CASE STUDY – PAN AUSTRALIA RESOURCES (PNA)

INTRODUCTION

The takeover bid for control of PanAust Ltd (PNA) by its major shareholder GRAM has prompted a
review of PNA trading, and the circumstances surrounding the hostile bid.
Certainly, the share price of the company has been under considerable pressure since January 2013
and severe price reductions have culminated in two successive bids by GRAM about 10 months apart.
Both bids have been launched from long term lows and both bids have offered substantial premiums.
It suggests the share price of PNA has been severely undervalued for reasons quite separate to
copper price weaknesses. Some background to the PanAust Ltd takeover is provided by a YouTube
video accessible by clicking the image above, and trading anomalies associated with the bids are
detailed in the YouTube links provided below.
A review of trading has revealed high levels of non-genuine selling through periods where the share
price was trending downwards and immediately following the tabling of bids. Non-genuine selling
following the 2nd bid was also accompanied by non-genuine buying which resulted in an artificial
market.
Any price capping or forced under-valuations associated with non-genuine trading would certainly
have helped GRAM’s cause, firstly as the bids for control were being formulated, and secondly,
as shareholders were considering the offers put before them.
Having received acceptances for more than 90% of issued shares, the successful bidder, GRAM
immediately announced financing, through the Bank of China, to fund a feasibility study of PNA asset
Frieda River in Papua New Guinea. The rapid move provides a glimpse of the long term planning that
has gone into the PanAust takeover. The Frieda River asset only came under PanAust's control after
the 1st bid was tabled and was rejected.
All trading requires a thorough review by ASIC and by the Takeovers Review Board, especially since
non-genuine trading results in artificial prices, and shareholders may have been placed in a position
where they have had to consider hostile takeover offers based on an artificially low share price.

The case study provides a current example of how non-genuine patterns of trading and the targeting
of companies can be inextricably linked.

ACCESS TO YOUTUBE PRESENTATIONS

PNA Part 1 – Page 2 <Link to YouTube Part 1 >

PNA Part 2A – Page 6 <Link to YouTube Part 2A>

PNA Part 2B – Page 9 <Link to YouTube Part 2B>

PNA Part 3 – Page 13 <Link to YouTube Part 3>

PNA Part 4 – Page 19 <Link to YouTube Part 4>

PNA Part 5 – Page 24 <Link to YouTube Part 5>

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PNA Part 1 - Transcript of a YouTube Presentation on Pan Australia (PNA)

The takeover bid for PanAust Ltd provides an opportunity to judge whether the natural market forces
that faithfully reflect genuine supply and genuine demand, or something else, has been responsible for
the demise of shareholder wealth and the loss of control over the affairs of a publicly listed company.
Irregularities in PanAust trading data suggest that shareholders were placed in a position where they
have had to consider an offer for their shares, based on a share price heavily influenced by non-genuine
trading behaviours.
Trading that identifies with being non-genuine has accompanied the undervaluations that occurred prior
to bids being made for control of the company, and also, in the trading that followed offers being tabled.
All aspects of the takeover require a thorough investigation, and until that takes place, it is our view, that
the company needs to be placed into suspension and all matters dealt with.

The something else could well be the result of non-genuine

transactions, associated with algorithms and short selling, that have
resulted in artificial adjustments to prices since January 2011.
This alternative situation might more accurately explain the grossly
under-valued share price prior to bids for control being unveiled,
commencing in April 2014

The PNA share price had been in an extended down trend since January 2011, undergoing a fall of 65.2% up until
a bid for control of the company was put forward by its major Chinese shareholder GRAM.
PanAust (PNA) Share Price Chart – January 2011 through May 8, 2015
The PNA share price had been in an extended down trend since January 2011, undergoing a fall of 65.2%
up until a bid for control of the company was put forward by its major Chinese shareholder GRAM.

65.2% price decline

The hostile bid offered $2.20

per share to shareholders but
it was pitched as a non-
binding indicative offer.

Bid announcement, May 13, 2014

Management rejected the bid, even after it was

increased to $2.30 per share. The Board
advised shareholders that the bid was
materially below its valuation for the company.

The Board did however grant access to confidential information whereby the offer might be improved.
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Non-acceptance of the bid resulted in the share price retreating to its pre-bid price.

It then slumped to new lows of $1.15 just prior to the arrival of a new, unconditional bid pitched at $1.71.
The new lows meant that prices were reduced by a further 22% from those that preceded the 1st bid.

