Short selling is a practice of selling shares in a company that you do not own, in the hope of buying them back later at a lower price. When the short selling is said to be “covered”, the seller has already borrowed the shares from someone who does hold them, normally a bank or a broker with the agreement that the shares will be paid back on demand. “Naked” short selling is when no such loan has been organised: the whole strategy relies on being able to produce the shares by their later cheaper purchase.

Short selling occurs in a bear market where there are reasons to believe that stocks will fall in value soon. Putting large quantities on the market for sale will tend to depress the price anyway, but may, in a nervous market, begin a spate of selling of those shares. Indeed the short seller has an interest that that should happen. For this reason, short selling is viewed as destabilising, especially for companies that are experiencing difficulties, making the chance of recovery even smaller. Macquarie Bank is widely recognised to be suffering severe share price pressure at the moment partly attributed to short selling. (Business Spectator)

Others argue that short selling, both naked and covered, are normal practices on the market that help liquidity, particularly where shares are in short supply and drive down costs of dealing on the market by encouraging high volumes of trade.

Both the SEC and ASIC have introduced bans on short selling in the context of the current financial crisis. However, the introduction of the ban in Australia was quite patchy.

ASIC announced a temporary ban on naked short selling on all stocks on Friday, 19th September, to be put into effect on the following Monday. Short selling bans of financial stock had already been announced in US, UK and Ireland and in part ASIC wanted to avoid short sellers from those markets turning their attentions to Australia. Then, on Sunday, ASIC extended its ban to covered short sales as well. However, last minute re-jigging by ASIC, which caused the market to open almost an hour late on Monday, exempted covered short sales on hedge positions arranged before the 22nd. The bans for all stocks would be limited for 30 days, and indefinitely for financials.

ASIC's revisions of the ban attracted some criticism for delays, lack of clarity and for the inclusion of non-financials as well as covered short sales. Others have defended ASIC arguing that this is new territory and some tweaking would be necessary based on ongoing monitoring and discussions with market players. The bans both in Australia and overseas were followed by some recovery in the market, indicating that short selling was a contributor to falling prices, perhaps also a return of confidence to the market as a result of the measure. In the UK, for example, the FTSE 100 financials gained 8.8 per cent on the day of the introduction of the ban, which followed a four day 9.9 per cent fall. (FT)

Ethics?

What does all this have to do with ethics? Businesses are much more than entities traded on the market: they provide goods and services needed by society, they provide employment and through that sustain families. Destabilising them to make a, usually small, profit on a lower share price is putting considerable goods for a considerable number of people at risk for the sake of a small one. The rule of the 'greatest good for the greatest number' would argue that it is an unethical practice in ordinary circumstances, let alone ones where the risk is, as now, very great indeed.

A company needs to deal transparently with its shareholders, and needs to observe "appropriate" levels of disclosure to the market. Shareholders, like voters, can exercise their disapproval either at the ballot box or by selling up. Those in the market place who may enter into transactions with the company need to know what they are getting into before they make the decision. In all contexts, public and commercial, shareholders, voters and stake-holders, all deserve to be advised of decisions that are likely to expose them to serious risk of harm.

While most of these requirements are covered by various pieces of legislation, they fundamentally depend upon these ethical principles.

Do any of these ethical requirements, then, require a public regulator like ASIC to reveal why it has not employed a particular person?

Denise Brailey has a significant public profile in Western Australia where she has successfully identified shonky operators, especially in the real estate sector. As The Australian reports:

"In 2005, she provided ASIC with a list of 12 investment companies that had raised billions of dollars from "mum and dad" investors and which she believed were in serious danger of collapse. She dubbed them the "dirty dozen".

"Companies on that list included Fincorp, Westpoint, Australian Capital Reserve and Bridgecorp, all of which have subsequently collapsed owing investors hundreds of millions of dollars.

"Only in the wake of all those collapses has ASIC moved to overhaul disclosure rules in that sector." (The Australian)
She applied for a job as an investigator with ASIC but was not successful. Now, The Australian, her referees and she herself are implying that ASIC has not employed her because (one or all of the following):

• ASIC is not fulfilling its duty;
  
• ASIC is afraid of what she might uncover;
  
• ASIC is influenced by some third party that does not want to be investigated.

The argument then goes that, in the interests of public transparency, ASIC should declare why it has not given Ms. Brailey the job.

