NSW Supreme Court rules against US based 'activist short seller' Bonitas

8 minute read  18.02.2020 Mark Standen, Kate Hilder
Case note | Rural Funds Management Limited as Responsible Entity for the Rural Funds Trust and RF Active v Bonitas Research LLC [2020] NSWSC 61

Key takeouts

  • What is the case about? This decision concerns an attack by US based and self-described 'activist short seller' Bonitas Research LLC (Bonitas), and Bonitas' founder Matthew Wichert on Australian company Rural Funds Management (RFM), which resulted in loss/damage to RFM.  
  • Allegations? RFM alleged that Bonitas and Mr Wiechert's conduct contravened ss 1041E, 1041F, 1041H and 1041D of the Corporations Act 2001 (Cth) (Corporations Act) and s12DA(1) of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), as a consequence of which RFM, suffered loss and damage.  RFM sought declarations as to the contraventions, damages and compensation, including profits made by Bonitas and Mr Wiechert resulting from the contravention.
  • What did the court find? In finding in favour of RFM, Justice Hammerschlag found that:
    • Australian courts have jurisdiction: 'The Act [the Corporations Act 2001 (Cth)] and the ASIC Act reach the conduct complained of';
    • Bonitas and Mr Wiechert's actions contravened ss 1041E, 1041F and 1041H of the Corporations Act 2001 and s 12DA(1) of the ASIC Act;
    • RFG failed to establish that Bonitas and or Mr Wiechert contravened s 1041D of the Corporations Act (and in consequence, s 1317HA has no application).  
  • Next steps? The Supreme Court will consider the assessment of damages on 6 March.  Damages will not include profits made as a result of the contravention.
  • Bonitas' response? In a series of tweets responding to the judgement Bonitas reportedly defended its position.  In a letter cited in the judgement Bonitas maintained that 'Australian courts have no jurisdiction over us, and we will contest the enforcement of any orders or judgments you obtain'.  

Summary

On 12 February, the NSW Supreme Court handed down its decision in Rural Funds Management Limited as Responsible Entity for the Rural Funds Trust and RF Active v Bonitas Research LLC [2020] NSWSC 61. 

The case concerns attacks in the form of tweets and reports by US-based short seller Bonitas Research LLC (Bonitas) and Bonitas' CEO and founder Matthew Wiechert on Australian company Rural Funds Management Limited (RFM) that caused 'a significant drop' in the traded price of units listed on the ASX. 

In finding in favour of RFM, Justice Hammerschlag held that Bonitas and Mr Wiechert's conduct contravened ss 1041E, 1041F and 1041H of the Corporations Act and s 12DA(1) of the ASIC Act but that RFM failed to establish that Bonitas and Mr Wiechert contravened s 1041D.  

In a Nutshell: Background Facts and Allegations

The plaintiff, Rural Funds Management Limited (RFM) is an Australian unlisted public company and the responsible entity of, the trustee for, and the manager of, two stapled registered management investment schemes: Rural Funds Trust and RF Active (together RFF).  Units in RFF (units) are listed on the Australian Stock Exchange (ASX).

Starting on 6 August 2019, self-described 'activist short seller' Bonitas Research LLC (Bonitas) launched what Justice Hammerschlag described as 'a concerted course of making statements and disseminating information scathingly critical of RFM and RFF' in which they accused RFM and RFF of dishonesty and fraud with the intention of driving down the price of units for commercial gain.

This conduct caused a 'significant drop' in the traded price of units traded on the ASX.  

RFM alleged that Bonitas and Mr Wiechert's actions contravened ss 1041E, 1041F, 1041H, and s 1041D of the Corporations Act, and s 12DA(1) of the ASIC Act as a consequence of which, RFM suffered loss and damage.  RFM sought declarations as to the contraventions and damages and compensation, including profits made by Bonitas and Mr Wiechert resulting from the contravention.

Jurisdiction

The defendants in the case are both US based: Bonitas Research LLC (Bonitas) is incorporated in Texas, and Bonitas' CEO and principal Matthew Wiechert is also based in the US.  

Neither Bonitas nor Mr Wiechert elected to defend the proceedings in court.  Instead, in a letter sent to RFM’s lawyers and cited in the judgement, they 'respectfully decline the invitation' to appear, and assert that Australian courts have no jurisdiction over them.  'Australian courts have no jurisdiction over us, and we will contest the enforcement of any orders or judgments you obtain that certainly will be contrary to the discoverable facts, as well as United States and Texas law and policy' the letter states.

Addressing the issue of jurisdiction, Justice Hammerschlag 'declined to express any view on the operation of the Constitution of the United States of America, or on Texas law and policy' on the basis they 'play no role in the adjudication of these proceedings, which are governed by the laws of Australia'.
His Honour held that the 'The Act [the Corporations Act] and the ASIC Act reach the conduct complained of'.  

'Section 1041H of the Act and s 12DA of the ASIC Act reach conduct in this jurisdiction that is misleading or deceptive or is likely to mislead or deceive. If there has been such conduct, the provision is engaged, whether or not there is other conduct outside of the jurisdiction' His Honour writes.

