Stopping David Tweed

David Tweed, the notorious share raider has again made an approach to shareholders to purchase their shareholdings

I recently received an offer to buy some David Jones shares of mine – bought for the discount that I think they’re in the process of phasing out. The offer is to buy the shares for $2.04 per share when their market value – at the time the letter was sent was $4.08.

All this is mentioned on the offer, so it’s not so bad. But David Tweed has been running this scam for over a decade. The offers are always relatively straightforward – he offers to buy from you at a huge discount – or sometimes at a premium – but he’ll pay you in instalments over years by which time he’s banked the excess money and he’s ahead.

Before the regulators got to him he didn’t have to set out the market price and he made some serious money. But then he was only ever catching out the old, the infirm and the unwary. So all these formal requirements – to mention the market price – to tell you “This is an important document that requires your immediate attention. Please seek independent financial or professional advice” don’t help much. Or they don’t help enough to make it not worth David Tweed’s while to do it.

It’s pretty amazing that our commitment to form is so strong.  We have laid the regulation on retail investment, and investment advice with a trowel. But just as we’ve driven investment ‘advisors’ (ie salespeople who sell investments on commission) mad with regulation, but not helped the consumers of their service to work out if they’re any good or not, so we’ve failed to stop David Tweed.

So let me get this straight, we set up all this stuff to protect vulnerable and gullible investors, but when something that comes along which could only possibly attract gullible investors, not only don’t we stop it, but we try to kill it with a thousand requirements that don’t really address the problem. Now I can see why one might want to argue for a more laissez faire approach. Certainly I don’t want to protect every nitwit from being parted with their money if it requires me to impose huge costs on others.

But this is not even a bona fide investment proposal. It is an attempt to take advantage of others. It is of course possible that the service could be useful – to those who have small holdings who don’t want the hassle of going through a broker. But in that case the letter should say that quite simply. So I’m wondering if there cannot be some general duty of straightforwardness in such matters.

We could require of all such offers some basic level of bona fides. If we’re worried about the potential economic good it could do – sweeping up small holdings from people who might want to avoid the hassle of going through a broker – the document inviting action should be very simple, advising the recipient of the letter that they will lose a substantial amount of value and advising them not to proceed with the offer unless they have some good reason to do so.

Right now we seem to have the worst of all worlds, lots of regulation, but regulation clearly incapable of putting to an end one of the simplest, most long standing and well known scams around.

Sigh . . .

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rog
rog
13 years ago

I dont understand how he is a scam – he is upfront and suits some people.

You cant regulate against dickheads

drzax
13 years ago

Ok, wait, wait, wait…so this guy offers to buy your shares for half what they’re worth (or some other deep discount) and then also goes ahead and says “I’ll pay you later” – and then on top of that states all this in the copy of the offer letter?

That’s not a scam. There simply must be more too it because surely even bewildered 85 year olds would spot the problems with that deal. I certainly can imagine this being presented in a way that makes it out as some kind of opportunity (which it’s obviously not, in any way), maybe with a good logical falacy; in which case it should be illegal. I simply can’t believe he gets takers.

Bingo Bango Boingo
Bingo Bango Boingo
13 years ago

It works, drzax. There isn’t much more to it. As Nick says, it isn’t dickheads so much as it is the elderly whose diminished mental capacities don’t permit a genuine consideration of the offer documents.

Here’s my scheme: give the Federal Court, on the application of ASIC, the power to prohibit a person from offering to acquire securities without the consent of ASIC. The Court’s discretion would be limited so that it could not disqualify a person unless it was satisfied that the person has previously offered to acquire securities (a) in bad faith and (b) on terms that are unconventional or uncommercial according to the standards of a reasonable holder of the securities. A further rule would be that ASIC must not give its consent unless it is satisfied that the offer is being made on conventional/commercial terms.

A brilliant plan with absolutely no holes, I’m sure.

BBB

NPOV
NPOV
13 years ago

drzax, remember that it’s targeted primarily at people who received their shares without having to pay for them (through demutualisations etc.)

Tel_
Tel_
13 years ago

The other day I was climbing a ladder and noticed a sign on the ladder that said, “standing above this step may cause you to lose your balance”. I wonder if that provides a guarantee that it is impossible to fall off any lower step? Obviously someone long ago sued someone else for falling off the ladder now we have really dumb legal requirements that serve no purpose. That’s what happens when you try to use regulation to protect people from their own mistakes.