The price spike as a

result of the 1st Bid 2nd Bid
$1.71
($2.31 per share)
And another
price spike

The PanAust Board’s response to the 2nd bid was to reject

the offer because it still undervalued the company.
Yet strangely, independent analysts subsequently
assessed fair value in the range $1.84 to $2.04, well below Pre Bid Price
the previous unconditional bid adjusted to $2.30.
New lows following the 1st bid

The valuation, apart from contradicting the Board’s response to the initial bid, failed to take into account the strong
operational position the company was in with its projects. Also, copper continues to have a very favourable long term
outlook, and the copper pricendhas recently started an uptrend after extended price falls.
The 2 bid arrived on March 30, 2015 after the share price had slumped.
It represented a 39.6% premium to the closing price on March 27, 2015.
The premium associated with the first bid (based on the closing price prior
to the bid) was also around 39%.

The bid premiums serve to demonstrate the artificial nature of pricing on the ASX.

As documented by research, artificial

adjustments to prices accompany the
large number of non-genuine transactions
that are distributed by algorithms.

On May 8, 2015 a supplementary bid of $1.85 was put

forward which was promptly accepted by the Board.

The Board appeared to roll over without defending shareholder rights particularly given that non-
genuine trading accompanied a grossly undervalued share price.
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While the $US copper price has been in an extended downtrend from January 2011, currency
fluctuations have softened the impact on the $AUD copper price. Price falls in $AUD prices have
been substantially less than in $US terms.

Copper Price Charts - 2011 through May 8, 2015

A 16.7% price drop since Jan 2011

$US Price per pound A 35.6% price drop since Jan 2011
$AUD Price per pound

$AUD copper prices have oscillated between $3.32 and $3.75

corresponding to prices of between $7150 and $8250 per tonne.
The copper price action compares to a 65.2% fall in the PNA share price.

Prices in both currencies have

commenced uptrends in recent times

The changed outlook for copper, the strong operational

outlook of the company and the highly questionable demise of
the PNA share price had been completely overlooked by the
Board in recommending the revised offer.
 5

A build up in open short positions occurred intermittently but at strategic times. The following points of
interest are quite telling:

1 A sudden reduction in short positions occurred without a commensurate increase in price as shorts
were covered. Prices actually fell. It was likely to be an orchestrated event requiring full investigation.
It is an event often associated with the covering of shorts. And it demonstrates how short selling can
be abused. i.e., fair price discovery is avoided when short positions are covered.
Such actions identify more with price rigging than genuine trading.
2 A build up in short positions preceded the 1st Bid, and was followed by a rapid unwinding

3 A build up in short positions also preceded the 2nd Bid, and was also followed by a rapid unwinding.

Also of note was that share price was forced to long term lows immediately prior to each bid. The low prices are
the result of short selling combined with non-genuine trading in preparing the way for a successful bid.
.
Of particular interest are the identities of short sellers and the identities of stock lenders and what
relationships or affiliations they might have with ‘GRAM’, the hostile bidder and major shareholder.
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PNA Part 2A - Transcript of a YouTube Presentation on Pan Australia (PNA)

Non-Genuine Selling Trends

Tutorial 2A assesses non-genuine selling behaviours immediately following GRAM’s second Bid.
Non-genuine selling behaviours are characterized by brokers achieving inordinately large numbers of price falls
with their trading even though their selling volumes have been comparatively light.
It suggests trading designed to impact prices rather than to genuinely exchange shares and it results from
small trades that cause a reduction in prices.
The patterns are diametrically opposed to how genuine sellers go about maximising the proceeds of sales.

Samples of Downtick Selling Profiles

GRAM’s second Bid was announced on March 30, 2015

Given its interest in taking over the company, GRAM would have been favoured by price falls dating back to
January 2011, and in particular, preceding and following its initial Bid announced on May 13, 2014.
nd
The share price immediately spiked to $1.71 following the 2 Bid, and stayed at that level until a
subsequent Bid which increased the offer to $1.85 per share.
Trading has tended to be capped at the takeover offers put forward by GRAM, and certainly, any sustained
upward movement in prices would have upset plans for taking control.
nd
An analysis of trading following GRAM’s 2 Bid, reveals the familiar patterns of non-genuine selling that
are evident in the trading of all stocks subjected to algorithmic trading and short selling.
Trading for the consecutive days May 4 through May 13 is provided in the following slides. There was a
trading halt on May 8
PNA Broker Selling Profiles - May 4, 2015 PNA Broker Selling Profiles - May 4, 2015

Non-genuine patterns of
selling Bias towards non-
genuine selling
Contrasted by
efficient selling?
An investigation of trading reveals
an artificial market dominated by
the activities of just one seller.

