ASIC’s recent focus on market integrity takes it back to its origins – the blockbuster 1974 Senate select committee report on the “Poseidon bubble” and its causes.
Recently, Australian Securities and Investments Commission (ASIC) chair Joe Longo has been talking about the regulator’s focus on market integrity. ASIC’s Equity market cleanliness snapshot report 786, which was released in July, identifies periods of “temporary deterioration in market cleanliness” that occurred during the COVID-19 pandemic and again in late 2023.
ASIC’s response included “targeting pump and dump activity, intervening on chat rooms, reviewing ‘finfluencer’ activity and undertaking targeted reviews where we observed leaks ahead of market announcements”.
While most of the regulator’s attention is focused on public securities markets, Longo is also expanding its scrutiny to private credit, private equity and commodity markets.
This work takes ASIC back exactly 50 years to its origins in one of the most important documents in Australian corporate history — the 1974 report of the Senate Select Committee on Securities and Exchange into the stock market events that became known as the “Poseidon bubble”.
The madness of crowds
The Poseidon bubble is named for the listed no- liability company Poseidon NL. In 1968, Adelaide stockbroker Norman Shierlaw vended some mining claims into then-dormant Poseidon and became its largest shareholder. He hired a prospector, who identified a promising nickel site at Windarra, in Western Australia. Nickel was in global shortage and the resource price was high. Drilling began at Windarra in 1969. By mid-September, the Poseidon share price was at 80 cents.
Early results were promising and the share price started to rise on insider buying. On 1 October, when the directors publicly announced the find, the price reached $12.30. Two days later, the front page of the Australian Financial Review ran the headline, “Nickel boom turns radioactive”. By the summer of 1969, people were piling into nickel stocks, then into companies with leases near Windarra, and then into miners in general. New companies were formed — often without existing projects — and raised money by prospectus. From October to December 1969, the ASX All Mining index rose by 44 per cent and trading volumes almost doubled.
The Poseidon AGM on 19 December 1969 attracted international attention. The following Monday, the price jumped to $175. Poseidon shares peaked in February 1970 at $280 — average male weekly earnings then were $71.30. This valued the company at $700m, roughly a third of the capitalisation of BHP Ltd, Australia’s largest company at the time. As one expert on stock market bubbles later observed, “That kind of value was not bad for a company that only had one mine”.
Just as quickly, the bubble burst. By early March 1970, prices were falling fast. Newspapers began reporting on the “shady practices” of share promoters, securities industry insiders, rumour- mongers and speculators. On 19 March, Senator Lionel Murphy — then Opposition Senate leader — successfully moved a motion to form a Senate select committee to look into securities markets and make recommendations for reform. From August 1971, the committee was chaired by lawyer and Tasmanian Liberal Senator, Peter Rae.
A failure of regulation
Senator Rae’s inquiries were relentless. His parliamentary biographer says he “worked intensively on this committee for more than four years, at times sleeping four hours a night and returning home only one night a week”. The committee collected more than 12,000 pages of evidence from 142 witnesses — “representatives of various regulatory bodies and government institutions related to the industry, university lecturers, stock exchange members and executives, stockbrokers, Companies Act registrars, managers of mutual funds and other institutional investors, company directors, financial journalists, accountants, company secretaries, geologists, engineers, representatives of life offices and shareholders”.
The findings, released in July 1974, were explosive. The committee uncovered “numerous instances of improper practices in the making of new issues, and in the distribution of previously issued shares”. It collected “considerable evidence of insider trading, manipulation and other abuse in the stock-markets... of behaviour among share brokers, other intermediaries and advisers in the securities industry and among some financial journalists, which has fallen short of minimum standards of propriety, competence and financial responsibility”.
The committee was also “alarmed by evidence of improper, reckless and incompetent behaviour on the part of some of those in control of public companies and investment funds” and by “the frequency and serious nature of failures to meet appropriate standards of full, accurate and timely disclosure”. It concluded, “The investor has too often been exploited by controllers of listed public companies and by managers of investment funds”.
The committee’s unanimous report was national front-page news. The Age in Melbourne called it “probably the most explosive document produced by either house of Parliament since Federation... also the most important”.
Towards national market regulation
The committee identified the Poseidon bubble as a failure of regulation and recommended urgent legislative action “on the grounds of fairness and commercial morality, and in the interests of economic efficiency”.
At the time, companies regulation was in the hands of state companies offices, and the markets overseen by self-regulating local stock exchanges. Conflicts of interest among insiders (like Shierlaw at Poseidon) were common, and allegations of market manipulation and insider trading were routinely ignored. The evidence given by GI Hynam, chair of the Perth Stock Exchange — also a broker, a close friend of Poseidon’s consulting geologist, and an early investor in the company — sums up the Perth exchange’s attitude about complaints, which was, “Here is a man who had made some money and who could have made more, and he wants to make somebody the scapegoat and not himself. Then we took it seriously and had to go into it. We found that everything had been done strictly according to the rules and regulations”.
The committee argued that the practices it uncovered could not be dismissed “as part of that exceptional series of events known as the Poseidon boom and, therefore, as having no implications for legislative action”. A decisive response was required. Its key recommendation, to which the final chapters of the report are devoted, was the creation of a powerful national regulator — an Australian Securities Commission modelled on the US Securities and Exchange Commission.
The committee concluded, “We have no doubt that, in the absence of an effective regulatory organisation, exploitation of the investor will continue, rising to serious levels whenever investor interest, conditions of liquidity and other circumstances occur and produce heightened stock market activity. Government in Australia would be irresponsible if it were not to upgrade substantially regulatory procedures so as to guard against repetition of fraud, abuse and incompetence on the scale of recent years”.
For ASIC, the important work of being the effective regulatory organisation envisaged by Senator Rae continues.
Dr Pamela Hanrahan is an Emerita Professor of the University of NSW and a consultant at Johnson Winter Slattery.
This article first appeared under the headline 'The Poseidon Adventure’ in the September 2024 issue of Company Director magazine.
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