Debt has always been an efficient tool?

Article in The Star: "Debt raising vital for Khazanah stable of enterprises"

One snippet:

"DEBT has always been an efficient tool for finance and investment and it comes to no surprise that the list of companies that have the largest amount of debt includes some of the largest companies on Bursa Malaysia."

That is a rather remarkable statement in itself. 

I would therefore like to add some counterweight:

"Debt has also always been an efficient tool to bancrupt a company in the fastest possible way".

There are worldwide many, many examples of companies that used too much debt and did not live to tell the tale.

One reason for the increased risk of bancruptcy is that earnings are simply too low (or even negative) to sustain the debt payments.

Another reason is that despite having reasonable earnings a company might run into cashflow problems.

The stable of enterprises of Khazanah might have more options to increase debt even more (through Khazanah), but that might not always lead to the desired outcome and even increase the problem. MAS might be one example in this category.

Also, easier debt from a GLF like Khazanah might give a company a possibly unfair advantage over its privately funded rivals.

An example of a heavily indebted company outside the Khazanah stable is 1MDB, a story that most likely will end very costly for the Malaysian taxpayers.

China Automobile Parts: "bad reputation"? (3)

Things continue to worsen in regards to China Automobile Parts, PKF issued the following rather strong worded statement.

PKF retracted their 2015 audited accounts since the financial statements for FYE2015 do not give a true and accurate picture of the financial position of the company.

Unfortunately, appendix 1 and 2 (mentioned in the text) are not enclosed. That is a pity, they might provide details when things started to turn sour, and how bad things might be.

Audited accounts being retracted from a listed company might be a first in Malaysia, but definitely not for unlisted companies, 1MDB being a rather "famous" example of that.

1MDB's new audit company

According to this article from Bloomberg 1MDB has appointed Parker Randall as their new auditor.

Their UK website can be found here. Some screenshots:

I certainly hope that Parker Randall will be the right "choose" for 1MDB, that they can "delivery" that, with the help of the 3 E's: "Exceeding, Expectations, Experts".

The local firm executing the audit will most likely be AFTAAS.

The "about us" page does not reveal much information:

And is exactly the same as the Team-profile.

Similar to the Forum-page:

1MDB was worldwide one of the most talked about companies in 2016, and unfortunately often for the wrong reasons.

A lot of pressure will therefore be on the shoulders of little known outfit AFTAAS, which looks like a rather "remarkable" choice, given the size, scope and history of 1MDB.

1MDB accounts "are audited by an international firm" (3)

From my previous posting on this matter:


The Board would like to stress that 1MDB accounts are audited by an international audit firm, Deloitte, " it said in a statement issued in capital Kuala Lumpur tonight.
It said that Deloitte signed off 1MDB’s 2013 and 2014 accounts without qualification and similarly KPMG signed off the 2010, 2011 and 2012 accounts with no qualification.


This subject has suddenly become more interesting, since the news has been published that Deloitte has resigned as an auditor.

1MDB did not give any reason why it held back the news of Deloitte's resignation, which was known for five months, and which seems to be material information.

But then again, transparency was never 1MDB's strongest point.

On top of that:

".... in a separate statement referred to the civil forfeiture complaint filed by the United States Department of Justice (DoJ) on July 20. It said the complaint contains information, which, if known at the time of the 2013 and 2014 audits of 1MDB, would have impacted the financial statements and affected the audit reports."


Despite this "small setback", 1MDB declared:


".... the Board remains confident that no wrongdoing has been committed by 1MDB and that the past audited financial statements continue to show a true and fair view of the company’s affairs at the relevant points in time ......"


That confidence seems highly misplaced given the overwhelming information available pointing to the opposite.

Hopefully one day the Board (and all other parties associated with 1MDB) will be held responsible for its deeds.

The Securities Commission has formed the AOB (Audit Oversight Board), its mission statement:

Fostering high quality independent auditing to promote confidence in the quality and reliability of audited financial statements of public-interest entities and schedule funds in Malaysia.

Over the years many critical articles have been published and dozens of red flags have been spotted regarding 1MDB. How is it possible that three of the highest regarded accounting firms in Malaysia have failed to spot the many relevant issues and have approved the accounts without even a single qualification? These same companies have also audited numerous companies listed on Bursa.

AOB should investigate all that went wrong, the reasons behind it and take appropriate measures.

1MDB's strange reaction

Assume you are running a company.

Not some small SME, but a huge one, with tens of billions of Ringgit of assets (and unfortunately, also a huge amount of debt). The company is owned by the people of Malaysia, and you really want to perform to your best ability for them, you definitely don't want to let them down.

You are doing your best, but things have not been easy, it is tough to meet the debt obligations.

And then ..... out of nowhere, a party contacts you, to tell you that they will soon send billions of Ringgit to you.

And, to your big surprise, they do this all for free, to help the people of Malaysia.

Added to that, they will even do their best to get other parties involved to send even more money (and those parties are indeed cooperating, as we speak).

How would you react, sounds too good to be true?

Basically that is what happened this week to 1MDB, I guess Christmas came early for the company and its management team.

And what was their reaction to the announcements of the above events?


1MDB notes a press conference led by the US Attorney General today relating to a civil court action filed by the government of the United States of America.

1MDB highlights that it is not a party to the civil suit, does not have any assets in the United States of America, nor has it benefited from the various transactions described in the civil suit.

Furthermore, 1MDB has not been contacted by the US Department of Justice or any other foreign agency in relation to their investigations.

As previously stated, 1MDB will fully cooperate with any foreign lawful authority, subject to international protocols governing such matters and the advice of the relevant domestic lawful authorities.


What an incredible strange and terse reaction. Four sentences, that is it, have they even bothered to read the filing?

The document is of course only an executive summary, only 136 pages long, but even then, there is so much detail, is this the best 1MDB can offer?