93% of Downtick trades by UBS Securities averaged just
68 shares in size.
It’s algorithms were clearly tuned to deliver trades that
caused price reductions.
i.e., these are not the actions of a genuine seller.
A further damning statistic is that 89 % of UBS Downtick
trades were crossings. The crossings were between DMG
and MERL via centre point trades, and to itself.
It shows trading that was highly contrived and highly
focussed on causing price reductions.
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PNA Broker Selling Profiles - May 6, 2015

Non-genuine selling Trading on May 6, 2015 saw a contrast between highly

manipulative selling by Merrill Lynch and highly efficient
Efficient selling by Citigroup and Macquarie.
selling
The efficient selling served to cap prices thereby ensuring
that shareholders remained focused on what had been
offered with the Bid.
i.e., an upward share price surge would have disrupted
what was on the table with the Bid and so this selling is
likely to by non-genuine in the sense that it was a ploy to
help the Bid succeed, and in no way focussed on
maximising the proceeds of sales.
A thorough investigation was never under taken.

Non-genuine selling was much less pronounced on May 7

PNA Broker Selling Profiles - May 7, 2015 although shares appeared to wash between 5 brokers as
leading net-sellers and Merrill Lynch who was the major
net buyer.
MERL was the manipulative seller the previous day.

CITI was both a major seller (28.9%) and a major buyer

22.9%) resulting in net-sales of 227,159 shares

Broker Sells Buys Net

MACQ 593,564 6,003 -587,561
DMG 455,041 145,199 -309,842
JPM 275,400 3,877 -271,523
MOELIS 232,843 0 -232,843
CITI 1,083,990 856,831 -227,159
MERL 118,005 1,632,309 1,514,304

On May 7 Citigroup (CITI) was both a major seller (28.9%) and a major buyer 22.9%) resulting in net-sales of 227,159
shares. Their trading and other brokers buying and selling shares with little to show at the end of the day draw
attention to wash trade activity – i.e. illegal activity where an entity is both the buyer and the seller of shares. If not
wash trades affiliates could still be trading shares back and forth amongst themselves so that at the end of the day
there minimal change to beneficial ownership. The result is the same and it enables prices to be unfairly controlled
in the process.
Forensic audits are the only way of establishing the relationships, if any, between the prominent sellers and buyers
and the corporate connections they may have. Such audits are rarely if ever undertaken.
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Trading on May 11, 2015 followed an announcement by the Company that outlined the Board’s acceptance of the
revised Bid of $1.85. A total of 70.8 million shares traded in response to GRAM increasing their offer.

PNA Broker Selling Profiles - May 11, 2015
RBS Morgans was the dominant seller in capping prices
accounting for 53.5% of all selling.
However they were also a strong buyers accounting for
89.7% of all buying. In the process they accumulated 25.7
million shares.
Their trading is likely to contain high levels of wash trades
or trades that have the same effect as wash trades by
being washed through affiliate brokers.
The way they went about selling is also deeply suspicious
as 90% of their Downtick trades had an average parcel
size of just 7 shares.
They represent frivolous trades to cap prices while being
an aggressive buyer of shares.
Their connections (if any) to GRAM, the hostile bidder,
also requires investigation.

PNA Broker Selling Profiles - May 12, 2015 PNA Broker Selling Profiles - May 13, 2015

2015 2015

RBS Morgans was a dominant buyer and seller on May 12,
the following day, they became just a strong buyer.
On May 12, they were responsible for 82.6% of all buying,
while running a selling algorithm that functioned as a
non-genuine seller.
With just 1.8% of all selling volumes they accounted for
53.5% of all trades that resulted in a fall in price.
Around 90% of their trades that caused lower prices
averaged just 38 shares in size.
High levels of non-genuine selling were responsible for all
price falls on May 12 as circled above.
Broker RBS Morgan (MORG) was again influential in
causing DTs, while accounting for 14.2% of all selling.
76% of RBS Morgan Downtick trades averaged parcel
sizes of just 4 shares.
Yet RBS Morgan also accounted for 86.2% of all buying for
the 16.95 million shares that traded.
RBS Morgan clearly had an influential impact on trading
precisely when GRAM’s new Bid arrived.
Non-genuine selling patterns are again evident for a
number of brokers.
In particular, DMG, where 90% of their DT trades were for
parcels sizes of just one share.

The trading anomalies in the previous examples highlight the artificial nature of trading that takes place on the
ASX with full regulatory approval. It suggests that price rigging activity helped to support the hostile BID by
GRAM
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PNA Part 2B - Transcript of a YouTube Presentation on Pan Australia (PNA)

Non Genuine Buying and Selling following the 2nd Bid for PNA.

The previous tutorial featured patterns of non-genuine selling that would have been instrumental in capping
prices following the 2nd Bid for control by major shareholder GRAM.
The current presentation looks at patterns of non-genuine buying that were also a feature of trading.
Non-genuine trading, both buying and selling, identifies with creating an artificial price, perhaps to coerce
shareholders into accepting a low-ball, hostile bid.
The term low-ball applies because the $1.75 offer was far below the 1st bid (i.e. $2.20 increased to $2.30,
which was rejected by management) yet in the interim, the company had secured the Frieda River copper
project from Glencore, and the outlook for copper remains very strong.

