MSWG's latest issue of The Observer

MSWG's latest weekly newsletter dated 18-24 January contained two interesting articles:


OCBC SETTLES CIVIL CLAIM WITH THE SC
"OCBC has settled a civil claim with the Securities Commission where it was purportedly involved in
manipulation of DRB-Hicom Berhad shares in July 2011. The settlement was reached following a letter of demand sent by the SC pursuant to its civil enforcement powers.  OCBC was required to pay RM2,475,000, which was equivalent to three times the pecuniary gain of RM825,000, which OCBC had made as a result of the breach. OCBC Bank agreed to settle the fine, though without admission or denial of liability.

MSWG’S COMMENTS:

While we laud the SC for having disclosed the suit and the broad details, we remain unsure as to the substance of the breach and the transgressions involved.  As such we believe that future cases should contain these details."


I agree with MSWG's comments.  Although enforcement has clearly improved over the last few years (which is of course commendable), the explanation of the enforcement is often lacking clarity, to put it mildly. Added to this, I am not in favour of all these settlements "without admission or denial of liability".


KINSTEEL BERHAD (“KINSTEEL”)

The Board of Directors of Kinsteel announced that the indirect subsidiary company of Kinsteel, Perwaja Steel Sdn Bhd (“PSSB”) has defaulted in repayment of Murabahah Medium Term Notes of RM50,000,000 on 29 November 2013.  By virtue of this default, PSSB has cross-defaulted its banking facilities with RHB Bank Berhad, OCBC Bank (Malaysia) Berhad, Standard Chartered Bank Malaysia Berhad and Kuwait Finance House Berhad (collectively known as “the Banks”) totalling RM768,738,785. The reason for the default was due to the company’s inability to generate sufficient cashflow amid the slowdown of steel industry as a result of oversupply and decline in steel prices.
Pursuant to the default, the lenders of PSSB have the right to enforce its rights under the loan documents which include enforcing the various collaterals given to secure the loan/credit facilities granted by the lenders to PSSB, which collateral includes the corporate guarantee given by Kinsteel. 

The extent of the liability of the Company is limited to the corporate guarantees provided to the Banks amounting to RM706,000,000.  Nevertheless, Kinsteel is taking proactive approaches to negotiate with its lenders to arrive at an amicable arrangement to both parties. In addition, PSSB has been granted the abovementioned Order that restrains any actions by the lenders on the guarantees provided by Kinsteel for PSSB’s facilities. According to the opinion of the Board mentioned in the announcement, there is no impact to the business and operations of Kinsteel arising from the default. Kinsteel will be able to continue with its existing business of manufacturing and trading of steel bars and steel related products, which has its own distinct autonomous business operation and management whereby its financial and business operations are independent from those of PSSB.

MSWG’S COMMENTS:

We find it difficult to comprehend that there is no impact to the business and operations of Kinsteel on the default on banking facilities of RM768,738,785 by one of its indirect subsidiary where the exposure of the company to the defaulted banking facilities amounted to RM706,000,000. The company should update shareholders on the financial status of its subsidiaries and associates which are now in PN1 and PN17 status.

The relevant announcement by Kinsteel to Bursa can be found here. The company announced a horrible set of numbers for its nine months until 30 September 2013: a loss for the period of RM 370 Million (of which RM 156 Million attributable to equity holders) on sharply lower revenue of RM 1.2 Billion. The balance sheet also looks very weak, showing RM 1.8 Billion in overdrafts and short term borrowing versus equity of only RM 382 Million.

The share price over the last 2 years:

Penny Stock Saga: were the share prices manipulated? (2)

More news regarding this interesting case, which is very important for Singapore (SGD 8 Billion in paper value lost from the highs), but also has a heavy Malaysian component to it (many persons involved are Malaysians).

The parties being sued by Interactive Brokers are (according to this website):

Malaysian nationals:

• Neo Kim Hock
• Peter Chen Hing Woon
• Tan Boon Kiat
• Quah Su-Ling
• Lee Chai Huat
• Kuan Ah Ming

British Virgin Islands-registered companies:

• Sun Spirit Group Ltd
• Neptune Capital Group Ltd.