And are they not happy receiving back their money, do they not want to know what has happened, do they not want to see some justice being done?


"[1MDB] .... does not have any assets in the United States of America".

No, the assets are from people who allegedly stole money from 1MDB, and bought assets in the US with the proceeds. The US wants to freeze these assets and give them back to the right full owner, 1MDB.


".... nor has it benefited from the various transactions described in the civil suit."

Nowhere it is claimed that 1MDB has benefited from the transactions, in the contrary, dozens of examples are given that 1MDB allegedly has been conned from its precious money, estimated to be about RM 12,000,000,000.00.


This blog is more about capital markets, not many listed companies are mentioned in this case, but bonds are, and unfortunately not in a very positive way.

Malaysia has the ambition to become an important financial centre. The above cases (just a selection) seem to warrant scrutiny from the relevant authorities, why have they been so quiet regarding this case, surely this is not good for the Malaysian reputation?


The nice thing about these cases is that one can observe real conversations (either by phone or through email), like this one:

And to end this posting on a slightly more positive note, some Menglish is for ever added to the archives of the FBI):

Are SC/BM not involved in 1MDB probe? (2)

I wrote before:


“There are three agencies involved, comprising the police which deal with cheating, criminal breach of trust and so on; the MACC (Malaysian Anti-Corruption Commission) which deals with corruption; and the central bank, BNM, that deals with aspects relating to our financial system and what contravention there has been of our rules [and] regulations, and our laws."

I definitely hope that the Securities Commission and/or Bursa Malaysia are included in the probe as well. Although 1MDB is not a listed company, the following companies are or were listed on Bursa:

• Utama Banking Group Bhd
• Cahaya Mata Sarawak Bhd
• Putrajaya Perdana Bhd
• Loh & Loh Corp Bhd
• RHB Cap Bhd

I definitely should add AmBank to that list. This bank paid a penalty of RM 53.7 Million to Bank Negara, although the exact reason for it ("non-compliance with certain regulations") is very vague (here and here).

With the shareholders of AmBank being hit by the penalty, are they not allowed to know the exact facts regarding the non-compliance? Later this year, at the AGM, they have to vote about the Board of Directors, should they not know who was responsible for this issue?

More news regarding the UBG deal has been revealed by The Australian: "Email trail links banks to Malaysian scandal", some snippets:

Together with other information compiled by police in neighbouring Singapore, they also raise concerns that the UBG takeover may have ultimately benefited 1MDB adviser and UBG director Jho Low, who is close to the family of Malaysian Prime Minister Najib Razak, at the expense of ordinary Malaysians.

......

While AmBank told the world, through the Malaysian stock exchange, that PSI belonged to Obaid, internal bank emails obtained by The Weekend Australian show it was told the secrecy was necessary because Saudi royals were behind the company.

“PSI, a privately held company of the Royal Family of the Kingdom Saudi Arabia, is governed by the strictest confidentiality,” Ambank officer Daniel Lee was told in a March 18, 2010 email.

“As such, it is with regret that we are not able to provide you with access to PSI’s financials.”

Adding to the secrecy shrouding the deal, the email to Lee came from an anonymous Gmail ­account “project.unicorn1@ gmail.com”, operated by a person or persons calling themself “Team Project Unicorn”.

Even now, five years after PSI took control of UBG and delisted it from the Malaysian exchange, the identities of the person or people operating the email account remain unknown.

Saudi Arabian documents obtained by The Weekend Australian show that when PetroSaudi was set up in 2007 it was half-owned by Obaid and half by Saudi royal Prince Turki bin Abdullah. However, there is no indication Prince Turki was ever involved in PSI.

The Weekend Australian was also unable to verify the existence and status of PSI. It’s not listed on the Seychelles publicly available company register, and yesterday the country’s Financial Services Authority had yet to respond to a request for a more detailed search.

It is sometimes hard to tell who was on whose side during Project Unicorn.

In UBG’s corner, Low sat on the board as a representative of the Abu Dhabi-Kuwait-Malaysia Investment Corporation or ADKMIC, which owned a little over half of UBG — a stake it had bought from the Taib family.

Even though ADKMIC carries a name that makes it seem a fund from the oil-rich Middle East, police in Singapore have told Malaysian authorities that Low actually sits behind the British Virgin Islands company.

However, in UBG’s 2009 annual report, Low declared he owned no shares in UBG, either directly or indirectly.

......

Later in the year when PSI was mopping up minority shareholders, this would be directly contradicted in a statement to Malaysia’s stock exchange, Bursa Malaysia, describing Obaid as “the sole shareholder and director or PSI Seychelles”.

......

On January 12, 2011, almost a year after Team Project Unicorn set out the outlines of the deal, the UBG takeover was complete. With all shareholders paid out and the company now solely owned by PSI’s Malaysian subsidiary, Javace, UBG was delisted from Bursa Malaysia and dissolved.

At 2.50 ringgit a share, ADKMIC was entitled to 658m ringgit, or about $US195m.

But who got that money? When the UBG takeover was announced at the beginning of 2010, Malaysian state-owned newsagency Bernama reported ADKMIC shareholders included “prominent Middle-Eastern investors”. But police in neighbouring Singapore tell a different story. In March last year, Singapore Police’s Commercial Affairs Department told Malaysia’s central bank that an account held in ADKMIC’s name at the Singapore branch of Swiss bank BSI was “beneficially owned by Jho Low”.

Singapore Police allege that between June 2011 and September 2013 almost $529m flowed into the ADKMIC account from an account at RBS Coutts’ Zurich branch held by another company allegedly associated with Low and embroiled in the 1MDB scandal, Good Star.

The SC should have investigated these claims by now, the above might implicate serious breaches of the listing rules.

AmBank was of course also involved with the (in)famous "donation" of RM 2.6 Billion in the accounts of the PM.