In the selling and buying profiles of brokers that follow, the following keys explain the key elements of charts.

% of Downtick Trades % of Uptick Trade

% of All Selling % of All Buying

PNA Broker Selling Profiles - May 4, 2015 PNA Broker Buying Profiles - May 4, 2015

Non-genuine selling

Efficient selling Efficient

Non-genuine buying
buying

Given the hostile nature of the bid, strong selling and buying needs to be assessed for possible wash trades, where
back and forth trading may have been put in place to manage the share price at a crucial time.

In particular the entities buying through UBS Securities need to be matched against the entities selling through the
dominant sellers such as Morgan Stanley (MS), Citigroup (CITI), BBY and even Deutsche Bank (DMG).

Buying by Merrill Lynch and to a lesser extent Citigroup qualifies as being non-genuine as relatively small amounts of
buying caused disproportionately large numbers of price increases. With just 12.4% of all buying between them, they
accounted for 64.3% of all increases in price. It is not how genuine buyers operate in seeking to minimise their
outlays for purchases.

Efficient buying UBS Securities is all well and good, but not if it involves collusion. Audits are required to clarify.
 10

PNA Broker Selling Profiles - May 5, 2015 PNA Broker Buying Profiles - May 5, 2015

Non-genuine
Non-genuine selling buying

Efficient
buying

Non-genuine selling by UBS is highlighted by 88.8% of DT trades averaging just 38 shares in size, and nearly all of
them being the result of some form of broker crossing. It was also the dominant seller.
Yet as a strong buyer, UBS was remarkably efficient in avoiding Upticks in price, just as it was the previous day.
UBS Securities ended the day with just 76,846 net purchases, again raising concerns regarding wash trades or trades
that have the same effect even after being transferred back and forth between other brokers.
Non-genuine buying is also highlighted by MERL and DMG accounting for 61.2% of all Upticks from just 13.6% of all
buying. The buying profiles for May 5 were near identical to May 4.
Merrill Lynch’s non-genuine buying is highlighted by 94.4% of their trades that caused price increases averaging just
42 shares in size.

PNA Broker Selling Profiles - May 7, 2015 PNA Broker Buying Profiles - May 7, 2015

Non-genuine
buying
Efficient
buying?

The non-genuine selling coincided with the circled brokers accounting for 20.8% of all DT trades from just 6.5% of all selling.

Patterns of Non-Genuine buying are clearly evident. Also of concern is the potential for wash trades between major sellers
and buyers. UBS was replaced by Merrill Lynch as the dubiously efficient buyer.
 11

PNA Broker Selling Profiles - May 11, 2015 PNA Broker Buying Profiles - May 11, 2015

Efficient buying?

Non-genuine
buying

As previously mentioned RBS Morgan was a dominant seller in capping prices on the day that management
capitulated to the revised Bid. Their selling was non-genuine in that they continually caused price falls with tiny
parcels of shares. Yet they were also the dominant buyer without causing a single Uptick in price on a day when 70.8
million shares traded. Their trading would have resulted in an artificial pricing environment that would have
confused and misled all other participants.

Merrill Lynch, BTIG, Citigroup, UBS Securities and Macquarie collectively were responsible for 93.2% of all Upticks
but supplied only 0.6% of all buying between them. The entities behind the Bid were no doubt responsible for the
dysfunctional trading conditions.

PNA Broker Selling Profiles - May 12, 2015 PNA Broker Buying Profiles - May 12, 2015

Non-genuine
selling
Dubiously
Dubiously efficient buying?
efficient selling?

Non-genuine
buying

Trading on May 12 emulated the previous day with non-genuine selling split across a range of brokers, and Morgan Stanley
dominating as the buyer without recording an Uptick. With just 1.8% of all selling, RBS Morgan (MORG) accounted for 37 %
of all Downtick trades. Also, 89% of DT trades averaged just 38 shares in size. And they were responsible for 82.6% of all
buying without a single Uptick trade. The three circled brokers accounted for 85.7% of all Uptick trades but they
represented just 3.3% of all buying. The trends hardly reflect the forces of genuine supply and demand. The data again
serves to highlight the non-genuine nature of trading and the artificial pricing environment that was in place.
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PNA Broker Selling Profiles - May 13, 2015 PNA Broker Buying Profiles - May 13, 2015

Dubiously
efficient selling? Dubiously
efficient buying?

As a leading seller by volume, 76% of RBS Morgan (MORG) Downtick trades had parcel sizes that averaged just 4
shares in size.

