Industry leaders and observers hope regulators turn attention to purportedly abusive naked shorts
B.C.-based junior silver miners recently enjoyed a multi-day streak of rising stock prices, from January 28 to February 1, which some attribute to the same anti-hedge fund retail crowd behind the recent GameStop saga. But the leaders of such companies and industry observers are reportedly saying that this campaign won’t get nearly as far.
The problem, based on interviews reported by Business in Vancouver, is that the current movement is likely to be neutralized by a much more formidable group of adversaries.
“You’re not fighting Citadel and Melvin [Capital] – you’re fighting the world’s biggest banks,” Mickey Fulp, publisher of the Mercenary Geologist, told the publication.
According to Fulp and other industry insiders and observers, silver shorters or so-called “bullion banks” include financial institutions that can muster billions of dollars against a Reddit army of retail investors who may only be able to bring $1,200 each to the fight. But while they might not prevail, retail investors and the junior miners they invest are hoping to cast a light on alleged predatory trading by large hedge funds that target Canadian companies.
“We’re finally in an environment where we actually have a chance to be heard, whereas a year ago the regulators never would have listened,” said Russell Starr, CEO of Trillium Gold Mines, who said his junior mining company has been unfairly attacked by hedge funds engaging in naked short selling.
As explained by Business in Vancouver, IIROC has asserted that naked short selling is considered illegal in Canada. But in a 2019 study on short-selling, McMillan LP concluded that Canada’s “hands-off” and lenient approach to short sales has made it more vulnerable to naked shorts that raise risks of failed trades, distorted share prices, and the creation of phantom shares.
The vulnerability could be traced back to 2012, when Canadian securities regulators scrapped the “uptick rule” that limited short sellers to betting against stocks whose prices were going up. With that rule gone, short sellers have a much wider berth.
“At its worst, naked shorting can be a tool for unscrupulous short-campaigners deliberately spreading misinformation to drive down the target’s share price,” McMillan said.
Last year, Terry Lynch, CEO of Chilean Metals Inc, started a campaign called Save Canadian Mining and commissioned a study by Murenbeeld, which concluded that prior to 2012, junior mining stocks on the TSX and venture exchanges generally traded in line with the metals commodity index; today, such stocks trade at roughly 35% relative to the benchmark.
“If you actually did it legitimately, you can’t sell what doesn’t exist,” Lynch told Business in Vancouver. “But that’s exactly what’s happened to many of these issuers.”