But there might be more. According to blogger "jebatmustdie", there are issues with a RM 5 Billion bond from 1MDB (the article can be found here, readers in Malaysia might need a VPN to access it):

The terms and conditions of this RM5 billion bond had been clearly spelled out and that it could only be used according to Shariah principles.

Is sending money to Good Star Ltd in compliance to Shariah principles? What does Good Star do?

Securities Commission is the controller of bond issuance process. It also ensures compliance to documents when the bond was offered as well as the continuous monitoring that the terms and conditions are always being complied with.

In it's 2015 annual report, there is no mentioning at all of 1MDB, the elephant in the room

1MDB needs a new script (3)

I wrote before about Avestra Asset Management and its curious relationship with 1MDB (here and here).

The Australian published today an article "Court shuts Avestra schemes linked to 1MDB crisis" on its website that seems relevant.


The Federal Court has ordered the shutdown of five investment schemes run by Avestra Asset Management, a Gold Coast fin­ancial services group drawn into Malaysia’s 1MDB crisis.

Judge Jonathan Beach made the orders after reading a report from provisional liquidators that found undisclosed related-party transactions, 13 potential breaches of corporate law and failure to invest according to the fund’s individual mandates.

The report, compiled by Simon Wallace-Smith and Richard Hughes of Deloitte and released to The Australian by the court, also reveals that a Cayman Islands vehicle linked to the 1MDB scandal is the owner of the Avestra Credit Fund, which backed a takeover bid against Malaysian company Harvest Court Industries.

1MDB needs a new script (2)

I wrote before about the rather curious relationship between 1MDB and Avestra, an asset management company that seems to be managed from a townhouse in the Gold Coast, Australia.

It has been mentioned several times in the press "Australian firm Avestra Asset Management has been managing over US$2 billion of 1Malaysia Development Bhd's monies invested in several Cayman Islands funds."

It must be noted that 1MDB has never denied the above.

Avestra was fined in the past by ASIC having committed six offences, and being mentioned by hard-hitting blogger "Dr Benway" in a not "very positive way", to put it mildly.

But things are about to get much stranger according to this press release:


ASIC seeks court orders to wind up Avestra Asset Management

ASIC has commenced proceedings in the Federal Court of Australia against Avestra Asset Management Ltd (Avestra), the holder of an Australian financial services licence and responsible entity or trustee of a number of managed investment schemes. Avestra's schemes are managed funds which invest in shares and other financial products.  ASIC understands the schemes comprise approximately $18.5 million under management.

ASIC alleges that Avestra has persistently contravened its duties in relation to a number of the schemes, including to:

• act in the best interests of scheme members
• exercise the required degree of care and diligence
• do all things necessary to ensure that the financial services provided under its licence are provided efficiently, honestly and fairly.

Among other things, ASIC alleges that Avestra borrowed money on an unsecured basis from the property of its schemes, and invested scheme property in entities and offshore funds connected to its directors without proper due diligence or regard for the interests of members.

ASIC is seeking interim orders to appoint provisional liquidators or receivers to take control of Avestra's assets and report on, among other things, any suspected contraventions of the law, any losses suffered by scheme members, and whether the schemes ought to continue in operation (under a new responsible entity) or whether they should also be wound up.

ASIC is seeking final orders that Avestra be wound up on a just and equitable basis.

According to this article there are clear links with Malaysia, in particular Harvest Court Industries, Eddie Chai and several ACE listed companies:


ASIC: Avestra ‘diverted cash to tax haven’

The corporate watchdog has accused management of Gold Coast funds management group Avestra of diverting investors’ money to unregulated entities in tax haven the Cayman Islands and using fund money to prop up a timber tycoon’s controversial takeover bid for a Malaysian company.

In a blockbuster 200-page Federal Court affidavit, Australian Securities & Investments Com­mission senior investigator Glenn Childs details the regulator’s concerns about failures to disclose related party transactions, potential breaches of takeover laws and the plummeting value of Avestra’s investments.

Mr Childs said he was concerned that Avestra Asset Management executives Paul Rowles and Clay Dempsey “may not be fit to act as the responsible managers” of the company and “investor funds may be at risk”. The company controls about $18.5 million of investors’ money.

Earlier this month, ASIC asked the court to appoint Simon Wallace-Smith and Robert Woods of Deloitte as provisional liquidators of Avestra with a mandate to take control of the 13 funds run by the group.

Justice Jonathan Beach on Thursday ordered the application be heard on October 27.

Avestra has yet to file a defence and its solicitor, Angela Yates of Moray Agnew, declined to comment because the case is before the court.

Mr Childs’s affidavit reveals that Avestra has been the subject of a full-scale ASIC investigation since December 2014.

He alleges Avestra began moving money to the Cayman Islands funds in May last year after ASIC began inquiring into management of its Australian wholesale funds.

Avestra allegedly closed the Australian wholesale funds — Canton, Worberg and Safecrest — and opened equivalents in the tax haven, Bridge Global CMC and Hanhong High Yield.

However, the underlying investments, allegedly dominated by risky punts on Malaysian second-bourse stocks [most likely the writer means the ACE market], did not change.

Mr Childs alleges that one of the funds into which investor money was channelled, the Avestra Credit Fund, failed to disclose a series of investments that involved conflicts of interest.

The largest was $US5.4m, about three quarters of the fund’s assets, loaned in May last year to Zenith City Investments, a company registered in tax haven Seychelles and run by Malaysian businessman Eddie Chai.

“The circumstances in which the loan to Zenith was made suggest that it may have been used for an attempt by Zenith and its director (Mr Chai) … for an attempt to take over the board of Harvest Court Industries … a company listed on the main market of the Malaysia Bursa,” Mr Childs said.

At the same time, Avestra “itself acquired a significant holding in Harvest Court Industries on behalf of its various schemes”, he added.