The answer to David Tweed is obviously David Tweed, his offer is an honest offer, and he lives up to his promise… that already puts him well ahead of anyone sitting in parliament right now. If you don’t think his offer is generous enough, then don’t take it.

Every day I see business people dressed in expensive suits, and I know those suits are made in China for a frighteningly low price and yet there are still people expecting me to make a public demonstration of stupidity by wearing one. Go figure. If the leaders of Australian business want to dump their spare cash into clothing and import markup, they are entitled. If granny wants to dump her shares into David Tweed, then she is entitled. The courts have enough work to do and my freedom is tenuous as is without more people finding excuses to take it away.

NPOV
NPOV
13 years ago

“Thats what happens when you try to use regulation to protect people from their own mistakes.”

Too right. Let’s repeal seat-belt laws, allow unlimited speeding on roads with no other traffic, and allow the unregulated purchase and consumption of all drugs.
Anyone that dies only have themselves to blame.

Look, ridiculous as a “standing above this step” message might be, if it’s saved a single life, it’s worth having it. Humans do make stupid and fatal mistakes, sometimes simply because our brains aren’t really adapted to living in a modern world of ladders and fast cars. If some simple regulations can reduce the degree to which they make such mistakes, what possible argument is there against them?
If you can demonstrate that specific regulations aren’t working, or are counterproductive, then fine, repeal or change them. But it hardly proves that regulations whose primary aim is to protect us from our own fallibility are inherently bad.

rog
rog
13 years ago

Most elderly people are not able to fully comprehend the intricacies of the modern telephone let alone finances – that why they give power of attorney.

You cant legislate against every contingency, the law books themselves would constitute a health hazard

hrgh
hrgh
13 years ago

I was served at Australia Post this morning by an elderly lady who had trouble turning on the handset to scan a barcode (press the red button on top). She then became flustered as she had trouble scanning the barcode (shine the red laser over the barcode).

I imagine there to be many women of her generation who have been left assets by a deceased partner, having left “all the money stuff” to their partners in the past. Some might argue that it’s their own fault that they didn’t develop financial literacy earlier in life. I argue that it doesn’t matter, some people (through their own choices or through circumstances beyond their control) have diminished financial literacy or diminished decision making capacity.

David Tweed might make a legitimate offer to informed citizens, but if he is able to intentionally exploit those people who are not fully informed or capable then freedom of choice has failed those people. Regulation becomes necessary.

NPOV
NPOV
13 years ago

..or at least, “doesn’t do more harm than good”. All legislation has some negative as well as positive effect. No doubt there are cases where seat-belts have killed people. But they’ve saved far more.

Don Arthur
Don Arthur
13 years ago

What about things like lotteries and scratchies. Don’t these also take advantage of people who lack the ability to act in their own financial interest?

Mark Heydon
Mark Heydon
13 years ago

“Look, ridiculous as a standing above this step message might be, if its saved a single life, its worth having it.”

This is not self evidently true. What if saving that single life costs $10m? $100m? $1bn?
Despite the cries from the great unwashed, their political “leaders” and tabloid cheerleaders, there needs to be some cost/benefit prioritisation of regulation. Saving the proverbial “single life” is not worth any expense.

Tel_
Tel_
13 years ago

allow the unregulated purchase and consumption of all drugs.

Moderate citizens need to learn to stand up to both Baptists and Bootleggers. Our current drug laws are making a few evil people very rich, and making a lot of good people suffer.

All legislation has some negative as well as positive effect.

Wrong. All legislation has a large negative effect, as well as whatever positive effect it might have and I’ll run down the list:

* documentation — people to write the legislation, then take notes at every court case involving that legislation, then train the legal staff to deal with that legislation, and train the police to recognise whatever important points are involved, and regular review committees, and information leaflets/websites so the general public might have some clue what the legislation it, and private solicitors to consult with business and explain how to live with this legislation, and probably more

* enforcement — police need more time, more money and often additional powers to handle whatever might be the special thing that is so important this week. It is inevitable that police are imperfect and use their new powers where convenient rather than where strictly proper. It is also inevitable that the use of force leads to destructive outcomes. We then need brigades of special inspectors to check through private material, make sure all the regulations are followed, and with every position of trust there will be someone who can’t really be trusted and then we need supervisors (even more entrusted) to keep track of those people.

