Transparency? I Can't See It.

The sales season will begin in late January. An article appeared on Breednet during December stating that “transparency in thoroughbred trading is a major issue”.

I'd like to know what open and frank discussion has taken place on this subject in this part of the world?

Perhaps the writer was referring to recent high-profile cases involving shady practices and secret commissions in the USA, resulting in seven-figure settlements in favour of plaintiffs, with auction houses and consignors scurrying to formulate fairly toothless codes of practice.

But no, it was a local reference.

Expecting a loose collection of free enterprisers (I hesitate to use the word ‘industry’) to reform themselves from within is a big and improbable ask, especially as some of the actors and institutions who might be involved in the process may be amongst those most discomfited by the outcomes.

Strengthening the integrity of the sale process can only be in the game’s best interests.

The term ‘horse trading’ was coined a long, long time ago. It still carries an unwholesome connotation. Similarly, vocations such as ‘used car salesman’, ‘lawyer’ or ‘politician’ have been given a life of their own. The connotation goes something like this: be wary, this man may appear to be your servant but, uwittingly, you might be his.

There are Joe Publics who suspect that the inside of the horse business isn’t kosher. There are some within the business who think the same, subscribing to the belief that wads of money and corruption go hand-in-hand.

It’s said that the only people who oppose rorts are those who have never had the chance to be involved in one.

And after years of being around sales, I’ve even encountered a few buffoons who aren’t happy unless someone is ripping them off – they pass it off as a kind of rite of passage into the inner sanctum.

In good times, like the last decade, the wheels of business have been so well lubricated that issues such as propriety, transparency, ethical practices etc have scarcely rated a mention because we’ve all been too busy counting.

If one day, because of a change in political wind or plain bad publicity, a regulator is empowered to take a closer look at the horse business, it may not be a pleasant day.

If you are someone who has been buying and/or selling for any great length of time, chances are you will be aware of or been invited to become part of some practice which in other-world commerce can result in fines or even imprisonment but which goes unchecked in the thoroughbred world - inducements, secret commissions, price fixing, bid rigging.

Commerce is commerce and I can only think of one reason why a blind eye is turned to an activity which turns over hundreds of millions of dollars. I suspect the thinking is, why get in the middle of a game being played only amongst the wealthy? If someone makes a squillion at the expense of someone else who has a squillion, does it really matter? They deserve each other. If sale prices which defy logic are window-dressing, sleight-of-hand or smoke-and-mirrors, who is getting hurt? (well, breeders are, indirectly, but that’s another story).

In Australia, there is regulation at the lower end of the market through the licensing of syndicators. This supposedly protects the man-in-the-street investor (typically someone spending between $4,000 - $20,000 for a share in a horse) as syndicators have to adhere to standards of disclosure. Syndicators require a licence and their paperwork is subject to approval before the offer goes public.

In addition to the purchase price, there are significant costs incurred before a syndicator puts a horse to bed. He may put whatever ‘profit margin’ he likes on the horse and personally I don’t think there’s anything wrong with that. Go to a licensed restaurant and you’ll find a difference between the price on the wine list and what you would have paid for the same bottle at the grog shop down the road. A potential share purchaser can decide whether he wants to be involved after he has looked at the prospectus. Just like the restaurant owner and the wine in his cellar, if a syndicator doesn’t want to be left carrying the goods, he has to make the offer attractive enough.

Where there is no protection for the ‘small investor’, however, is if the horse was acquired via a rort in the first place. One example would be a silently-owned horse being put through a sale by the syndicator only to be “bought” by him at a price which, when it’s syndicated subsequently, ensures a fat profit. Or one where a vendor and the syndicator agree on a price before the auction.

(PS: so I don’t get any strongly-worded mail from female syndicators, the word ‘she’ is interchangeable with the word ‘he’ in the above paragraphs).

The auction system is where the thoroughbred business can start some reform.