Under examination by ASIC, Mr Rowles denied knowing Mr Chai wanted the money to buy more stock in Harvest Court.

Mr Chai succeeded in his takeover bid but it was controversial, sparking a Malaysian High Court case.


The Malaysian regulators (BM and/or SC) might want to take note of the above, several Bursa listed companies do indeed have Avestra as an investor.

Two of the funds that are being managed by Avestra have the following track record according to information from their own website:

In a bit more than one year, the funds NAV price lost 60% of its value.

And this fund lost 46% of its NAV price in only nine months time.

According to its website the company delivers "superior performance", but I can't find any proof of that, in the contrary. I only notice a very bad performance and a extreme volatile NAV price. Losing 40% respectively 34% in a single month is simply beyond my believe.

1MDB is not invested in these two funds, that will be of some relief to Malaysian taxpayers.

But it still leaves important questions, for instance:

• Did 1MDB invest in a fund managed by Avestra, if so who was responsible for the due diligence of selecting the fund manager, and how was that process exactly performed? Did the due diligence result in any red flags?
• Which fund did 1MDB exactly invest in, and what have the returns been so far?
• Is any commission paid to an agent (or other person/organisation) when 1MDB made this investment, if so how much?

Malaysian royalty has called for a speedy, thorough, transparent probe in the affairs of 1MDB without fear or favour, let's hope that will indeed happen soonest.

Are SC/BM not involved in 1MDB probe?

Article in The Edge: "Zeti: Public deserves answers to 1MDB"

One snippet:


“There are three agencies involved, comprising the police which deal with cheating, criminal breach of trust and so on; the MACC (Malaysian Anti-Corruption Commission) which deals with corruption; and the central bank, BNM, that deals with aspects relating to our financial system and what contravention there has been of our rules [and] regulations, and our laws."


I definitely hope that the Securities Commission and/or Bursa Malaysia are included in the probe as well. Although 1MDB is not a listed company, the following companies are or were listed on Bursa:

• Utama Banking Group Bhd
• Cahaya Mata Sarawak Bhd
• Putrajaya Perdana Bhd
• Loh & Loh Corp Bhd
• RHB Cap Bhd

According to this article from The Malaysian Insider, all these companies were very much linked to 1MDB and the actors involved in the drama.

BM and/or SC have been as quiet as a mouse over the whole affair, but they should revisit all deals regarding these four companies, if the information provided to the public has been correct at all times.

Excellent, old-fashioned investigative journalism

From The Washington Post:

"How a curmudgeonly old reporter exposed the FIFA scandal that toppled Sepp Blatter"

Some snippets:


Jennings is an advocate of slow, methodical journalism. For half a century, the 71-year-old investigative reporter has been digging into complex, time-consuming stories about organized crime. In the 1980s, it was bad cops, the Thai heroin trade and the Italian mob. In the ’90s, he turned to sports, exposing corruption with the International Olympic Committee.

For the past 15 years, Jennings has focused on the Federation Internationale de Football Association (FIFA), international soccer’s governing body. As other journalists were ball watching — reporting scorelines or writing player profiles — Jennings was digging into the dirty deals underpinning the world’s most popular game.

“I’m a document hound. If I’ve got your documents, I know all about you,” he said. “This journalism business is easy, you know. You just find some disgraceful, disgustingly corrupt people and you work on it! You have to. That’s what we do. The rest of the media gets far too cozy with them. It’s wrong. Your mother told you what was wrong. You know what’s wrong. Our job is to investigate, acquire evidence.”

That is, essentially, Jennings’s mantra: Take time, dig up dirt and don’t trust those in power.


In the Malaysian context, journalism has improved clearly over the last two decades, partially helped by the popularity of the internet and the shift towards increased transparency. Good investigative stories, for instance regarding 1MDB, have emerged. Some people seem to be not yet ready for this shift.

Bank Negara makes it difficult for 1MDB? (2)

I wrote before about this rather puzzling statement:


“The remaining US$1.103bil in 1MDB’s investment funds managed by Cayman (Islands) Monetary Authority has been redeemed and is kept in US currency at BSI Bank Ltd Singapore (BSI Singapore),” he said in a written reply to the Dewan Rakyat in response to a question raised by Petaling Jaya North MP Tony Pua.

“The decision to use a bank in Singapore is to facilitate transactions as Bank Negara Malaysia (BNM) regulations require approval by the bank for each transaction exceeding RM50mil,” wrote Najib, who is also the Prime Minister.


It didn't seem to make any sense at all. And when that is the case, often something else is going on.

This article in The Edge "1MDB has no cash after all" dropped a bombshell on the whole affair:


There is no cash after all in 1Malaysia Development Bhd’s (1MDB) Singapore bank account.

That was the shocking revelation by Prime Minister Datuk Seri Najib Razak (pic) yesterday in response to a parliamentary question asked by DAP lawmaker Tony Pua.

Pua asked whether Bank Negara Malaysia (BNM) had been informed by the authorities in Singapore that the bank statements of 1MDB and its subsidiary (Brazen Sky Ltd) at the Singapore account of Swiss bank BSI had been falsified and whether there was US$1.103 billion (RM3.99 billion) in cash in the account as previously stated.

“1MDB has explained that the redeemed investments of 1MDB [from the Cayman Islands] are in the form of assets in US dollars in a bank in Singapore for the purpose of balancing the liability of the company’s US dollar,” said Najib in his written reply to Pua.

Najib, who is also the finance minister, told Parliament in March that the cash redeemed from the funds that were kept in the Cayman Islands is now with BSI Singapore. In his written reply yesterday, he said the answer he gave in March is now “amended”.