And yet they were responsible for 86.2% of all buying without a single Uptick trade. Again, the trends hardly reflect
genuine supply and demand

And the situation where the 5 circled brokers with 10.5% of all buying accounted for 97.8% of all Upticks is
somewhat bizarre when prices are meant to reflect the forces of genuine supply and genuine demand. The market’s
dysfunction would have not have contributed to shareholders being able to make informed decisions about their
investments.

Merrill Lynch were responsible for 43% of all price increases from just 0.6% of all buying. Their non-genuine buying is
highlighted by the fact that 99% of MERL’s Uptick trades averaged just 34 shares in size.

The data trends confirm a completely compromised market place for Pan Australia shares..
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PNA Part 3 - Transcript of a YouTube Presentation on Pan Australia (PNA)

The first Bid for control for Pan Australia was tabled on May 14 2014. Following its rejections the share
price languished until early April 2015 when a 2 nd Bid materialized. The presentation looks at trading in the
intervening period; in particular from the four month period September 2014 through December 2014.

Three days from each month were analysed for this period. The results again reveal that non-genuine
selling has been a prominent feature of trading.
The four consecutive months followed the rejection of GRAM’s conditional bid for the company and
coincided with the share price resuming its downtrend.

Importantly, the Bid for control by GRAM in May 2014, and the company’s response, clearly demonstrated
the artificial nature of pricing that has been delivered by the market. Prices were forced to levels that
were far below the valuations held by the bidder (GRAM) and the Company itself.
Research into the trading of stocks across the ASX has shown that entities are able to control prices
through non-genuine trading behaviours facilitated through:
 the tuning of algorithms, combined with,
 manipulative short selling, and,
 collusive trades back and forth between themselves
Non-genuine trading supports day to day trading agendas and it supports the strategic targeting of
companies through forced undervaluations.
It is able to accomplish that despite obvious conflicts with the laws that govern trading

The dates where trading has been assessed are highlighted on the following chart.

Secular down trend

Resumption of down trend

Dates used to assess
non-genuine trading
Initial bid by
GRAM

Sep 11, 17 & 26

Nov 6, 21 & 27
Oct 3, 16 & 27

Dec 1, 16, 24
 14

Broker Selling Profiles for September 2014

PNA Broker Selling Profiles – Sept 11, 2015

Non-genuine selling Trading across the 3 days shows extremely high

levels of non-genuine selling led by CSUI
(September 11 and September 26) and Morgan
Stanley on September 17

PNA Broker Selling Profiles – Sept 17, 2015

Efficient selling
The ability to tune algorithms
to trade genuinely or non-
genuinely, is highlighted by
Credit Suisse’s trading on
September 17 versus their
trading on the other two days
featured.

PNA Broker Selling Profiles – Sept 26, 2015

Put another way, the Non-genuine selling

discretionary tuning of
algorithms to suit trading
agendas, rather than to achieve
the maximum returns from
sales, is highlighted by CSUI’s
trading
 15

PNA Broker Selling Profiles for October and November 2014

October 3, 2015 October 16, 2015 October 27, 2015

Non-genuine selling biases continued through October with prominence passing back and forth between the same
small group of institutional brokers.

The contrast between seemingly efficient selling by Morgan Stanley (MS) on each of the three days, and non-genuine
selling by others, is likely to have little to do with superior trading and everything to do with implementing trading
agendas.

Audits would clarify, but the trading data suggests a highly contrived market dominated by the settings supplied to
algorithms rather than the genuine forces of supply and demand.

November 6, 2015 November 21, 2015 November 27, 2015

Morgan Stanley also showed how algorithms can be tuned to achieve differing trading agendas with their non-
genuine selling on November 6 and November 21 and their efficient selling on November 27.
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PNA Broker Selling Profiles for December 2014

December 1, 2015 December 16, 2015 December 24, 2015

Non-genuine selling was significant on Dec 1 when over 11 million shares traded and again on Dec 16 when close to
3 million shares were sold.

Yet the mixed trends on Dec 24 corresponded to just 176,522 shares trading.

It is of interest that in light trading prices are still constricted by algorithmic transactions even though they are much
fewer in number. The constrictions continue in heavy trading where programs simply expand the number of non-
trades required to maintain control over prices.

Buying and Selling Summary

The table summarises the trading of the leading 16 brokers of the 45 brokers who traded PNA over the 12 days
reviewed.

The trading in the above table represents around 90% of 49.2 million shares that traded.
The share price declined by around 43%.
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Trading Period Following GRAM’s Initial Bid

1st BID
Review Period
53% Price Slump

2nd BID

43% Price Slump

The share price retreated 43% following the first BID through December 2014. It had retreated 53% by the time the
2nd Bid arrived from GRAMM, and all the while trading was accompanied by algorithms functioning as non-genuine
sellers as they implemented short selling strategies.