* chilling effect — people give up keeping track of all the paperwork and figure it just isn’t worth doing an activity anymore because they just can’t follow all the stupid rules. Most people don’t even know which regulations they are breaking because the rules constantly change. I’m sure that our current set of road rules have reached the point where the primary aim is to discourage as many people from private transport as possible. When you have a no-right-turn sign with a small thesis in fineprint attached at the bottom, something surely has gone wrong.

* social destruction — until we can learn to live and let live (regardless of our neighbour’s lifestyle) we can never trust one another so, people find it safer just to stay isolated as much as possible. This was the situation for gay people for many centuries and still is in large parts of the world. You can’t have freedom without tolerance.

* entrenchment — once a department is created to supervise a regulation, the primary purpose of that department is always to keep itself in a job.

* auctioning extremism — politician #1 says, “we must regulate”, #2 says, “I’m better, I regulate more”, #3 says “zero tolerance”, #4 says, “they are not human”. You would think it was a huge step between #1 and #4, but sadly it happens easily.

Please note, I’m not opposed to all regulation. But I do think there has to be very good evidence that the regulation is useful before it is brought into law. When anyone says, “what harm can it do?” the answers is always, “lots”.

rog
rog
13 years ago

Somehow Nick Gruen confused my comment on Tweed (dickhead) with his Mum – which just goes to show how wars are started.

NPOV
NPOV
13 years ago

“Our current drug laws are making a few evil people very rich”

Tel, no question from me on that one. But a completely unregulated drug industry, where anyone was allowed to manufacture and consume whatever substance they wanted would almost certainly be worse than what we have now.

Mark, I’m all for cost-benefit analysis of regulation. But who are you to say what a single life is worth? What matters is whether that $10m (or whatever) could have been used to save more lives if spent elsewhere.

NPOV
NPOV
13 years ago

Indeed, on the subject of drugs, I’d argue that illegal drugs currently do so much damage partly the actual market that exists in them is completely unregulated.

denningesque
13 years ago

David Tweed made a real killing after the spate of demutualisations in the 90s and the early part of this decade. People, mostly average punters, who were lifetime members of NRMA etc suddenly got a packet of shares. They didn’t know what to do with them, probably didn’t know what they meant or their value. Everyone is entitled to access a share register, particuarly if they have a shareholding. This is what Tweed did. And he mailed out his offers.
I find him reprehensible but so what. He did nothing illegal. There were a spate of actions he brought in the Magistrates and Supreme Court to enforce the sale of the shares. Sometimes he was sued over these transactions. He won them, even if the beak found for him through gritted teeth. And why not. The law of contract is fairly simple and straightforward.
The laws on disclosure were changed and ASIC watched him like a hawk. I think he had a relatively minor problem in a Federal Court matter but by and large he adapted and continued in his ways. Again, so what. He offered a bad bargain true, but was there coercion? No. Was there a misrepresentation. No. Was there unconscionable conduct (in the legal sense) of course not. Why? Because he operates as a stock “market” should operate. He offers to buy shares for a value. The stock owner either agrees or disagrees to sell the shares for that sum. There is no law I know of that requires a person to sell a share for the listed price or its equivalent value. If he or she (whether 18 or 85) is not someone under a disability (as the law recognises it) agrees there is a binding contract and the shares are transferred to Tweed. He can do that by mail, on a street corner or through a stock brocker. He can do it from a speeding train if he wants to. As long as the elements are there the bargain is made and there is a binding contract.
All this hand wringing begs the usual regulatory questions, what is he to disclose. If he is required to set out in full detail what he will pay and when and why this represents less than the book value then he will probably do it in a 10 page screed. And the punter who receives this offering will STILL NOT read it. If the regulators want him to offer a fair value for the shares then the lawyers will have a field day. If the regulators want everyone to sell only for the list price then the market will just seize up. Deals are done for shares where the list price of the share is only a small component of the transaction.
Tweed is, to the use the descriptor of Tiny Rowlands, the unacceptable face fo capitalism. He is a moral vacuum and is a market scavenger. But trying to stamp out his, lets remember, legal practices wouldn’t be worth the price it places on everyone else.

Bingo Bango Boingo
Bingo Bango Boingo
13 years ago

denningesque, if you can’t think up a regime that gets rid of the David Tweeds but allows the rest of the market to function as freely as it does now, might I suggest you just haven’t thought very hard about it? The fact that you have identified disclosure as the relevant regulatory question suggests that you really haven’t understood the problem at all.