Transparency of 1MDB has been simply horrific, any small listed company on Bursa would put 1MDB to shame. Even the tiniest of ACE-listed companies with assets that are less than 1/10,000th of the size of 1MDB needs to issue:

• quarterly statements (although unaudited)
• audited yearly statements, including the notes and lists of assets
• year reports, including statements by the Board of Directors
• announcements regarding any major issue
• a reply to queries of Bursa within one working day

And all has to be done in a correct and timely fashion.

1MDB's website contains none of the above, except for some photo's of smiling children and a highly biased selection of news articles (conveniently leaving out any critical article).

1MDB urgently needs to increase it's transparency in a big way, the more so since it manages OPM (Other People's Money).

1MDB accounts "are audited by an international firm" (2)

In the previous blog post on this subject I wrote about the pretty bad state of audits, even if performed by the "Big Four" companies.

But how would the situation be if an audit company is warned in detail about possible fraud or other financial irregularities, surely auditors will step up their game, zoom in on the situation at hand and give a proper report?

According to short seller Carson Block the answer is an astonishing "no".

In "Beware the false reassurance of corporate probes" (free registration might be required) published by the Financial Times he writes (some snippets):


When it comes to defending themselves against accusations of wrongdoing, management teams and their complacent boards follow a well-worn routine. Their immediate reaction is to issue a blanket denial and announce that an independent committee of directors will investigate the accusations. The committee duly appoints an independent law firm to oversee the investigation, and the consulting arm of a Big Four accountancy to pore over the books.

Too often, such investigations are worthless endeavours that lead to more pain for investors. Frequently, companies are exonerated by their boards but subsequently tumble into bankruptcy or announce earnings restatements or evidence of other serious problems.


Directors are not inclined to embarrass themselves by exposing serious problems that had long been under their noses. That would invite shareholder lawsuits, regulatory scrutiny and professional embarrassment.

Nor are they likely to relish the prospect of clashing with management when the chief executive is often the one who put them on the board in the first place. Board members may even be conspirators in the fraud. If they are based in China and have little connection to the US, they are unlikely to face prosecution.

Time and again, investigators report that they have found no evidence to support claims of wrongdoing. The question that investors need to ask themselves is: how hard did these investigators look for clues that might have revealed something was amiss?

The firms hired to support the probe are often given a deliberately narrow brief. For example, there might be tight restrictions on the investigators’ ability to investigate the sources of the company’s cash balances.

Fraudsters have repeatedly duped independent committees and their advisers by showing that they control large cash balances. Often, they do this by borrowing the funds. If directors make it impossible to detect such ruses by limiting investigators’ access to evidence, nobody knows; the entire process is shrouded by the cloak of attorney-client privilege.

Accounting firms are also rife with conflicts of interest. Their main line of work is auditing public companies. This makes them unwilling to heap embarrassment on management teams and boards. To do so would be bad for business.


That doesn't sound that promising. Block gives a concrete example:


In 2011, Sino-Forest Corporation, a China-based company listed on the Toronto Stock Exchange that Muddy Waters had accused of falsifying its revenue, spent approximately $50m on such an investigation, hiring PwC as a consultant. The result was a clean bill of health. In a press release announcing the completion of the investigation, the independent committee said the company was unequivocally “not the ‘near total fraud’ and ‘Ponzi scheme’ as alleged by Muddy Waters . . . Sino-Forest is a real company.”

Unfortunately, investors who bought Sino-Forest bonds following the committee report saw their prospects for recovery plunge when the company declared bankruptcy four months later.


The problem is not confined to emerging markets. In the US, numerous independent board investigations have issued clean bills of health, only to be proved wrong later on.

A report into wrongdoing at Enron, carried out by a law firm hired by the company, was later described as “a whitewash” by an Arthur Andersen investigator. When Global Crossing ordered an investigation into allegations levelled by a former employee, the report came back clean. Yet the company fell into bankruptcy and settled with the SEC over an accounting scandal.


The solution according to Block:


Boards that truly want transparency should stop hiring law firms to conduct these investigations in private and under legal privilege, and open their work to genuine scrutiny.


Hopefully 1MDB will follow this advice for increased transparency, it is long overdue.

1MDB accounts "are audited by an international firm"

Article from The Malaysian Insider:


Debt-laden 1Malaysia Development Berhad (1MDB) insisted today its accounts are audited by an international firm, saying it reserves the right to sue those making malicious and slanderous statements against the government-owned strategic investor.

The company broke its silence after senior banker Datuk Seri Nazir Razak yesterday told its board to appoint independent auditors or resign over a RM42 billion debt. "

The Board would like to stress that 1MDB accounts are audited by an international audit firm, Deloitte, " it said in a statement issued in capital Kuala Lumpur tonight.

It said that Deloitte signed off 1MDB’s 2013 and 2014 accounts without qualification and similarly KPMG signed off the 2010, 2011 and 2012 accounts with no qualification.


Accounts audited by international audit firms, members of the "Big Four".

What possibly could go wrong?

Well, let's start with "The dozy watchdogs" written by The Economist, some snippets:

PwC’s failure to detect the problem is hardly an isolated case. If accounting scandals no longer dominate headlines as they did when Enron and WorldCom imploded in 2001-02, that is not because they have vanished but because they have become routine. On December 4th a Spanish court reported that Bankia had misstated its finances when it went public in 2011, ten months before it was nationalised. In 2012 Hewlett-Packard wrote off 80% of its $10.3 billion purchase of Autonomy, a software company, after accusing the firm of counting forecast subscriptions as current sales (Autonomy pleads innocence). The previous year Olympus, a Japanese optical-device maker, revealed it had hidden billions of dollars in losses. In each case, Big Four auditors had given their blessing.

