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Wednesday, 28 Jun 2017 | 9:39 PM ET | 01:14 Shareholder activist David Webb, who published a report highlighting vulnerabilities in some Hong Kong small-cap shares which subsequently tumbled this week, said the rout was a sign regulators had failed investors. Webb's report, titled " The Enigma Network: 50 stocks not to own ," published in mid-May, created a diagram outlining a complex web of cross-shareholdings of 50 Hong site link Kong-listed small-cap companies. On Tuesday and Wednesday, many of those shares tumbled as much as 90 percent, although some posted moderate recoveries on Thursday. David Webb | The Enigma Network: 50 stocks not to own A diagram from shareholder activist David Webb’s report, titled “The Enigma Network: 50 stocks not to own,” on cross-shareholdings among some Hong Kong listed companies. Webb, a former director of Hong Kong Exchanges and clearing (HKEx), the operator of Hong Kong's stock exchange, pointed to a failure of the regulatory system in Hong Kong as a key issue, advocating separating the regulatory role from HKEx and moving it to the protectorate's Securities and Futures Commission (SFC). "Clearly, this current system has not served investors; it hasn't protected their interests. It hasn't improved regulations for a long time," Webb, who is also the editor of Webb-site.com, told CNBC's " Squawk Box ". "We had a penny stocks meltdown in 2002, 15 years ago, quite similar to this one and very little reform has come out of that," he said. Signage for the Hong Kong Exchanges & Clearing Ltd. (HKEx) in Hong Kong But he noted that the six-week delay between publishing his report and the stocks' collapse likely indicated his report wasn't the direct cause, with some other catalyst likely. "There are a whole number of companies in there, a number of which were clearly bubbles and so they were going to burst at some point," he said. "I didn't expect them to burst simultaneously, but because of the cross-shareholding relationship between those companies, I can see why that could have happened." In an email to CNBC, the exchange cited comments from HKEx CEO Charles Li at a media event on Thursday that some of the heavily traded small-cap stocks weren't eligible for regulated short selling and the exchange was concerned about the possibility of illegal naked short-selling. HKEx said via email that in January it had recommended companies disclose a breakdown of major investments as well as their costs, fair value, performance and prospects. "We are proposing to codify this requirement," HKEx said. Webb noted that it took years to put his diagram of cross-shareholdings together.
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