Nick is quite right. The tendency of practising commercial lawyers to forget that there is such a thing as a bad law, or that there may be a need for a new good law, is disturbing. I know it is fashionable in some circles to pretend from time to time that there is no moral basis for commercial law, but only the truly clueless actually believe it.

Finally, it’s ironic that you’ve chosen the moniker ‘denningesque’. I assume it’s a little joke on your part. Lord Denning rarely let the terms of the then-existing common law get in the way of doing justice.

BBB

denningesque
13 years ago

NG, yes I am a lawyer so yes I have done you the favour of showing you my sociopath – ology. You should know that. You have been to my web site. Yes my moniker is a nod to the great Master of the Rolls. It was hardly a big secret. And yes he was a friend of the common man/woman and he could be a terror on barristers, or so I have read, who maundered on (much like I was – I get it). And he changed the law, sometime bending it out of recognition. Often for the better. But even he didn’t didn’t go so far as change the basic law of contract.
The points I made in my “central casting” monologue is that the proposed cure for Tweed’s behaviour will have a worse effect on everyone else. NG and BBB are throwing the onus onto me to think up a cure. You have the complaint, you provide the prescription. It is not that it hasn’t been looked at before by many over a long time. I made the point that there are real problems to trying to do this. That is the point NG and BBB didn’t address. Contract law is not “a bad law” as such. It is about as basic as it gets. It is at the heart of commerce.
I mean, what do you want from ASIC? The Tweed law whereby any offer he makes has to be vetted by ASIC or the Federal Court? OK, then add a few (read many) million to the budget – assuming the law is constitutional which I doubt. The changes made at the suggestion of ASIC does require further transparency. That was politically driven but I have no real problems with that. The effect of the law was to require more information – ie more transparency. So Tweed and others provide that additional material which does help the recipient. So what. There will be always punters who will ignore the information under their nose or the advice they receive. Don’t forget that only a small minority of offerees responded to Tweed’s letters. Maybe a law to stop trading in shares except through a stock broker. Except that Tweed got a licence. Or lets have ASIC review all trades to see if they are fair.
A classic example of the problem of trying to save people from themselves is when the Queensland police contacted people last year who were sending money to Nigeria in response to the famous email scams. Some of the punters refused to believe they were being scammed and a few were angry, accusing the police of interfering and “ruining” their chance to get the $20,000,000 on offer. So what law do we enact to stop these people from parting from their hard earned. Perhaps a ban on transferring money overseas. That will hurt a lot of families of immigrants who rely on remittances. I am all for prosecuting the fraudster but if someone doesn’t listen to reason what do you do.
The doctrine of equity deals with those very unfair situations where one party is disadvantaged, like someone under duress or where one party lies or hides relevant information. All of that can void a contract. And that is good and I am all for law reform as long as it achieves a benefit and doesn’t create another lot of problems. I think the Fair Trading and Trade Practices Acts are good ways of regulating behaviour. But none of that really applies here. You seem to want a law to ensure that “bad” behaviour is not rewarded. So define “bad” behaviour that can be applied in a rational way. Perhaps a register of malefactors. Yeah right!
Perhaps a good first step was to restrict of the defamation laws. And encourage publicity of Tweeds behaviour.

denningesque
13 years ago

NG, the whole and sole purpose of the Nigerian scam example is that sometimes no matter what the authorities do some, and only some, people act against their best interests (for whatever reason). I am all for prosecuting fraud but by any legal or logical definition Tweed’s operation is not fraudulent. I am not sure I completely understand your proposal but I suspect it is to prohibit a bad bargain by the offeree (apologees if I got it wrong). Your definition of bona fides is so wide that it would bring on tears of joy to most lawyers. An unbelievably strong string to a defendant’s bow …. in all sorts of cases. I don’t know whether the average small business owner would be popping the champagne corks though.
There is already a common law prohibition against misrepresentation and section 52 of the Trade Practices Act prohibits misleading and deceptive conduct. I am clearly not winning any converts so I’m not going to till the same old ground other than to say there is a reason why governments might loath the Tweeds of the world but are not prepared to regulate them out business. They don’t want to catch the multitude of quite “innocent” transactions in their wake. If Tweed is forced to go to court I very much doubt that would stop him. His legal fees are probably tax deductible.
I am pretty sure Tweed was not in operation in the 70s ( I think he would have been in school then) and I doubt he was in action in the 80s. From what I hear, the law of diminishing returns is applying to his operations. Notoriety will do that. Here at least radio talk back goes nuts when a Tweed letter goes out. He may very well get Granny’s 500 shares for a song. He might also get a businessman’s 500 shares who doesn’t properly pay attention (less likely of course). I don’t want to beat up on the Granny’s of the world…. but…… we all have to take responsibility. Unfashionable and unpopular but true. Put another way don’t expect any government of whatever persuasion to throw a regulatory blanket over share purchases.
My last hurrah. You are in your trench and I am in mine. Fine words (or even mine) won’t change anyone’s position.

