Thursday, 26 June 2014

ClearView Wealth abuses share buybacks to distort market pricing

In theory, share buybacks create value for shareholders by reducing number of shares outstanding and thus increasing cash flows, earnings and dividends per share. Such a theoretical value-adding buyback involves companies buying their shares at the lowest price attainable to achieve a long-term reduction in shares outstanding. In reality, this is almost never the case. "Increased EPS" is instead used a flimsy pretense to justify buybacks that are performed to directly move share prices. As an entirely accepted commonplace occurrence, criminal directors ramp "market" prices on which executive bonuses and options are awarded.

In Australia, companies have predictably taken this to ludicrous lengths. Criminal directors use share buybacks to ramp their price to predetermined and preannounced levels, breaching fiduciary duty by not seeking the lowest price possible. Companies alternate share issuing with share buybacks, with no reduction in shares outstanding achieved, or issue even more shares than they buy back. Companies will even perform share buybacks and share issuance at the same time, unequivocally admitting they are attempting securities fraud. Euphemisms such as "supporting the share" and "capital management" are commonly used for this securities fraud. In one of the most blatant cases of such fraud, ClearView Wealth Limited (CVW.AX) revealed a capital raising and buyback in the very same ASX announcement.

ClearView openly admitted it was going to attempt securities fraud, in a public announcement, and then proceeded to do so. ASIC of course did nothing whatsoever about this, in line with its zero enforcement policy. When companies perform buybacks explicitly to move market prices, due to the directors' "belief" that the share is undervalued, there is absolutely no justification for this in economic theory, it is open fraud. According to standard finance textbooks, what ClearView did is known as "share manipulation".

But how can Australian regulators, financial media and analysts condone companies explicitly admitting the deliberate distortion of market pricing? Simple. The dregulators, presstitutes and analysts simple assume market efficiency, that prices by definition are unramped and fair, and that higher prices thus always are better. According to ASIC, due to market efficiency share prices cannot be ramped, and so ASIC needs take no action when share prices are ramped.

Criminal listed investment companies commonly announce buybacks explicitly to ramp share prices to parity with NTA (or even beyond). Due to costs, the fair going concern value of listed investment vehicles is lower than NTA, and there is zero justification in economic theory for such vehicles to move their share price above their fair market value. Every director that has performed such a share buyback has not only breached their fiduciary duty to shareholders, but has also demonstrably distorted market prices and committed share manipulation.

If companies are allowed to set their own "market" prices with fraudulent buybacks, they no longer can be considered legitimate listed enterprises priced by a market, but are instead correctly referred to as listed securities frauds. The success of a company that sets its own "market" price is not determined by operational performance or fundamentals. Instead, the longevity of such a scam depends solely on the company's continual ability to raise capital to fund its price fixing. A listed company that sets its own "market" price is a ponzi.

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