And although accountants have largely avoided blame for the financial crisis of 2008, at the very least they failed to raise the alarm. America’s Federal Deposit Insurance Corporation is suing PwC for $1 billion for not detecting fraud at Colonial Bank, which failed in 2009. (PwC denies wrongdoing and says the bank deceived the firm.) This June two KPMG auditors received suspensions for failing to scrutinise loan-loss reserves at TierOne, another failed bank. Just eight months before Lehman Brothers’ demise, EY’s audit kept mum about the repurchase transactions that disguised the bank’s leverage.

The situation is graver still in emerging markets. In 2009 Satyam, an Indian technology company, admitted it had faked over $1 billion of cash on its books. North American exchanges have de-listed more than 100 Chinese firms in recent years because of accounting problems. In 2010 Jon Carnes, a short seller, sent a cameraman to a biodiesel factory that China Integrated Energy (a KPMG client) said was producing at full blast, and found it had been dormant for months. The next year Muddy Waters, a research firm, discovered that much of the timber Sino-Forest (audited by EY) claimed to own did not exist. Both companies lost over 95% of their value.

Of course, no police force can hope to prevent every crime. But such frequent scandals call into question whether this is the best the Big Four can do—and if so, whether their efforts are worth the $50 billion a year they collect in audit fees. In popular imagination, auditors are there to sniff out fraud. But because the profession was historically allowed to self-regulate despite enjoying a government-guaranteed franchise, it has set the bar so low—formally, auditors merely opine on whether financial statements meet accounting standards—that it is all but impossible for them to fail at their jobs, as they define them. In recent years this yawning “expectations gap” has led to a pattern in which investors disregard auditors and make little effort to learn about their work, value securities as if audited financial statements were the gospel truth, and then erupt in righteous fury when the inevitable downward revisions cost them their shirts.

The modern audit does not even provide an opinion on accuracy. Instead, the boilerplate one-page pass/fail report in America merely provides “reasonable assurance” that a company’s statements “present fairly, in all material respects, the financial position of [the company] in conformity with generally accepted accounting principles (GAAP)”. GAAP is a 7,700-page behemoth, packed with arbitrary cut-offs and wide estimate ranges, and riddled with loopholes so big that some accountants argue even Enron complied with them. (International Financial Reporting Standards (IFRS), which are used outside the United States, rely more on broad principles). “An auditor’s opinion really says, ‘This financial information is more or less OK, in general, so far as we can tell, most of the time’,” says Jim Peterson, a former lawyer for Arthur Andersen, the now-defunct accounting firm that audited Enron. “Nobody has paid any attention or put real value on it for about 30 years.”


Those conflicts of interest

Even so, the misaligned incentives built into auditing all but guarantee that accountants will fall short of investors’ needs. The beneficiaries of the service—current and prospective shareholders—pay for it indirectly or not at all, while the purchasers buy it only because they are required to. As a result, companies tend to select auditors who will provide a clean opinion as cheaply and quickly as possible. Similarly, accountants who discover irregularities may be better off asking management to make minor adjustments, rather than blowing the whistle on a misstatement that could embroil their firm in costly litigation.


I invite the reader to Google on search terms like "Deloitte" "accounting" "scandals" or "KPMG" "accounting" "scandals", and one would see a huge list of incidents regarding these two audit firms. PwC or EY , the other companies in the "Big Four" don't seem to be any better, for that matter.

Bank Negara makes it difficult for 1MDB?

Article from The Star: "PM: 1MDB moved RM4bil from Cayman Islands to Singapore".

One snippet:


“The remaining US$1.103bil in 1MDB’s investment funds managed by Cayman (Islands) Monetary Authority has been redeemed and is kept in US currency at BSI Bank Ltd Singapore (BSI Singapore),” he said in a written reply to the Dewan Rakyat in response to a question raised by Petaling Jaya North MP Tony Pua.

“The decision to use a bank in Singapore is to facilitate transactions as Bank Negara Malaysia (BNM) regulations require approval by the bank for each transaction exceeding RM50mil,” wrote Najib, who is also the Prime Minister.

That is a rather interesting statement from the Prime Minister of Malaysia, who is also the Minister of Finance.

"To facilitate" means "to make easier", in other words, Bank Negara Malaysia makes things more difficult by requiring approval.

Should other Malaysian companies follow suit, that is leave their money outside Malaysia, is that the lesson we learn from this?

1MDB's "attacks" politically motivated, who cares?

I wrote before about 1MDB and its new CEO Arul Kanda. A few snippets:


"Another thing that will serve the fund and its communication team well is to rid itself of the notion that all its critics have a political agenda.

That's undeservedly self righteous for a fund that has ratcheted up over RM40 Billion in debt, rolled over a RM2 billion debt three times over a year, switched auditors and bosses twice and is in the red to the tune of RM665 million in 2014."

I fully agree with this.

Definitely not a good start by the new CEO of 1MDB, the remark about political motives.


Sarawak Report has reported recently many new articles about 1MDB and related matters. At this moment of time we don't know if the allegations are true and if the huge amount of emails, documents etc. are indeed genuine (Sarawak Report claims to have thousands of supporting documents).

A reaction from 1MDB was very much needed and according to an article in The Star Arul Kanda stated:


"It is clear that the attacks being directed at 1MDB are politically motivated. These are deliberately coordinated attempts to undermine the company by spreading unsubstantiated allegations and speculation, which in turn could potentially harm the economy."


Again Arul Kanda seems to stress a possible political motive about the allegations. But honestly, who cares? 

There are two matters at hand:

• Are the documents/emails etc. as specifically shown on Sarawak Reports website genuine?
• Are the conclusions drawn from these documents correct? 

Arul Kanda should start by making a clear statement regarding the first matter, then at least we (interested observers) know were we stand. If they are not genuine, we don't have to bother with the conclusions. If they are genuine, then we can proceed with the second matter at hand.

This blog focusses more on corporate governance issues regarding listed companies, and one company in particular is mentioned in the articles, UBG Bank, here and here. There are several allegations in these articles regarding the deals in which UBG Bank was involved and its subsequent privatisation.