Tel_
Tel_
13 years ago

But a completely unregulated drug industry, where anyone was allowed to manufacture and consume whatever substance they wanted would almost certainly be worse than what we have now.

Well I happen to disagree and I think you will find that since drug prohibition is a relatively recent legal invention, something like 95% of human history supports my side of the argument, and the remaining 5% of modern times is arguable.

By the way, before everyone jumps on denningesque for being a lawyer, please remember that an excess of regulation (especially badly drafted regulation) is guaranteed to boost demand for the legal industry so, denningesque is doing his best to cut his own wages here.

Tweeds success is based on grannie whos inherited 500 Natonal Mutual shares picking up her mail, reading something that baffles her and figuring shed better sign the form.

If we didn’t have so many stupid regulations constantly bullying people into filling out useless paperwork then granny wouldn’t feel that signing random contracts was normal. People have become sheep because they have lived under a system that treats them like sheep, rewards blind obedience, and has ways of punishing those who would question authority.

hrgh
hrgh
13 years ago

“What about things like lotteries and scratchies. Dont these also take advantage of people who lack the ability to act in their own financial interest?”

The intention of David Tweed is to deceive people out of their money. It is targeted to those unable to make an informed decision.

The intention of a scratchy is not deception. It is targeted those able to make informed decisions.

denningesque
13 years ago

There are huge problems in regulating to your desired result NG. There is a couple of ways to do it (within the parameters you have set out). The Corporations Act would need to be amended so that ASIC has an administrative function. Presumably that would require the offer to be approved before it is sent out. How wide do you draft the law? You can’t amend the law to specify it applies to a particular named person. It is appalling on so many levels. I don’t think the Federal Government has done it or would even contemplate doing it. On top of that it is easily evaded. Someone else will do it. Even if you listed those people through regulation it would require constant updating as Tweed works through nominees.
The amendment would need to relate to a particular action or service. Presumably the action/service would be an offer to purchase shares or an offer to a particular class of individuals. Either or both options would catch the hundreds if not thousands of offers made by legit companies making take over bids for a sum of money or a share swap offer (or a combination). So is ASIC to view the offer and go through a mountain of proposals so that it can block Tweed’s proposal? The problem is that it is very difficult to legislatively “weed out” Tweed type proposals from all others. Your proposal is not the same as banning pyramid schemes, which are banned, because that form of scam can be defined and proved. You can’t sensibly legislate a “trickery” or a “fairness” test. Is the test to be a ridiculously low offer for shares. How do you define that legislatively? Do you say an offer 10 or 30% less than the market value falls within this category. So what about offers that are part share swap and part cash. Sometimes shares in a small public company will be sold for a lot less than the market value if there are other benefits to the shareholders (seats on boards etc..). In today’s environment where shares are on a roller coaster, mostly heading southward the offer made today might be on the money when considered by ASIC. How do you incorporate a bona fide test? How do you objectively determine what is bona fide and what is not in this type of situation? As I said earlier that sort of a test would give small business a major headache (& not manna from heaven). It could easily be used against small business owners expanding by taking over other companies in financial difficulties. Against my interest it would give a lot of lawyers a lot of work. For what positive purpose though. ASIC would not want to have its officers jump the box in a court review to give evidence of how they determined the offer was not bona fide. I know that the average ASIC officer would rather have his/her front teeth knocked out in a serious car accident than give evidence under oath and be cross examined.
What time frame would be applicable? It has to be some reasonable time frame. That means more resources (and pressure) for ASIC. As I said earlier, hundreds of thousands if not millions into its budget. Regulators hate being gatekeepers. They much prefer to oversee and prosecute when they find a breach or one is brought to their attention. Apart from the costs involved there will always be line ball decisions. ASIC would be exposed if it gets it wrong. ASIC’s decision, even if described as administrative, would be subject to judicial review. ASIC, much like any party to litigation, hates losing. If it loses it pays the winners costs.
If the primary intention of the regulation is to frustrate Tweed and his ilk that would offend against public policy. The parliamentary draftsman would have a fit. The most likely by product of this regulation would be to slow down the legitimate trade in shares and run up costs across the board.
The above is jsut a few of the more obvious reasons why no government Federal or State, ALP or Liberal, have ever contemplated going down this path.
On another level every citizen has to be responsible. HRGH says “The intention of David Tweed is to deceive people.” How do you prove Tweed’s intention from a letter? How do you show to a judge’s satisfaction that it is deceit? How do you show it is “targeted” to those unable to make an informed decision. How do you prove those recipients are unable to make what is described as an “informed decision”. What constitutes an informed decision? Just being old is not enough. Lacking worldly experience hardly takes things further. Moral outrage is one thing, regulating then enforcing it is a horse of an entirely different colour. I am pretty sure Tweed sends his offers to everyone on the share register. I know what side of the argument gets the rough end of the pineapple.