Singaporean listed companies involved:

• Asiasons Capital
• Blumont Group
• LionGold Corp
• Innopac Holdings 

From an article in Business Times (Singapore) written today by Grace Leong, more news regarding the answer by Quah Su-Ling and the rebuttal by Interactive Brokers (emphasis mine):


IPCO International chief executive Quah Su-Ling, who is among eight clients sued in High Court over $79 million in losses sustained by Interactive Brokers (IB) in the wake of the penny stock crash, has alleged the US online brokerage was involved in a "commission-generating scheme".

According to court documents inspected by The Business Times, Ms Quah, who is seeking to unfreeze nearly $15 million in assets belonging to her and her company Sun Spirit Group, said she does not recall signing the broker's account-opening documents or completing any forms.

The large-volume trades in the shares of Asiasons Capital, Blumont Group and LionGold Corp from her account and that of Sun Spirit's happened because Ken Tai, owner of Algo Capital and her financial advisor, had exceeded his authority over the accounts, she said.

She was rebutting allegations that she may have been involved in an "intricate pump-and-dump scheme to artificially generate trading volume" in the stock trio and to drive up their share prices before they crashed and wiped out over $8 billion in value.

In arbitration proceedings against her, the British Virgin Islands-incorporated Sun Spirit and eight other individuals and entities to recover $79 million in unpaid margin loans, Interactive Brokers flagged "suspicious trading activities through the defendants' accounts" made by Algo Capital. A hearing in relation to the freezing order was held last Friday.BT understands that judgment was reserved.

The broker alleged: "The unusual trading pattern employed by (Algo), which involved buying and selling the same stock in the same account on the same day at the same price, or closing out a large amount of shares in the morning, then repurchasing those shares in smaller lots throughout the day at set intervals, ... (gave) the market the appearance that the stocks were more heavily traded than they were.

"For instance, Algo often traded substantial portions of the volume of total daily trades in LionGold shares and even exceeded 80 per cent of the total trading volume on certain days. Similarly, for Asiasons shares, Algo's trading volume was as much as 67 per cent on some days."

But Ms Quah, in her affidavit, said Mr Tai had purportedly told her that it was the broker that had "placed pressure on him to maintain his high-volume trading".

"Despite the fact that Ken Tai had been trading large volumes of shares in the companies for an entire year (from August 2012 to October 2013), Interactive Brokers did not see fit to flag or exercise its rights to suspend or freeze Sun Spirit's or my accounts in light of what they now allege as 'suspicious activity'."

Between October 2012 and last Oct 4, the broker allegedly made commissions amounting to $776,152 on trades done in her account, and $177,981 on Sun Spirit's account, she said.

She also claimed the broker may have violated the Securities and Futures Act by offering margin-trading services to Singapore residents in respect of SGX-listed stocks without the requisite licence from the Monetary Authority of Singapore (MAS), and was in breach of its own internal policy.

But Interactive Brokers, represented by Senior Counsel Harpreet Singh of Cavenagh Law, said Ms Quah has not produced any credible evidence to support her claims.

Nor has she explained why Mr Tai would "gratuitously implicate" himself by admitting he was in a commission-generating scheme to defraud the defendants, it said in court documents.

IB said it is "completely unaffiliated with the advisers and/or customers who trade on its platform and in no way manages or supervises customer trading or offers any input in the trading".

"It is highly improbable that a sophisticated and experienced businesswoman and investor would be so trusting of Mr Tai. ... The more plausible explanation is the defendants, all of whom were interrelated and had connections with (LionGold, Asiasons and Blumont), were fully aware of Mr Tai's actions."

In challenging Ms Quah's claims as to why she did not disclose her relationship with the other defendants, the broker said she must be "intimately aware that most brokerages would impose higher-margin requirements on customers who disclose they are insiders of a stock they are trading, or that they hold a large position in that stock, either individually or acting in concert with others."

"If there was anyone trying to circumvent the need to obtain a licence from the MAS, it would be Ms Quah and Ipco, who had incorporated Sun Spirit on the other side of the world, and then used it for investment in the (three companies') shares through its account with Interactive Brokers."

On why Ms Quah and Sun Spirit could have been involved in such unusual trading activities and yet suffered huge losses, the broker said: "They may have expected their scheme to continue to be successful, or believe that they could have sold off their positions for large gains before the share prices collapsed, but had simply waited too long."