A high-priced yearling these days costs about the same as a Potts Point townhouse with ‘harbour glimpses’. Housing is a community need so performance standards apply to the real estate agent, the vendor and even bidders at auction. On the other hand, no one needs a horse (just one letter difference, house and horse). Horses are an indulgence, hence Rafferty’s rules.

There are numerous transparency issues. They can’t be rolled into one blog, so I will propose a simple start point:

Why can’t I know exactly who owns the horses that are being offered for sale?

That can’t be too much to ask. How much privacy is the actual owner/s entitled to?

If I am buying a house I search the title. I can see who owns it and what financial obligations exist. As at thoroughbred auctions, the agent is the agent for the vendor but I have the opportunity to know who I am dealing with and what behaviour can be expected of the parties.

If I am looking to buy a big stake in a company I can examine the share register to see who I am falling into bed with.

If I am buying a car, I can check beforehand that everything’s ridgy-didge.

As a horse buyer, I would like the same comfort in the sales ring (or indeed in a private treaty sale). The vendor wants me to hand over my money. Who is the vendor? The sale company should not be shielding that information from me.

The information may colour my attitude to the sale. The reasons may be business or personal. For example, I may hold the view that this vendor has the ability to pervert the bidding in some way and create what I think might be a false market. That shouldn’t be confused with running a horse up to its reserve - I think that’s quite legitimate. In an ideal world the bidding ought to start there!

Or it may be someone with whom I’ve had unsatisfactory dealings and I don’t want to give him the benefit of my custom. Or the horse may be a foal-share arrangement and perhaps I don’t want to bid against those who bid in 50 cent dollars. Or I’d like to know if a sales company employee or bloodstock agent is involved in the ownership thereby possibly creating a conflict of interest. Or perhaps the vendor is the guy who ran off with my wife.

The position of the auction houses is interesting. The proprietorship of Magic Millions are up-front and highly visible traders, but not so some of their operational staff. On the other hand, William Inglis and its staff appear to be at arm’s length, but I couldn’t be 100% sure until I ask them the question or someone tells me. New Zealand Bloodstock is owned by a major consignor and some staff are also involved in ownership. There is a glaring need for transparency when sales companies with vested interests also finance some of their customers – both sellers and buyers - control credit and are responsible for filling buying orders.

So what can I do to find out ownership information?

Firstly, I can rarely find out by looking in the sales catalogue. Most horses are catalogued under draft names.

Secondly, there’s little point looking at the Stud Book website as that only shows who bred the horse. While that might be a guide, it’s ancient history as anything could have happened since foaling.

Thirdly, asking the consignor isn’t always fruitful and shouldn’t be necessary. Many consignors willingly supply the information but others can be coy about it. There are some owners who are happiest when others don’t know they are involved.

Compare this situation with racing. I can pick up the race book or go to a website and find all the owners listed for today’s runners. To have an unregistered interest in a racehorse is a breach of the Rules. It threatens integrity.

Ideally, I would like to see a section of each catalogue – an index of ownership - set aside to list the ownership of each lot, provided by stat dec if necessary. However, a more space-friendly solution would be to have a section of the auctioneer’s website where the information can be referenced.

Furthermore, it should be a condition of sale, as it is now in the USA, that if anything more than 10% of a horse is sold since being catalogued, that a notice to this effect is required and an announcement is made by the auctioneer. Payment of proceeds can be made conditional on these requirements being met.

Any semi-devious human mind can think of ways of getting round these requirements - secret arrangements of the nudge-nudge, wink,wink variety. But there’s no guarantee that the ugly scenarios which have played out in the USA can’t be replicated here. Why wait, we should start changing the culture.

I’d be interested in comments as to why vendors at public auction are entitled to any particular rights of privacy.

Sales companies have the right to ask for my credentials and those of my principals before accepting my bids. Buyers shouldn’t have to resort to the Official Information Act to find out who they are buying a horse from.