An Overall View of Downtick Selling Profiles

The discretionary tuning of algorithms to suit trading agendas can be assessed by comparing the day by day trading
profiles of the leading brokers.
 18

Brokers alternated from one day to the next as prominent non-genuine sellers.
The fluctuating profiles show an ability to tune algorithms to either deliberately
cause price falls, or to trade efficiently.
Regulatory audits are required to determine the entities responsible for non-genuine
patterns of selling but at least thye brokers are obvious.
Importantly, brokers are not licensed to be able to manipulate prices. As gatekeepers
of the system they need to adopt a duty of care to ensure that their programs
respect the laws that govern the markets.
That isn’t currently happening.

Mitigating Circumstances – Declines in the Copper Price

Falls in the copper price have also been associated with price rigging concerns associated with the stockpiles held in
bonded warehouses by major Chinese interests.

Certainly it is convenient to adjust prices with trades back and forth between affiliates, or trading partners, where
ownership over the goods is retained and the price reductions are endured for longer term strategic reasons.
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PNA Part 4 - Transcript of a YouTube Presentation on Pan Australia (PNA)

Mitigating Circumstances – Short Selling & Stock Lending

Short selling is legal, however it can be abused, and that leads to price rigging concerns.
Unfortunately, the majority of short selling is under reported as it takes place without triggering the 5%
compulsory disclosure requirement for substantial shareholders.
Also, the information that is published by ASIC and ASX doesn’t go anywhere near far enough in
revealing what is taking place with short selling and securities lending.

Regarding PNA, it is of interest to know who have been making their shares available for short selling,
especially knowing that their holdings will be devalued.
Or whether individual holders have not been aware that their shares have been used for shorting?
Certainly, the inadvertent lending of stock held under custodial arrangements has occurred in other ASX
companies.
Also of interest, are the identities of those engaging in short selling and what their levels of exposure have
been in terms of open positions and whether or not those exposures are actually correct?
Then there is the issue of whether or not naked short selling is taking place, even on an intra-day basis.
Who would know? With all of the obvious trading irregularities remaining unaddressed anything seems
possible.
And finally there is the question of whether short sales are involved with wash trades back and forth
between affiliates so that control over stock is retained while prices are encouraged lower? And if affiliates
are the buyers of stock sold short it would explain why short covering is achieved easily and without forcing
prices back up.

There is not much difference between naked shorting and a covered intra-day short sale that is re-
purchased the same day, especially when the focus is on gaming the market.

Short selling in that instance reverts to just a manipulative trading ploy, used within programming code to
force price adjustments, with little or nothing to do with judgements that a stock is overvalued.

Currently, exposures can be camouflaged by spreading short sales across multiple brokers, and while an
overall figure is quoted for open short positions, individual exposures are concealed.

Full disclosure would make for a more efficient market by exposing manipulative positions whereby others
could take the other side of their trades. Full disclosure would also make entities more accountable for
their actions.

The reality is that answers to questions such as the above are not likely to be forthcoming, as audits
are required to get to the bottom of market irregularities, and audits are seldom, if ever, undertaken.
 20

Despite concerns about reporting and the amount of information not disclosed, there are often more
questions than answers with what is actually disclosed.

The following disclosures by Deutsche Bank regarding PNA are a case in point. Deutsche Bank on June 24,
2014, referred to a holding of 35,828,393 shares as at June 19. It was held as follows.

Based on disclosures the number of shares

pending settlement amounted to 33,220,203

The non-disclosure represented 92.7% of the

shares involved with the disclosure notice.

It is an odd situation as settlements take place in ‘T plus 3’ yet the notice spanned four months of trading.

The disclosure notice contained a large list of purchases between February 20, 2014 and June 19, 2014
that resulted in Deutsche Bank becoming a substantial shareholder during a critical period.
There weren’t any selling transactions disclosed in the notice.
Given the reference to pending settlements, it is noted that June 16 through June 19, 2014 there were
only 5.82 million purchases that may not have settled.

Clearly the majority of the 33.22 million shares where ownership wasn’t disclosed (i.e., 92.7% of
the notice) should have been settled with only 5.82 million shares awaiting to be processed.

In any case, by the time the notice was lodged (i.e., June 24) all shares should have settled.
The ambiguities raise questions about:
 The possible avoidance of provisions concerning T plus 3 settlements,
 the nature of purchases and the motivation for purchases,
 who the shares were purchased from,
 the extensive selling also undertaken by Deutsche Bank for other clients over the period while it
amassed a substantial holding, and,
 on whose behalf the selling was for, given they were strong buyers.
 21

The Deutsche Bank notice issued on June 24, 2014 coincided with the following share price action.