Penny Stock Saga: were the share prices manipulated?

The first cracks seem to have appeared in the (in)famous "Penny Stock Saga", where the crash of Asiasons Capital, Blumont Group and LionGold Corp wiped out SGD 8 Billion in a just a matter of a few days.

In an article "Offshore broker's role in penny stock saga, Court papers filed by US firm shed disturbing light on stock trio debacle" by Goh Eng Yeow in The Straits Times (Singapore), it is noted:


Concerns centre on the outcome of the investigation being conducted by the Monetary Authority of Singapore (MAS) and Singapore Exchange (SGX) over the odd trading activity surrounding the stock trio - Asiasons Capital, Blumont Group and LionGold Corp - before they crashed, wiping out over $8 billion in value in days.

There have been all sorts of rumours and allegations circulating in the market on how the three counters achieved spectacular price surges last year and their subsequent crash.

None of these rumours has been substantiated, but a court document filed here by United States online brokerage Interactive Brokers sheds some light.

Interactive has asked a court to freeze the assets of eight of its clients - six individuals and two companies - that lost almost $80 million in total from the stock debacle.

That court document makes for depressing reading. The allegation it contains seems to suggest how easy it is to subvert the local stock market using an offshore brokerage account.

It begs the question as to whether offshore brokers have put sufficient checks in place to stop a stock manipulator from using their trading platforms to manipulate prices in Singapore's market.

How does an offshore broker check if the accounts that are opened with it are genuine or not? And on what criteria does it extend loans on the shares pledged to it as collateral for share trading?

Would the malfeasance which Interactive purportedly uncovered ever come to light, if its erstwhile clients had not failed to make good on the massive losses which they had sustained in punting the stock trio?

Interactive describes itself as an online broker catering to well-heeled individuals and institutions. It says it does not employ any human "brokers" or "advisers". All trading is done online by customers or by independent financial advisers appointed by them.

In hindsight, this would appear to make it far easier for a person to open a trading account with Interactive Brokers than with any of the nine traditional brokerages here serving retail investors. This is because the SGX requires the client to turn up in person at the brokerage.

Interactive said it was only after the parties failed to make good their losses when the stock trio collapsed that it investigated further and found that there was something amiss.

To adhere to Singapore's regulations, its policy has been to prevent customers, whose legal residence is in Singapore, from trading Singapore-listed stocks.

But it claimed that these parties "deliberately misled Interactive and/or engaged in multiple non-disclosures when applying to open their respective... accounts".

The six individuals had listed themselves as Malaysians and given Malaysian residential and mailing addresses, while the two companies were listed as British Virgin Island-registered entities.

But further checks after the stock trio's crash suggested that "they are likely to be resident in Singapore and/or have a sufficient connection with Singapore".

Interactive noted the eight parties had appointed the same financial adviser, Algo Capital Group, which operates out of a Bishan address to trade on their behalf. They had also borrowed large sums to buy substantial stakes in Blumont, Asiasons and LionGold.

But what must surely take the cake is Interactive's belated acknowledgement that "many of the trades appear to serve no economic purpose and appear now to have been undertaken in a manner possibly to manipulate the share prices of the companies concerned".

Interactive noted that Algo often accounted for "substantial portions of the volume of total daily trades in LionGold shares, and even exceeded 80 per cent of the total trading volume on certain days".

The same trading pattern exists in Asiasons, where Algo's trading volume "was as much as 67 per cent on some days".

"(Algo) often sold a large block of shares at a given price in one or more of the (parties') accounts, then quickly re-purchased approximately the same number of shares at the same price, putting the accounts back where they started, but giving the market the appearance that the stocks were more heavily traded than they really were," it alleged.

Now, if any remisier is so brazen as to indulge in similar trading behaviour, he will surely be hauled up by the SGX's market surveillance team for questioning.

The question is that since Interactive is based offshore serving foreign customers, whose responsibility is it to ensure that it is up to scratch in keeping similar market misbehaviour at bay?

Of course, it is difficult to tell how much truth there is in Interactive's claims since its objective is to recover as much of its losses as possible.

But unless the MAS and SGX conclude their probe speedily, the uncertainties will continue to cast a pall over the market and make retail investors even more cynical about penny stocks. It is in the best interests of all to make haste on the investigation.