Clearly, not all things should be declared and, of those things that should, different people have different rights to information. For example, a business is not obliged to inform a competitor that some innovation it is about to implement is likely to harm the competitor's business in the near future, but it is required to inform that competitor if it is a neighbour and some experiment may occasion the loss of power or utilities to the neighbourhood.

A public regulator like ASIC should not reveal information relevant to an ongoing investigation since it may prejudice the investigation. Do the reasons for hiring and firing people, or not doing so, enter into the category of things that ASIC should reveal to the public, or to Ms. Brailey? If Ms. Brailey were employed by ASIC and it decides to fire her, it is a decision that causes her harm, she should be told why. But since the reason not to hire her does not harm her, other than by not conferring a benefit upon her, she has no right to that information on the basis of harm.

This leaves the public interest only. However, the public interest in the workings of ASIC are concerned with its use of resources and fulfilling its purpose. If it pursues an investigation concerning any company, publishing the reasons for doing so could easily prejudice the investigation: so not all information can be made available for public scrutiny because that would disable ASIC from fulfilling its purpose.

There are other sorts of information, or rather information gathering and publishing processes that should be excluded on similar grounds because the processes would be so resource intensive that they would also defeat the purpose of the regulator's existence. The benefit gained would be far smaller than the cost incurred. However, this does not mean that ASIC should not report on its activities, nor that there should be no oversight, especially of cases that have been completed. This reporting needs to be done in such a way that it does not cripple the efficient functioning of the regulator.

In part, the appropriate mechanism for reporting is concerned to whom the reporting is done. In a representative, rather than a participatory, democracy, the public elects representatives to do the work of government on their behalf. This representation normally includes the sorts of oversight of public bodies like ASIC. In Australia, it is performed by the Parliamentary Joint Committee on Corporations and Financial Services which publishes the results of its periodic inquiries (Australian Parliament).

Concerns about Ms. Brailey's employment application to ASIC may be made through that Committee.

ANZ, like any business, has a responsibility not to be involved, within limits, in business that damages people or treats them unfairly. OPES clients were not adequately aware that they had agreed to allow the broker to sign away the clients' ownership of their shares in the event that OPES failed to pay its loan. One of the reasons was that this was not a common practice and, for that same reason, alarm bells should have gone off at ANZ: there was a prima facie question in the transaction about proper consent.

ANZ subsequently began an inquiry into what happened. The new CEO, Mike Smith has now released some outcomes of that inquiry. He said, “while the OPES Prime collapse was not of ANZ's doing, it exposed serious cultural and ethical problems within the bank.” Among them were:

• engaging in business where the risks, including the reputation risks, were not well understood;
  
• the usual risk management and governance procedures were not in place;
  
• failure of oversight;
  
• senior managers failed “to join the dots”;
  failure to pass issues upwards towards the CEO. (ABC)
  
  As a result, a number of people have either been dismissed or convinced to leave the bank, including two members of the management board –Peter Hodgson & David Stephen. Others have taken pay cuts and some have had a “formal note” made on their employment records. The bank is also restructuring its management by significantly removing the middle managers, but this is a trend with most banks anyway (Business Day).
  
  The question is whether the bank is taking the problem seriously or is it another exercise in window dressing. The dismissals do include some very senior people. ANZ has also handed over its review to the regulator (APRA). The list of failings does ring true: there are some very similar items there to APRA's list in the NAB case.
  
  The bank has well-developed social and environmental responsibility policies and is taking steps to measure their effectiveness (ANZ). It has, albeit somewhat recently, signed up to the Equator Principles which are an international set of rules for guiding financial institutions in their lending practices (especially for projects in the developing world):
  
  “The Equator Principles Financial Institutions (EPFIs) have consequently adopted these Principles in order to ensure that the projects we finance are developed in a manner that is socially responsible and reflect sound environmental management practices. By doing so, negative impacts on project-affected ecosystems and communities should be avoided where possible, and if these impacts are unavoidable, they should be reduced, mitigated and/or compensated for appropriately.” (Equator Principles)
  
  So there is evidence of real concern for its ethical responsibilities.
  
  However, while the internal review has been handed over to APRA, only its findings and recommendations have been made public as, it seems, ANZ is preparing to fight its way through the courts against former OPES clients. A number of commentators consider that a head or two should roll from the Board. (Australian)
  
  It is well-known that lack of oversight and accountability is sometimes deliberately created in order to maintain “deniability” for those higher up in the organisation. It is important to have principles and clear procedures, but the only way to improve difficulties with accountability is to directly improve accountability.