PanAust (PNA) Share Price – January 2014 through May 14, 2015

Share price surge in

response to the BID
announcement

GRAMM BID at
$2.20 per share

Period associated with

Deutsche Bank buying

There are concerns about what motivated the buying immediately before, and during,
the takeover Bid launched by GRAM, and on whose behalf it may have been for.

Deutsche Bank’s ‘informed’ buying raises alarms when viewed in context with the circumstances surrounding the 1 st
bid by GRAM.

PanAust (PNA) Share Price – January 2014 through May 14, 2015

April 10

PNA traded for over a month with price

sensitive information ‘floating around’,
but not known to the broader market.
Period associated with
Deutsche Bank buying
During this period, substantial holder Deutsche
Bank, purchased around 21.5 million shares.
No shares were sold by the group during this period
Their buying as a substantial shareholder alone, accounted for over 25% of all buying for the period.
 22

The timing of Deutsche Bank transactions in accumulating a substantial holding, strongly suggest insider activity.

On October 14, 2014 the market was advised that Deutsche Bank ceased being a major shareholder of PanAust. The
period covered by the notice is shown below.

PanAust (PNA) Share Price – January 2014 through May 14, 2015

October 14, 2014

DMG Notice Period

The period covered by the notice saw large volumes of buying and selling put through the market by
Deutsche Bank related entities.

It is of note that the accumulation of the holding was characterized by outright purchases, whereas the
sell-down was accompanied by trading churn.
It is also of interest as to how much of the buying and selling associated with churn was actually genuine,
and on whose behalf the transactions were for?
From the disclosures in the October 14 announcement, it wasn’t clear as to what extent the holding had
been sold down.
There was also a statement to the effect that not all transactions were available.
The lack of clarity needs to be viewed in light of GRAM’s repeated bids for control of PanAust and what
role Deutsche Bank may have played.
Deutsche Bank’s strong selling following the rejected bid was noted in PNA YouTube 3

Further Substantial Holder Changes

Deutsche Bank again became a substantial shareholder on October 16, through the borrowing of 13
million shares from Citigroup Global, State Street Trust, Commonwealth Bank and National Australia
Bank on October 14.
The notice also contained ambiguities with missing transactions and unknown owners for 69.7 % of
shares under its control, 13 million of which (31.5%) represented October 14 stock borrowings.
Substantial shareholder status only lasted for a 4 day period with a ceasing notice lodged on October
20. The noticed detailed purchases of 1.32 million shares and sales of 2.89 million shares but the
main reason for the change was the return of 9.5 million borrowed shares.
 23

A further issue is the propensity of lenders, or their affiliates, to be both lenders of stock and the buyers
of shares sold short. It means that control is maintained over stock. It also means that price discovery is
able to be sidestepped in returning shares back into rightful ownership, and all the while, control over
prices is facilitated.

Shortfalls in disclosure and reporting requirements, and the heavily camouflaged trading agendas that
are implemented through the use of algorithms, make it exceedingly difficult for the market to deliver
fair price discovery.

It means that non-sophisticated participants (i.e., retail investors) are generally not well placed to be
able to make important judgements about the relative merits of companies especially when
fundamental issues are unfairly distorted by trading agendas.

The plight of shareholders is really brought into focus when they are forced into considering an offer for
their shares that is mired by unknowns, and forged through behaviours that require forensic
examination by the regulator, before being able to be considered with confidence.

And yet that is the situation faced by PanAust Ltd shareholders.

 24

PNA Part 5- Transcript of a YouTube Presentation on Pan Australia (PNA)

Issues Requiring Clarification

Important questions regarding GRAM, the hostile bidder for Pan Aust Ltd, include:

 To what extent has GRAM or its affiliates been lenders of stock?

 To what extent, has GRAM or its affiliates engaged in short selling?
 What trading involvements have GRAM and its affiliates had in terms of shares bought and sold
over the period January 1, 2013 through May 10, 2015?
 What changes have there been to group ownership, as a result of that trading?
 Who are the brokers GRAM and its affiliates deal with, and have any acted as agent for GRAM
while using their own accounts, in dealings over the last 2 years?
 What activity have these brokers engaged in as proprietary traders?

The questions are important given the irregularities identified with

PNA trading and the non-disclosure brought to attention.

Further Issues Requiring Clarification

There are also issues concerning management’s role in facilitating the takeover. They include:
 Major disruption to the company with radical strategies introduced following GRAM’s 1st bid that
helped to destroy shareholder value.
 The strategies included changes to the balance sheet and the cancellation of dividends that
have been widely criticized by former management, one of whom was forcibly removed from
office.
 Failure to defend shareholder’s interests by accepting a bid that was radically below a previous
offer despite the company being placed in a stronger position after obtaining control over Frieda
River, restructuring the balance sheet and enjoying an improving/ strong outlook for its product.
 Failure to protect shareholders’ interests from highly dubious trading activity.