Tel_
Tel_
13 years ago

The offer cannot advantage the offeror except by tricking the offeree. Thats the test. Its an objective test.

Let’s say the stock market takes a dive and I buy in at the low point, then a few weeks later it recovers nicely and I sell out. I couldn’t have made a profit without someone else making a loss in this situation. Thanks to the anonymity of the trading system, I never know who made that loss, but they must be real.

NPOV
NPOV
13 years ago

Yes but Tel you never *knowingly* took advantage of anyone. David Tweed must have known that they only people that were going to take up his offer were those that weren’t capable of fully comprehending the extent to which they were getting an extremely poor deal.
Those who trade on the stockmarket, for the most part, understand there’s always a degree of risk. Even you “buying in at the low point” is risky – there’s every chance that the shares you buy never significantly increase in value. Tweed was all but guaranteed to make a profit with his plan, as the probability of the collective value of all the shares he was offering to buy dropping in value by half and never recovering before he resold them is virtually zero – and given he was paying in delayed instalments, even if that happened and he made no money out of the share transactions, he wasn’t going to be left out of pocket.

Tel_
Tel_
13 years ago

The intention of a scratchy is not deception. It is targeted those able to make informed decisions.

Their advertising shows trucks of cash, bags of gold, bright colours, grinning happy people taking long holidays in luxury hotels, and they take special trouble to ensure that players must be over 8 years old (in NSW). The lottery pool is zero-sum, and we know that a substantial chunk of cash gets pulled out in tax. The only possible outcome is wealth transfer from the players to the government, but I’ve yet to see those expected return calculations printed on each ticket.

Someone once tried to explain to me that for most people, buying a lottery ticket is rational because it gives them a small but finite chance of great wealth, while working for a living gives them a zero chance at great wealth. Maybe that’s an informed decision… I don’t buy it, and I don’t buy the tickets either.

If you want to add up the poker machines, club keno, TAB and all the rest, and you want to look into the large number of known cases of gambling addiction, makes our friend Tweed look like a very small fish in comparison.

TH
TH
13 years ago

Firstly, all this talk of banning misses the point. As Denny points out, the logistics associated with banning these offers outright would be unworkable. This doesn’t mean there couldn’t be a substantial penalty were these sorts of offers are identified. Does it? ASIC wouldn’t need to be a gatekeeper, they could just extend there surveillance and enforcements activities.

The real issue is just whether ‘an offer that could not yield benefits to its maker unless the offeree is tricked into agreeing to it’ is a workable legal test. Now it seems to me that we can all identify Tweeds behavior as reprehensible, so shouldn’t a court (or tribunal) be equally capable?

Nic may have mentioned this already, but I think a key criteria would be that there is no chance of making money for the offeree – it’s not taking a risk, it’s literally giving money away.

On the other hand (I’m thinking this through as I go), I guess I could still endorse such a transaction where there are barriers to the offeree selling their shares in other ways. So I guess you could argue that Tweed is providing a convenience, or that many of these would never have received any money for their holding without Tweed’s offer. You could argue that people do benefit in some instances from selling shares for below market value. I’m not saying Tweed was providing such a service, but it does make things murky. How would you make a distinction here, or would you just bite the bullet and outlaw all below market offerings?