In this case, His Honour explains not only was Australia an intended destination for the statements and information disseminated by Bonitas and Mr Wiechert but it was also proven that the statements and information actually reached Australia and were read here.  There 'is ample evidence establishing' that the reports published by Bonitas and Mr Wiechert 'were published in a manner which made them capable of being accessed and that they were in fact accessed in Australia and that they remain accessible by persons resident in Australia'.  

Contraventions of ss1041E, 1041F and 1041H of the Corporations Act and s12DA(1) of the ASIC Act

Justice Hammerschlag found that the defendants did contravene ss1041E,1041F and 1041H of the Corporations Act and s12DA of the ASIC Act.
Justice Hammerschlag accepted that the allegations of dishonest and fraudulent conduct in the two reports released by Bonitas and Mr Wiechert were baseless, and that 'neither Bonitas nor Wiechert took the trouble to check with or enquire of RFM as to any of the matters which they broadcast. They had an obvious commercial interest in depressing the price. I have no difficulty in concluding that they did not care whether what they were saying was false'.

'Manifestly, the statements and information made and disseminated by Bonitas and Wiechert were intended to, likely to, and did, induce persons in this jurisdiction to dispose of their units, or acquire units. They were also plainly intended to, likely to, and did, have the effect of reducing the trading price of the units.  The conduct complained of was in relation to a financial product and was in trade or commerce' and RFM 'suffered loss or damage by the conduct complained of'.  

No contravention of s 1041D?

Justice Hammerschlag rejected RFM's argument that the behaviour also constituted a contravention of s 1041D.  

His Honour writes that in order for a contravention of s1041D to be established, the following three requirements must be met: 1) circulation or dissemination of information to the effect that the price for units will or is likely to fall; 2) the fall is because of a transaction or other thing done in relation to the units; and 3) that transaction, or thing done, constitutes, or would constitute, a contravention of ss 1041E or 1041F.

In finding that RFM failed to establish the breach, Justice Hammerschlag said that RFM's argument was 'unsound' because it relied on a misinterpretation of s1041D.   

Justice Hammerschlag writes that s1041D 'is concerned with dissemination of information about illegal transactions, acts, or things previously done by the disseminator, not with dissemination of misleading or deceptive information about legal ones done by the subject entity and, in any event, to which the disseminator was not party.  What the disseminator says cannot itself be the contravention. The circulation or dissemination of misleading information in contravention of the Act about a series of transactions or acts or things done, cannot itself be the transaction or act or thing done required by s 1041D(a). That is something separate.  Consistently with this, the section contemplates that at the time the circulation or dissemination occurs, the illegal transaction, act or thing done has already taken place. That is also not the case here.'

His Honour goes on to observe that 'as dishonest and deserving of criticism as their behaviour was, what Bonitas and Wiechert did was not within that which the section contemplates. They published false information about a series of transactions said to have been entered into by RFM, none of which transactions was, in fact, illegal'.  

On this basis, his Honour considers that 'sections 1041E, 1041F, and 1041H, rather than s 1041D, are directed to the type of mischief which occurred' in this case.  

Given this finding, his Honour said that there is no scope for the court to make a compensation order under s 1317 HA.  

Next steps?

The court will make appropriate declarations as to the contraventions of ss 1041E, 1041F and 1041H of the Act and s 12DA(1) of the ASIC Act by Bonitas and Mr Wiechert.  

The assessment of damages will be made on the footing that damages do not include profits made as a result of the contravention.

Response

  • Bonitas has defended its research and maintained its short position: In a letter cited in the judgement Bonitas maintained that 'Australian courts have no jurisdiction over us, and we will contest the enforcement of any orders or judgments you obtain'.  Following the judgement, Bonitas Research reportedly defended its research and confirmed that it has maintained its short position in a series of tweets.  The tweets reportedly describe the judgement as 'procedurally and substantially infirm'.  
  • Rural Funds Group has issued no comment beyond acknowledging the judgement to the SMH.  
  • Share price is recovering since the judgement? The SMH comments that since the judgement was released, the unit price has climbed 8% to a high of $2.08 on 13 February.  The shares were reportedly trading above $2.40 prior to the release of Bonitas' communications.  

Implications?

The SMH suggests that the decision could be significant given the increase in complaints to ASIC concerning similar attacks by overseas-based short sellers.  Reportedly, there are calls from some quarters for ASIC to take action to address the issue.

However, according to the Australian, ASIC has no plans to implement a licensing system for activist investors/analysts.  An ASIC spokesperson is quoted as saying that 'With regard to so-called activist investors or analysts, ASIC's general position has consistently been to encourage companies, where possible, to address specific external criticisms with sufficient, usable information so that the market can form its own view…If some use false or misleading information to hinder or distort that situation, then they might be potentially subject to whatever legal sanctions can be brought to bear'.

[Sources: Rural Funds Management Limited as Responsible Entity for the Rural Funds Trust and RF Active v Bonitas Research LLC [2020] NSWSC 61; [registration required] The Australian 13/02/2020; 14/02/2020; [registration required] The SMH 13/02/2020]

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