The authorities (SC and/or BM) should investigate these matters and check if all warranties and representations (made by all parties involved during that time) were indeed correct.


"1MDB welcomes the Prime Minister's request for the Auditor General to verify 1MDB's accounts, which have been audited by Deloitte, one of the world’s leading firms."


The verification by the Auditor General is of course welcomed, I hope that all findings will be published in a transparent way, for all to see, if possible backed by evidence.

The last part in the above sentence ("one of the world’s leading firms") is unfortunately not adding much value to the statement. Too many fraudulent companies all over the world (Malaysia is no exception) were audited by the "big four" (besides of course many being audited by other auditors, the "lesser" ones). Anyone still remembers Arthur Andersen? Much more information regarding this subject can be found here.

1MDB needs a new script

An article written by Anita Gabriel with this title appeared in The Business Times (Singapore) today, some snippets:


"Another thing that will serve the fund and its communication team well is to rid itself of the notion that all its critics have a political agenda.

That's undeservedly self righteous for a fund that has racheted up over RM40 Billion in debt, rolled over a RM2 billion debt three times over a year, switched auditors and bosses twice and is in the red to the tune of RM665 million in 2014."


I fully agree with this. Most likely it is in reference to (for instance) this article in The Malaysian Insider:

"1MDB’s critics politically driven, don’t know full facts, says new chief"

The seasoned investment banker said it was "quite clear" most of the allegations directed at the company had been driven more by "political rather than genuine business considerations", he told The Malaysian Insider in an email interview.


There have been many excellent articles about 1MDB by publications like Bloomberg, Reuters and The Business Times (Singapore). Surely these were not political driven.

Besides that, there were many other excellent articles from Malaysian publications like MalaysiaKini/KiniBiz and The Edge.

Everyone is interested in transparency, not in some sort of blame game.

Definitely not a good start by the new CEO of 1MDB, the remark about political motives.

Myself I am very interested in the funds 1MDB invested in (either currently or in the past). 1MDB has never been transparent about them, as far as I am aware.

According to this article:


"Australian firm Avestra Asset Management has been managing over US$2 billion of 1Malaysia Development Bhd's monies invested in several Cayman Islands funds."


Avestra was recently fined by the ASIC (the securities commission of Australia) for having committed six offences.

Controversial blogger "Dr Benway" wrote about this same issue (AG Financial) long before ASIC had fined the company (here, here and here). Please note that I can in no way guarantee the correctness of the postings by "Dr Benway".

Based on their own website it seemed that Avestra's business is run from a house or apartment on Australia's Gold Coast, which seems to be peculiar for an asset management company managing billions of RM:

The above seems puzzling. 1MDB should be transparent about the details of the funds it invested in, the rationale behind the decision, if it paid commissions (and if so, how much and to whom), the returns it received, the due diligence it had performed, etc.

Anita Gabriel recommends 1MDB to follow in the footsteps of Khazanah Nasional:


"It took Khazanah half its live span or ten years to turn its back on the secretive-style of investing which had previously drawn huge public outcry in the country

These days, the annual events where Khazanah provides some key indicators and updates on its investments are markedly more staid, relatively dull even; and that's a good thing. Transparency begets trust which begets credibility, all of which 1MDB is in deficit at this point."

Former Calpers CEO pleads guilty to bribery and fraud

Calpers is one of the largest public pension schemes in the US.

The latest stunning revelations will not do much good for its reputation.

Article by Yves Smith, some snippets:


In California, the Apollo private-equity firm paid a former CalPERS board member named Alfred Villalobos a staggering $48 million for help in securing investments from state pensions, and Villalobos delivered, helping Apollo receive $3 billion of CalPERS money. Villalobos got indicted in that affair, but only because he’d lied to Apollo about disclosing his fees to CalPERS. Otherwise, despite the fact that this is in every way basically a crude kickback scheme, there’s no law at all against a placement agent taking money from a finance firm.

$48 million wasn’t the total Villalobos got; it was $58 million because he was pushing deals to CalPERS on behalf of four additional clients: Relational, CIM Ares, and Aurora Capital. And the part that has been curiously airbrushed out of every media account of this scandal is Villalobos was engaged in improper conduct, even if he had managed to get the needed sign-offs from CalPERS. He wasn’t a registered broker-dealer, as he was required to be when marketing deals on a regular basis.

The first two payments were made in paper bags. The last installment came in a shoebox. The handoffs all came at a Sacramento hotel near the Capitol.

In a stunning admission covering years of corruption, the former chief executive of CalPERS said Friday he accepted $200,000 in cash, along with a series of other bribes, from a Lake Tahoe businessman who was attempting to influence billions of dollars in pension fund investment decisions.

….20 bank accounts, two Bentleys, two BMWs, a Hummer, art worth more than $2.7 million and 14 properties in California, Nevada and Hawaii.


The article concludes with a recommendation:


That’s why, as the Sacramento Bee stressed in a recent editorial, the time is long past for CalPERS and other public pension funds to provide far more in the way of disclosure of the fees paid and other details of their dealings with private equity general partners. As the SacBee pointed out:

The reasoning behind the disclosure waiver was to protect investment strategies. But they seem to have done a better job of protecting the ability of public equity firms to line their pockets with the public’s money. This is an issue ripe for legislation.


How is the situation in Malaysia, especially regarding the larger government linked funds, is there transparency regarding fees paid to fund managers?

Were for instance fees paid in this case?

"A little-known Hong Kong firm managing US$2.3 billion (RM7.6 billion) of 1 Malaysia Development Berhad’s (1MDB) offshore funds".