TH
TH
13 years ago

Firstly, all this talk of banning misses the point. As Denny points out, the logistics associated with banning these offers outright would be unworkable. This doesn’t mean there couldn’t be a substantial penalty were these sorts of offers are identified. Does it? ASIC wouldn’t need to be a gatekeeper, they could just extend their surveillance and enforcements activities.

The real issue is just whether ‘an offer that could not yield benefits to its maker unless the offeree is tricked into agreeing to it’ is a workable legal test. Now it seems to me that we can all identify Tweeds behavior as reprehensible, so shouldn’t a court (or tribunal) be equally capable?

Nic may have mentioned this already, but I think a key criteria would be that there is no chance of making money for the offeree – it’s not taking a risk, it’s literally giving money away.

On the other hand (I’m thinking this through as I go), I guess I could still endorse such a transaction where there are barriers to the offeree selling their shares in other ways. So I guess you could argue that Tweed is providing a convenience, or that many of these would never have received any money for their holding without Tweed’s offer. You could argue that people do benefit in some instances from selling shares for below market value. I’m not saying Tweed was providing such a service, but it does make things murky. How would you make a distinction here, or would you just bite the bullet and outlaw all below market offerings?

denningesque
13 years ago

All this talk of “trickery” begs the question: what is “trickery”. The OED defines trickery as “the practice or an instance of deception.” That is already covered in the Fair Trading Act of each state and the Commonwealth Trade Practices Act. NG defines the offending act as being “..making an offer that could not yield benefits to its maker unless the offeree is tricked into agreeing to it.” (Apologies for abbreviated quoting). That looks to me like another way of rewording section 52 of the Trade Practices Act. The only problem is to prove the act or acts of trickery. TH says “Now it seems to me that we can all identify Tweeds behavior as reprehensible, so shouldnt a court (or tribunal) be equally capable?” What is morally reprehensible is hardly a good test for what is illegal. It assumes that everyone is of equal mind and moral outlook. A legal test has to be a little more than “the vibe.” There is no shortage of people who loath Tweed but also think that people should be responsible for their own affairs and that a bad bargain is not something to invite a wave of regulation.
The other problem is defining “benefits”. As I said earlier there are no shortage of transactions arranged whereby the offeree receives what appears to be a bad bargain. There may be, and usually are, all sorts of good reasons for accepting the offer. They may (read will) be caught up in this regulatory tar pit. The reality is that oferees get a payment for their shares. It is a fraction of their listed price but it is something. So any argument that the oferee gets nothing from the contract is wrong.
So ASIC vets an offer which it deems unacceptable and, no surprises here, its decision is challenged in the Federal Court (or maybe the AAT). And again the issues of trickery and benefit come into play. What will a court look at, the letter of offer and ASIC’s reasons for refusing to release it into the market. NPOV says “David Tweed must have known that they only people that were going to take up his offer were those that werent capable of fully comprehending the extent to which they were getting an extremely poor deal.” Really? How must he have known that the only people who would have taken up the deal were those incapable of adequate comprehension (paraprashing). That is an inference. You can only draw an inference when there are facts to support that conclusion. Otherwise it is an assertion (which I suepect it is). It may be that some offers were taken up for a range of reasons including someone acted in a moment of stupidity (but are otherwise capable). Tweed makes an offer to all those on the share register and waits.
The net effect of trying to stop this bottom feeder is that ASIC will take on more functions (at more expense) and the speed in all sorts of share trades will slow.

denningesque
13 years ago

Fair ‘nuf. I think we are both arguing from legitimate positions. I think there are a lot of reasons why governments have not stepped to regulate to date. I think at least some of the issues I raised are part of that reasoning.
Interesting issues though.
….and yes this is all a dream.

TH
TH
13 years ago

Denny,

You seem to be exaggerating the administrative costs this would impose. I may be misinterpreting you, but you seem to be saying ASIC has to stop these offers up front. It doesn’t, it just has to have surveillance in place so it can punish them when they occur. Nonetheless, I admit that if the test is unclear, it may still be an impediment to trade. The real issue is the test – if the trickery test is sound, it won’t be any more difficult to enforce than existing provisions.

The problem is that in a lot of cases, it may not be so clear. Fair enough, but the test could be more objective: no below market offerings, unless some additional benefit is provided.

