Porto Energy shareholders watch half their value wiped out in under 10 minutes Thursday – with no news
Regulation Fair Disclosure,  also commonly referred to as Regulation FD or Reg FD, is a regulation that was promulgated by the U.S. Securities and Exchange Commission (SEC) in August 2000.  The rule mandates that all publicly-traded companies must disclose material information to all investors at the same time.
The regulation sought to stamp out selective disclosure, in which some investors (often large institutional investors) received market moving information before others (often smaller, individual investors).
Regulation FD fundamentally changed how companies communicate with investors by bringing more transparency and more frequent and timely communications, perhaps more than any other regulation in the history of the SEC. [Source - Wikipedia]
Following the tech boom (and bust in 2000) it became very apparent that Reg FD was critical to protect investors. Twelve years later in Canada, an annual refresher course should be mandatory for the senior management and directors of all public companies. While this regulation was specifically targeted at large U.S. listed companies, it is no less applicable to Canadian listed companies (of any size).
There have been a lot of weeks this year when I watch stocks trade on the TSX or the TSX Venture and ask myself what ever happened to fair disclosure - and why the existing Canadian rules seem to apply to some, but not to others.
Regulators only have so many warm bodies, and technology can only do so much, but if we’re going to maintain the reputation of the TSX and TSX Venture (as the global leader in raising exploration capital), then the listed companies need to start putting more effort into their disclosure.
Complicating this is the speed at which people are moving money in and out of these equities. For smaller stocks with less liquidity, the increasing use of computerized high volume trading can have a huge impact on share price and leaves the retail investor very vulnerable to losses.
Case in point – Porto Energy (TSX: V.PEC, Stock Forum; 5.5 cents)
For paid subscribers (until Thursday morning) we “were” sitting on gains of 200% since early August and even for free weekend readers Porto had generated a 50% gain since August 31st.
Investing logic would tell a person to take gains along the way but these are penny stocks and for many people they like to take the greater risk for the potential of greater returns (although statistically the odds are stacked against us).
Unfortunately what could go wrong did – and Porto hit a dry hole. That is not Porto’s fault. They did everything they could technically to go after a very high impact target and spent $10 million doing so.
However… while the “end” result was beyond their control, the timing with which they updated the general public “was” within their control. And that timing resulted in half the value of their company being wiped out in only 10 minutes on Thursday afternoon – with no news and before the stock was finally halted by the exchange.
When computers execute trades based upon multiple variables such as price and volume, these stocks can be grossly overbought short term, and going down they can be destroyed in minutes or hours. Such rapid share price destruction on Porto within minutes was something I had not witnessed before and it was disturbing to think this could happen to any of our investments.
What could have changed from the company’s perspective?
When it comes to exploration drilling, anything can happen (and no doubt the company is equally upset about these results and the collapse in share price). However, I am not impressed with the way Porto management handled this news.
The company stated October 9, that they should be in their target zone within two weeks. That was a week ago.
Thursday following the share price collapse, the exchange was forced to halt trading pending clarification from the company. Only then did they decide to issue a press release. Porto even stated in the news release (only a couple hours later) that plans were underway to plug and abandon the well. I find it hard to believe they would have only discussed and approved that decision mid Thursday morning.
There should have been no confusion in the minds of Porto management that the drilling of this well was critical to their share price, any future financing, and the overall valuation and future of the company. In a nutshell – it was a VERY material development. So why then did the company only issue a press release after the share price collapsed and their hand was forced by the exchange?
This is what I am talking about with Fair Disclosure.
Porto management should have either halted the stock and accommodated a more orderly selling process (and news distribution) or issued news in the past week before or after market hours.
From a share price perspective I doubt it would have helped, but at least everyone would have been on the same level playing field. And not looking up at their computers only to find half their investment was wiped out in minutes – with more destruction to occur the following day.
This was also a hard lesson in the rapid fire execution of orders we are seeing even on the smaller stocks. On exchanges like the NYSE I believe high frequency (algorithmic or black box) trading accounts for 60% of all trades. These are trades that occur in fractions of a second and are executed by computer programs.
Now we are seeing more and more of this happening on the TSX and the TSX Venture. And if listed companies don’t make a more concerted effort to follow strict fair disclosure policies, it is going to have devastating implications for retail investors.
Disclosure: Danny Deadlock owns 50,000 shares of Porto Energy (TSX: V.PEC)