Again, the questions are important as management appears to have

‘rolled over’ without strenuously defending shareholder rights.
 25

Mitigating Circumstances – Possible Trading Back & Forth Between Affiliates

In recent substantial shareholder notices, GRAM (Guangdong Rising Assets

Management Co) declared its interests in PanAust in association with
affiliated entities that form the group.

It is an exceedingly large group of affiliates as shown below.

Guandong Rising H.K. (Holding) Limited Hong Kong Rising Investment Development
Guandong Changsheng Enterprises Group Guangdong Fenghua Advanced Technology
Guandong Huaijian Enterprises Group (Holding) Co. Ltd.
Guandong Electronics Information Industry Guandong Hongling Group Co. Ltd.
Group Ltd. Hubei Guandong Rising Expressway Group Co.
Guandong Gold Group Co. Ltd. Ltd.
Guandong Rising Nonferrous Metals Grp. Guandong Rising Financial Holdings Co. Ltd.
Guandong Rare Earth Industry Group Guandong Rising Holding (Australia) Ltd.
Guandong Rising Metallurgy Group Guandong Rising (Australia) Pty Ltd.
Guandong Rising Mining Investment Dev. GRAM Caledon Resources
Guandong Rising Real Estate Group Caledon Overseas Holdings
Guandong Rising Investment Group Co. Caledon Coal Pty Ltd.
Guangzhou Digital Rise Technology C.C. Pty Ltd.
Shenzhen Zhongjin Lingnan Nonfe Metals Caledon MC Jersey Limited
Rising NonfeMetals Co. Haxelhurst Holdings Limited
Guandong Dabaoshan Mine Co. Ltd Blackwater Coal Pty Ltd.
Guandong Rising H.K. Energy Investment Bowen Basin Pastoral
(Holding) Limited SASAC

A major issue with trading on the ASX is the extent of back and forth churn that takes
place that can have minimal effect on company registers and which doesn’t attract
regulatory scrutiny.
In another ASX company, research identified 50 million buys and sells over a 10 day
period as having zero impact on the company register. The situation didn’t raise any
regulatory concerns.
The possibility of illegal wash trades is a natural consequence of large volumes of
trading churn. Churn is welcomed by the ASX as it is a beneficiary of increased
turnovers.
Churn requires buyers in abundance to willingly take the other side of large volumes of
selling. It takes place seamlessly right across the ASX suggesting trading back and forth
between affiliates who are not acting in the manner of genuine buyers and sellers.
Large volumes of selling, in a genuine market, ought to cause buyers to retreat and
hang back, not willingly accommodate sellers.
 26

Churn can also represent trades back and forth between affiliates undertaken by fund
managers but supposedly following differing trading mandates.

The end result can be wash trades, or trades that have the same effect and it is done
through market trades and crossings between entities under the control of fund
managers.

Importantly it doesn’t result in changes to beneficial ownership by the group and it can
be used as a ruse to rig prices.

The Australian Financial Markets Association (AFMA) presented a paper on the issue
back in 2010. (Google: AFMA, amend bill 2010 s1041b senate)

In view of GRAM’s complex structure a close examination of the web of accounts is required, along with
the accounts of brokers who have acted for GRAM.

A review is especially needed given:

 the extent of anomalies identified in the trading of PanAust, whereby,

 non-genuine trading activity has been a prominent feature,
 the market has delivered artificial prices for PNA shares, and
 there has been the potential for insider trading.
 issues with a lack of disclosure regarding critical trading relationships,
 the high levels of trading churn that has taken place and the possibility of illegal wash trades or
trades that have the same effect,
 a collapsed share price before both bids, and,
 the hostile nature of the offers.

Given the extent of concerns surrounding the PanAust takeover by major shareholder GRAM,
shareholders have every right to feeling as if they have been let down by the system.
On the strength of trading anomalies, lack of disclosures, poor management performance, and
potential insider trading issues, the weight of evidence certainly suggests that they have been.
Importantly, many of the trading concerns highlighted with PanAust are repeated in all ASX stocks
targeted by algorithmic trading and short selling.
Yet all issues raised in the PNA tutorials have to date met with the seal of approval.
The situation says a lot about market integrity concerning the ASX, and it says a lot about the
effectiveness of regulation.
The takeover of PanAust by major shareholder GRAM now requires a full investigation by the regulator
and by the take-over review board. Treasury also needs to take an interest in proceedings as the PNA
case study has implications for the entire market.