As you say, it then becomes about defining benefit. As I noted in my previous post, Tweedesque could provide convenience. They also provide cash for something that might otherwise just be a bit of paper. I suppose you could also argue that some of the discounted price relates to the cost of posting these offers or the risk that prices will fall.

However, as far I can see, the definition of benefit only becomes problematic where somebody is given a below market offer without any else attached. So how common are these sorts of offers? How important are they? Couldn’t you make a case that the benefit of saving pensioners from being scammed is worth banning these sorts of offers outright?

Having said all that, on further consideration I think it all falls down in the end becyase Tweed could just start offering something non-standard in addition to the below market offer, like a ‘free’ investment seminar, or ‘chance’ to win a holiday. He could even offer a couple of shares in another company. Could we legislate against these sorts of transactions without catching a whole range of legitimate activity?

denningesque
13 years ago

TH, it is always possible to legislate in detail what is a prohibited transaction. That could entail setting out in detail the elements of each sort of transaction. The legislation becomes more like a code. Parliaments tend to avoid this because the more you proscribe particular transactions which are set out in detail the more likely the malefactor will tweak his offering to avoid it. For every tweak the legislature amends. That is exactly what happened in the late 70s and early 80s with the tax legislation. It still happens to a degree. It really becomes a cost benefit analysis. Running this jerk to ground runs risks of causing “collateral damage.” Or at least that is how I see it.

Bingo Bango Boingo
Bingo Bango Boingo
13 years ago

denningesque, I tend to agree with your later comments. The drafting issues are pretty diabolical if the main thrust is to prohibit certain transactions. The solution is to do no such thing. Rather, we ought to prohibit certain persons from participating in the market without jumping over a further administrative hurdle that takes account of existing market prices. The criteria for prohibition would be relatively straightforward to formulate. They would rely on fairly simple inferences about past behaviour, both of the offeror and the many offerees (again, based on an objective analysis of the offer price and prevailing market prices). Since it would only be a conditional prohibition, not an outright suspension of economic rights, we should be less worried about catching the good guys in our net. The prohibition would have to be imposed by a court, ideally on the application of ASIC (and not each and every allegedly shafted investor, or commercial competitor).

BBB

Tel_
Tel_
13 years ago

The prohibition would have to be imposed by a court, ideally on the application of ASIC

I would hope that the court would have some decision-making basis upon which to apply this penalty (and yes it is a penalty), something a bit more concrete than “we don’t like you”. If the court always follows the ASIC recommendation then might as well skip the court and just let ASIC write the list of “good guys” and “bad guys” which is a guaranteed path to corruption (not a risk, a guarantee). If you want the court to seriously review the ASIC recommendation then you have to give the court something to work with, like a criteria or something where there is a plausible chance that the accused can defend themselves. Presumably your criteria is going to relate to the transaction somehow (what else can it relate to) and we are back to the same problem.

Bingo Bango Boingo
Bingo Bango Boingo
13 years ago

Tel_

Perhaps this is a case where legal jargon is getting in the way. “On the application of [*]” simply refers to person [*] who is able to sue for the prohibition order. It does not refer to any recommendation or other process under which any court is a rubber stamp.

As for the legislative criteria, I said:

“The criteria for prohibition would be relatively straightforward to formulate. They would rely on fairly simple inferences about past behaviour, both of the offeror and the many offerees (again, based on an objective analysis of the offer price and prevailing market prices).”

The criteria would really have to include inferences about bad faith and the market value of things. But because we are not trying to get at every single transaction out there, we can be a little more relaxed about the drafting issues (hence “relatively straightforward”). Courts deal with market value as a concept routinely. Inferences about bad faith are bread and butter (denningesque is overstating the difficulties here). Even still, it’ll end up complex. My hastily-put-together proposal simply seeks to quarantine the complex value judgments to cases where the offeror is a person who has already been judged (by a court) to have acted in bad faith in their acquisition of property at below market rates. Without this step, the results of any attempt to prohibit “uncommercial” transactions would be catastrophic. Anyway, I’m sure that as the discussion goes on my sarcastic “no holes, I’m sure” remark will be proved prescient.

The overarching point is that a disclosure-only regime has been proved ineffective, for the reasons Nick has already pointed out. We need something else if we want to stamp this stuff out entirely. Of course, some of the responses here suggest that we, as a society, may not want that.

BBB