investment decisions. This means that potentially, if someone detrimentally relies on that information, both the company and the “authorised person” (i.e. the poster acting in an agency capacity) put themselves at risk by not adhering to best practice.
The bottom line is this. If you are not a shareholder but you are thinking about investing in companies that engage in this kind of behaviour, you should be extremely wary and it should impact your perception of the quality and relative risk of the company, on top of all other factors under consideration. If you are a shareholder, you should be royally pissed-off that an executive of your company takes these kinds of unnecessary risks. It’s only going to take one lawsuit and an insurance firm to decide that they are not going to pay out on a D&O insurance claim, and you are going to see shareholders get burnt.
Now let’s get to Novogen specifically.
All I can say is WOW. I have never seen such blatant and tasteless collusion to manipulate shareholder perception. The most recent example is truly stunning and I intend to review the troublesome claims. More to follow…
Photo Credit : FIFA (www.fifa.com). Also a dodgy organisation.