Short selling attacks are just one of the ways listed entities can become victims of deception in the stock market. ESG, new technologies and other non-financial representations can also result in companies unintentionally deceiving the market.

Our Forensic Lens Podcast series, featuring corporate regulators and litigators, focused on deception in the stock market and how these listed companies can fall victim to this deception.

Our Manipulated Markets webinar, hosted by former KPMG Partner Christine Oliver, featured guest David Taylor, Partner at Minter Ellison and commercial litigator, specialising in class actions and complex disputes, explored further the key considerations for listed companies.

If you’re the target of a short seller attack

Short sellers can be a trap for directors. Simply because short sellers seek to lower the share price doesn’t mean their allegations are lacking substance. Not all attacks rely on inflated or incorrect information. Directors adopting a defensive approach too quickly can cause more damage and attract the attention of regulators and class action firms. Before deciding on what action to take, David Taylor encourages directors to:

  • make their own enquiries to verify the facts beyond what management presents.
  • get appropriate advice on the relevant issues.
  • consider the consequences of the response beyond the immediate share price impact.

Changes to interpretation of continuous disclosure obligations

An increase in judgments on class actions, provides companies with more guidance on how courts interpret the law on continuous disclosure.

Key issues to consider include:

  • The test for ‘awareness’ has changed. It may not matter if a company doesn’t actually hold an opinion, if it ought to have reasonably formed that opinion based on the known facts.
  • Companies should refrain from using words in their public statements that cannot be quantified, or that are capable of conveying a range of outcomes. This issue will be key to companies avoiding unintentionally deceiving markets as they make more non-financial representations, for example ESG related representations.
  • Short selling of shares may be an indication that the market holds a range of views about future performance. An implication of this finding is that only monitoring analyst’s commentary may not provide a full picture of how the market is responding to the information released.

Judicial guidance on continuous disclosure

The judicial guidance on continuous disclosure is continuing to evolve and care should be taken interpreting first instance judgments that may later be subject to appeal.

Your future class action risks

In addition to traditional securities claims, litigation funders and firms are likely to increase their focus on non-financial representations companies are making, including ESG-related representations. Potentially there is a risk associated with failing to disclose ESG-related issues, especially when conducting internal modelling of the financial impacts of an ESG issue.

Companies delving into new areas for the first time can also increase the class action risk. As more listed entities experiment with crypto and digital assets, care needs to be taken in relation to what is said to the market about those plans and when.

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