1MDB is an enigma that will be closely watched

Today an article in The Business Times (Singapore) about a Merrill Lynch report on 1MDB:

"1MDB is an enigma that will be closely watched: economist"

Some excerpts:


A regional economist has described Malaysian state investment agency 1Malaysia Development Berhad (1MDB) as an "enigma that will be closely watched". While conceding that its linkages to the government's balance sheet and the banking system were "probably limited", Chua Hak Bin noted that its systemic importance and weight "is evolving and rising rapidly".

In a May 7 report titled 1MDB's rise, Dr Chua, the head of emerging Asia economics for Bank of America Merrill Lynch, outlined the growth of the once-obscure wealth fund, owned by Malaysia's Ministry of Finance, to its present asset size of RM45 billion (S$17.3 billion).

1MDB has been looming large on the business pages of the Malaysian local media recently because of concerns that it could be accumulating debt too rapidly.

The Merrill Lynch report, however, seems to be the first time the agency has come under the scrutiny of a regional research house. At present, 1MDB is a large player in Malaysia with two big property projects both in their infancy. It has also acquired power generation capacity in Malaysia and abroad and is likely to continue expanding quickly.
"What stands out however is 1MDB's high leverage, which has raised concerns that 1MDB could emerge as a serious contingent liability for the government," Dr Chua said.

"Compared to the six largest listed non-financial companies, 1MDB's total liabilities are the second largest, only exceeded by Tenaga (over RM 70 billion),"

"At end-2013, our estimates put the public debt to GDP ration at 54.8 per cent and quasi-public debt to GDP ratio (inclusive of government guarantees) at 70.8 per cent"

Was 1MDB a threat to the system? A qualified "not really" seemed to be the answer. "1MDB's size and liabilities probably do not represent a systematic risk yet" said Dr Chua. "The government can comfortably absorb any eventual losses, with the public debt to GDP ratio still far below ratios seen in most developed economies. The 90 per cent ratio is typically seen as a red flag."

In the end, 1MDB was, well, unusual. "1MDB remains an unusual creature and is difficult to categorize," mused Dr Chua.

"It is not constrained as a government-linked company and can readily tap on the government's balance sheet and guarantees.

"It is not exactly a typical sovereign wealth fund which invests in funds derived from central bank reserves, fiscal surpluses or natural resources," continued the economist. "1MDB's aggressive expansion and acquisitions have been financed largely by debt, rather than cash flow from reserves or existing businesses. Most sovereign wealth funds are not so highly geared."

1MDB: Debt ballooned to RM 42 Billion?

Article in the Business Times (Singapore), which raises many questions:

Why are the accounts for the year ended March 2013 of 1MDB delayed for such a long time?

Why does 1MDB need RM 42,300,000,000.00 in debt (per March 31, 2013)? This amount is hugely up from RM 8.4 Billion the year before.

The fund made a profit of RM 778 Million, which looks ok, but it needs again a property revaluation of RM 2.7 Billion (without which it would have shown a loss).

Also, the profit as percentage on equity plus debt does not look that impressive.

More from the article:

"... the fund has come under fire for overpaying for the power assets. 1MDB forked out RM 10.85 billion for these, mostly old plants nearing the end of their concessions.

The latest accounts which reveal an impairment loss on goodwill back up the view that 1MDB could indeed have overpaid for those power assets."

And:

"Market observers say that the fund's growing debt obligations are causing some unease in the country's banking circles as well as regulator Bank Negara Malaysia.

"This is potentially a big risk and it's in everyone's interest to monitor the situation closely." said an insider.

The whole idea of a large government fund with very little transparency, buying over certain assets (power, land etc.), bundling some of them together and then bringing them to Bursa in the form of an IPO, I fail to see the benefits of that, in the contrary. 

As a seasoned banker said in the article:

"This is not value creation. It's not a sustainable strategy, more so for a long-term diversified company".

"all the IPOs this year were making money for investors", really?

Article from the website of The Star: "At least 9 IPOs worth RM18.14bil for 2014".

First of all a list of nine big IPO's in 2014. I have been sceptical about big IPO's, I think Bursa has been pushing this too much, it really should not be a target on itself. The target should be to bring good quality Malaysian companies to Bursa, at a reasonable price, leaving some money on the table for retail investors who might be willing to take the risk.

On the list:

• Two Iskandar developers, I am scared all the clever money has been made already, and the property market is way too hot and might already be cooling;
• 1MDB (floating its energy assets), I am critical of 1MDB due to the lack of transparency;
• Malakoff and IOI Properties, both playing the listing-delisting-relisting "game";
• 7-Eleven, the listing possibly will not go through, according to an article in The Edge today.

Further, the article mentions:

"Besides these IPOs, there is likely to be another group of companies coming to the market under the guidelines for special purpose acquisition companies, or SPACs, and business trusts."

I am highly sceptical of SPACs, and business trusts have performed badly (on average) in Singapore.

In other words, I am not very positive about the announced plans for future IPO's in Malaysia.

The article continues:

"RHB Investment Bank Bhd director and regional head of equity capital markets Gan Kim Khoon recently said that investors should ride on the wave of Malaysia’s IPO market, but only after doing their homework on the new entrants.

He noted that all the IPOs this year were making money for investors and said this trend was likely to continue next year, when speaking at a recent panel discussion on the prospects for next year’s equity market."

All the IPO's this year making money for investors? Surely that can't be true:

 

Further more statements like "investors should ride on the wave of Malaysia’s IPO market" and "this trend was likely to continue next year", I find those pretty dangerous statements given the high valuations and the bubble like conditions worldwide.

I have never bought a share for long-term investment at IPO price, the risk is pretty high: [1] often there is a lot of hot air injected in the company and [2] the quality of the audits is not up to the standard compared to when the company is properly listed.

I normally wait for at least two full years of audited results before I even consider investing in a listed company. Although I must have missed a few nice gains, I definitely also missed lots of misery.

I do agree though with the following statement: "but only after doing their homework on the new entrants".