The AMF has taken enforcement action against the author of a blog, a retired professor of financial analysis who describes himself on his blog site as a contrarian, fining him €10,000 for having disseminated misleading information about the level of debt of a bank (effectively a form of market abuse). A US blogger, who linked to the post and commented on it, has also been fined €8,000. The fines may seem small – a “shot across the bows” – but this first foray for the AMF into social media enforcement is somewhat controversial.

The Blogs

In August 2011, the AMF identified an English language article (the Blogpost), posted by a Frenchman on his blogsite, which the regulator considered to be the source of market rumours about the indebtedness of a French bank. In the AMF’s view, the Blogpost suggested that the figure in the bank’s consolidated balance sheet for “equity instruments and associated reserves” was made up solely of liabilities. The Blogpost demonstrated that if the bank’s “Tier ratio” at 30 June were to be recalculated on the basis of that premise, it would produce a figure of 2% rather than the 9.3% Basel II Core Tier One ratio produced by the bank’s published calculations.

The AMF considers that the information disseminated was in relation to operative accounting rules and to the Basel II principles then in application, and that it was information that the author knew, or should have known was misleading. The AMF’s complaint focuses primarily on the author’s characterisation of perpetual subordinated notes (TSDI) and super-subordinated perpetual notes (TSSDI) as liabilities. The regulator deems this to be misleading because Basel II permitted the bank to treat such instruments as Core Tier One capital, although the AMF acknowledges that as a matter of legal terminology, these could be considered debt instruments.

(It is worth noting that in an earlier post, published in French some ten days earlier, the author had also criticised the methodology adopted by the European banks and performed much the same calculations, but did not expressly describe the hybrid instruments as “liabilities”, although the author did suggest that the bank was some distance from compliance with Basel III rules. The AMF’s complaint is not directed to that post, although it refers to it – some inaccuracies in the figures in that first post were later corrected).

The AMF has also fined a US blogger €8,000 for relaying and commenting on the Blogpost in his own blog. The AMF ruled that as a financial professional, the US blogger should have undertaken some elementary diligence that would have led him to realise the inaccuracy of the information he relayed. In its decision, the AMF notes that it has jurisdiction in respect of the dissemination of false or misleading information relating to a financial instrument listed on a French regulated market, whether or not the behaviour took place in France.

This was the first time that the AMF has enforced the provisions of article 632-1 of the AMF’s General Regulations in relation to blog postings on the internet. The provision provides:

All persons must refrain from disclosing or knowingly disseminating information, regardless of the medium used, that gives or may give false, imprecise or misleading signals as to financial instruments. This includes the spreading of rumours or false or misleading information, where the person making the dissemination knew or ought to have known that the information was false or misleading.

Was it really a Capital offence?

Underneath this fairly bland account lies a rather more interesting story:

Prior to the publication of the Blogpost, there had been exceptional short selling of French bank shares, apparently fuelled by rumours on Twitter postings, market blogs and articles published in the mainstream English and French press which speculated that the bank might fail (one of these was retracted). The AMF imposed a short-selling ban four days before the publication of the Blogpost. The regulator recognised that the publication of the Blogpost was not intended to, and did not, affect the price of the shares, which had reached their lowest price some days before its publication.

However, the author’s decision to publish the Blogpost in English (according to the AMF, a “first” for the author), and to contact the US blogger, was seen as reflecting the author’s desire to extend the reach of the Blogpost. (It is not clear what evidence of “contact” the AMF relies on – neither blogger gave evidence and it appears that the US blogger had been closely following developments in France, and the author’s posts, for some time).

The Blogpost was plainly intended to be a criticism of the Basel II approach then applied by European Banks. It features a snapshot of the bank’s own report, and explains that the line in the balance sheet described as “equity instruments and associated reserves” was comprised of figures for subordinated debt, preference shares and Cocos, which the author believed should be treated as liabilities - ”actually different forms of liabilities-related interests subject to some conditions” – rather than assets. He suggests that a calculation which involved treatment of those instruments as “liabilities” would produce “the true equity at fair value”. The author does not suggest he is applying Basel II principles in this calculation, nor does he call the ratio produced by his calculations a “Core Tier One ratio” or a “Tier One ratio”; he suggests that the bank was not adhering to Alan Greenspan’s rules of prudential borrowing. (Various securities and preference shares which were treated as Tier One capital under Basel II would not count as Tier One capital under Basel III).

The Blogpost is clearly an opinion piece, and the author’s position and the calculations set out in the article are not complicated. It may be that the AMF’s point was that one could not wholly exclude the possibility that a novice investor alighting on the blogsite of a “monetarist business behavioural economist” and “independent financial analyst – contrarian” may not have appreciated that this was in the nature of commentary and might therefore have been misled by the calculations: in general, it may be sensible to consider featuring some formal disclaimer wording prominently on such blogsites.

Nevertheless, this enforcement action seems a somewhat disproportionate response to what is on its face an opinion piece criticising the then applicable capital regime, not least since it was published at a time when the rumours of which the AMF complained had already had their effect, and after other articles published in the mainstream French and English press had speculated about possible failure of the bank – arguably more directly fuelling rumours and contributing to market volatility and the depreciation of the share price. It is also not very clear from the decision notice why the AMF targeted the US blogger for enforcement action when it acknowledges that he was only one of a number who linked to the Blogpost.

The decision may be appealed by the French blogger – the US blogger apparently intends to ignore a process which he deems flawed and absurd. Meanwhile, other market commentators will no doubt view this decision, and its potential implications for free speech, with some concern.