Razorshort Capital LP: Oh hi, is this Harbinger?
Harbinger: This is they
RSC: Hi - I was just wondering if we could borrow a couple of shares.
H: Which ones?
RSC: The ones you have in Fortescue Metals Group
H: Ah yes. Fortescue Metals Group; in which we are the second largest shareholder and
RSC: Err.. yeh… whatever - so do we get them?
H: What do you want them for?
RSC: Um. To look at?
H: Ok, well as long as you give them back.
Harbinger, of course, ‘weren’t aware’ that their shares in Fortescue were being used to short the troubled Australian miner in which they are the second largest shareholder. Fortescue were, and on Monday released this to the Australian exchange:
Dear Sir
Fortescue Metals Group (”ASX:FMG” “Fortescue”) wishes to advise that it has been made aware that some 10% of the companies shares have been the subject of stock loans.
The stock loans were made by the owner’s custodian and the owner has since advised the company that it will immediately rectify the situation.
Fortescue Metals Group
The WSJ today reports that Harbinger were the guilty culprit:
Harbinger’s role is an irksome twist for both the company and the fund. It also coincides with heightened regulatory scrutiny of short sales in the U.S. and Australia. Corporate executives have lashed out at hedge funds that typically engage in these trades.
Unlike short-sellers, Harbinger has good reasons to root for Fortescue shares: the fund has been trying to exit its stake in the company before its investment gains are eroded further in possible future sell-offs. The hedge fund began accumulating that stake in 2004 through a privately structured convertible bond.
Harbinger’s excuse smacks somewhat of naivety. If Harbinger assented - even if by default - for stock it owned to be lent out, then surely it would have been collecting a small fee on the lending from its broker? If not, then that custodian has been taking big liberties.
There is also, of course, the chance that Harbinger knew full well what was going on. But then, why facilitate something which has been so damaging: Fortescue’s share price is down nearly 46 per cent since June. Harbinger have been in play since well before then.
You might have thought that such a big share price fall over the past two months was indeed enough reason for Fortescue’s management to be angry. But can shorters really be blamed? More straightforwardly, we’d suggest that - as with most miners - the share price had rather more to do with trends in global commodity prices:
