Tuesday, 29 July 2014

Independent directors: use different approach

I have highlighted several times the issue of independent directors, not speaking up for the minority investors (for instance in the case of related party transactions), not trying to unlock value in a company (for instance in the case of privatisation), not voting down (relatively) high wages for the management, etc.

Mak Yuen Teen wrote a letter to The Business Times (Singapore) "Independent directors: use different approach", which is also relevant in the Malaysian context. Some snippets:

.... The question I posed was in response to a discussion about the "nine-year" guideline on independent directors in the 2012 Code of Corporate Governance, under which the independence of directors should be subjected to a "particularly rigorous review" after nine years. In addition to the lack of clear guidance on how a "particularly rigorous review" is to be conducted, I was concerned about relying solely on the nominating committee or the board to determine if a director who has served beyond nine years should continue to be considered to be independent. This is because of the inherent conflict faced by the nominating committee and the board in this.

In fact, the nominating committee and the board are also conflicted in the initial and ongoing assessment of independence of directors, and in other issues such as recommending board appointments and re- election/retirement of directors. In the case of the latter issues, a check-and-balance is having shareholders vote on the election or re-election of directors.

In countries such as Malaysia and Hong Kong, the code of corporate governance recommends that the independence of directors should be subject to a separate shareholders' vote after nine years. If shareholders vote against the independence of the directors in this separate vote, then the company can still choose to retain the director as a non-executive director, but should not label him as an independent director. Alternatively, the board can just redesignate the director as a non-independent, non-executive director, without seeking a shareholders' vote.

At the forum, I had expressed doubt about whether such a shareholders' vote would be effective, if all shareholders get to vote on the continuing independence of the directors after nine years. After all, those who are familiar with our corporate landscape would know that there are many independent directors who have an inter-dependent relationship with controlling shareholders. If the vote is to be meaningful, then controlling shareholders should not vote.

David Webb said about this subject:

Another key issue in Asia is the lack of truly independent directors. "You have tycoons appointing their cronies and golf buddies as ‘independent directors'," notes Webb.

"There are very few really independent directors in Asia who are not tied to management or owners and who are willing to ask difficult questions," he says. "It is important that independent directors be elected by minority shareholders, with controlling shareholders forced to abstain from voting."

He adds that independent directors should be answerable to minority shareholders; so, if they fail to do a decent job, they can be quickly replaced.

Monday, 28 July 2014

Not all charts are the same

I read The Edge of July 21, 2014, and almost fell off my chair:

Aeon, the blue chip, one of my favourite Malaysian stocks, had dropped from about RM 16 to below RM 4. What has happened?

I quickly checked Bursa's website:

Same picture, Aeon's stock down by 75%.

Yahoo then:

Now it is getting strange, the share is indeed down a lot, but "only" around 50%.


And Wall Street:

Hmmm, nothing really happened, the price more or less going flat over the last year.

Checking Bursa's announcements site reveals the answer, a one-for-one bonus and a capital reduction from RM 1 to RM 0.50, so basically the share split in four.

If a bakery sells whole cakes for RM 20 and the next day decides to sell quarter cakes for RM 5, then the price not really fell by 75%, it stayed the same. A proper chart should reflect that.

Can The Edge, Bursa and Yahoo please update their charts?

Selamat Hari Raya to all Muslim readers and happy holidays to all.

Sunday, 27 July 2014

Kenneth Vun in the limelight again

Excellent article in The Star by Errol Oh: "Civil or criminal?".

Former corporate wunderkind Kenneth Vun is once again the subject of a court case filed by the Securities Commission (SC). On Tuesday, the regulator said it had taken enforcement action against him and six others at the Kuala Lumpur High Court for the manipulation of DVM Technology Bhd shares.

The SC has alleged that the seven actively transacted in DVM shares among themselves over a week in March 2006, causing the share price to rise from 11 sen on March 14 to a high of 32 sen on March 20.

The aim of this enforcement action, according to the SC, is to seek a disgorgement of all profits earned by the defendants as a result of the manipulation. The money is meant to be used to compensate affected investors. The SC is also claiming a civil penalty of RM1mil from each of the seven.

The commission also wants the defendants to be barred from becoming directors of listed companies and from trading on the stock exchange for five years.

We welcome enforcement by the authorities. However:

"Regulatory effectiveness is ultimately judged by swift enforcement actions."

Swift? The alleged share manipulation happened March 2006, more than eight full years ago! I would not exactly call that "swift" by any standard.

What determines the course of action that the SC takes in enforcing the law? How does it decide whether to take civil action or to pursue criminal prosecution?

Sure, every case is different; there can’t be a cookie-cutter approach for going after the wrongdoers. And yes, regulators can’t afford to reveal too much about how they probe suspected misconduct and how they go about trying to bring offenders to book.

However, the SC can surely be more transparent and articulate about its enforcement efforts. For example, the 100-page Capital Market Masterplan 2, which outlines strategies to grow the capital market up to 2020, doesn’t have a lot to say about the subject.

Here’s the key part: “Regulatory effectiveness is ultimately judged by swift enforcement actions. There will be greater focus on enhancing processes to expedite investigation and prosecution of cases. Towards this end, enforcement capabilities will be strengthened through the development of specialised investigation and prosecution skill sets.

“In addition, strategies will be developed to maximise the deterrent effects of enforcement actions and to enhance public awareness on the consequences of securities fraud. Greater efforts will also be made to encourage members of the public to volunteer information and evidence of possible violations of securities laws.”

In comparison, one of the four strategic goals laid out in the draft of the US Securities and Exchange Commission’s Strategic Plan for 2014 to 2018 is “foster and enforce compliance with the federal securities laws”. The discussion on this goal occupied 10 of the 39 pages of the plan.

On its website, the Australian Securities and Investments Commission has a 12-page information sheet that explains its approach to enforcement.

It’s time that the SC does more than provide updates on its enforcement policy. People ought to have a good idea of what to expect from the regulator on the enforcement front and what guides its actions when responding to violations of the law.

> Executive editor Errol Oh acknowledges that much of the regulators’ work is unseen. However, enforcement actions are strong indicators of vigilance, effectiveness and integrity.

I can't agree more with the above, the authorities should be more clear about their enforcement strategy. This is important for the shareholders, the public-in-general, but also for whistle blowers and people who file complaints with the authorities.

Kenneth Vun is of course quite well know (although often not for the right reasons), here is the previous decision against him.

Kenneth was the founder of Mesdaq listed FTEC Resources, which changed its name to Tecasia Group and then to Mangotone Group. The name changes didn't help much, the company went suddenly under in 2009, after reporting a RM 100 million loss. Kenneth had already sold his shares and resigned as a director. Large receivables, large inventories, decreasing cash, decreasing revenue, insiders selling, directors resigning, and the company "suddenly" going bust and being delisted. My guess is that the shareholders were looking at a total loss.

I am afraid that we have seen too many of these cases.

Mangotone Group and its six directors were reprimanded and fined by Bursa "for failing to make an immediate announcement of the following defaults in payments of credit facilities".

Was that enough enforcement? I doubt it. I am of the opinion that when companies that appear to be healthy, but do have some clear red flags, suddenly go under, the authorities should order an investigative audit into what really happened.

Vun is also mentioned being one of the major shareholders in Harvest Court, although he denies that.

Related articles by Where is Ze Moola can be found here and here.

Thursday, 24 July 2014

Dutch national day of mourning for MH17 victims

The Netherlands, having its first national day of mourning in more than half a century, today witnessed the arrival of 40 coffins with bodies and remains of those who perished on flight MH17 on July 17.
King Willem Alexander, Queen Maxima and Prime Minister Mark Rutte gathered with about 1,000 relatives of the 193 Dutch victims and foreign officials at Eindhoven airport where two military planes landed shortly before 4 p.m. After the landing, a soldier played ‘The Last Post’ before a minute of silence was observed. Flags on public buildings around the country are flying at half-mast for the day.
The coffins were moved from the planes to waiting hearses one by one as spectators watched in silence.
The bodies will be transported to a military base in Hilversum for identification, a process that may take months, Rutte said at a press conference yesterday. The Dutch are leading the investigation into what happened to the flight, which departed from Amsterdam for Kuala Lumpur.
Text from Bloomberg, video from the NOS.

Tuesday, 22 July 2014

Singapore regulator plans new rules to shield investors

The Monetary Authority of Singapore (MAS) yesterday proposed a set of regulations to boost investor protection, with new rules for investments linked to land banks, gold and other physical assets - following several scams that have left retail investors high and dry.

Its latest move, laid out in a consultation paper, means investment schemes linked to land-banking and other physical assets such as most precious metals, will no longer be made available to retail investors.

MAS also wants all retail investment products to be rated on their complexity and risk - a decision that David Gerald, president of the Securities Investors Association (Singapore), said would provide needed guidance for retail investors. "It's better late than never," he added.

The central bank plans to tweak its definition of collectively managed investment schemes (CIS) to include schemes that involve pooled profits and remove investors from the daily control of the investments. This will apply to land-banking, which would then be classified as a CIS.

All CIS must meet standards set out in the CIS Code, which ensures that the assets involved are liquid. Since land cannot be deemed liquid, unlike securities, it would no longer be offered to retail investors.

The above article comes from The Business Times and is really great news.

The current (highly unsatisfactory, in my opinion) situation is described by blogger Martin Lee:

Singapore’s approach is slightly different. It specifics a list of financial instruments that are regulated. This includes the usual investments like shares, unit trusts and life insurance. These regulated products can only be sold by licensed representatives who meet the prescribed requirements. Anyone who is not licensed but tries to give individual advice on them will be contravening the regulations (The irony is that you do not violate anything if you conduct a seminar to few hundred people on the same topic).

If a product falls outside this list, it is considered not regulated by MAS. The current position is that any product that does not fall under the scope of MAS is not up to them to regulate and hence they will not stop companies from selling such products. For example, land is considered a real asset so any sale is like a property purchase on a willing buyer and seller basis.

Martin Lee writes also about the proposed changes in the consultation paper.

This blog has also warned several times for unregulated schemes, some of which have collapsed or are likely to collapse in the near future.

Comments on the consultation paper can be submitted latest by September 1, 2014. I hope for a quick implementation of the new framework and subsequent enforcement of all kind of dodgy investment schemes. It is long overdue.

Malaysia (Securities Commission and Bank Negara Malaysia) also should take note, they are dealing with the same situation.

Sunday, 20 July 2014

Patimas: will there be justice?

On March 21, 2014 Patimas Computers Bhd. was delisted from Bursa Malaysia.

An investigative audit by UHY Advisory has shown lots of very serious irregularities, just to mention a few:


Next to that there was a court case between Patimas and one of its business relations, Omni Quest, the judgement of which also contained lots of material:

Patimas was audited by Ernst & Young, this was their statement made on April 26, 2011 regarding the annual audited accounts of 2010:

Pretty scary, since the irregularities were going on for so long, and one of the top 4 accounting firms did not find anything wrong in the accounts.

Further more we see things that are normal in a company going under, for instance many director changes, from their 2013 audited accounts:

And the usual rumours start to appear, two instances where Bursa queried the company:


Rumours that must have played their part in supporting the share price and volume:

And insiders selling in a big way, when the troubles start to appear:

Will the authorities take appropriate action within a reasonable timeframe? Time will tell.

Thursday, 17 July 2014

'No' to Versatile delisting

Article from The Star, shareholder activism taking place in Versatile Creative Bhd, successfully rejecting plans to delist the company. Some snippets:

Minority shareholders in Versatile Creative Bhd (VCB), citing the exit offer of 50 sen per share was not reflective of the company’s true value, have rejected the company’s delisting plan.

“The minority shareholders rejected the delisting because they argued that Versatile is worth more than the current share price (which was taken to fix the exit offer price), taking into account its land and factory assets,” said a minority shareholder.

VCB has two pieces of industrial land – in Pandan Indah, Kuala Lumpur and Balakong, Selangor – which site its factory buildings. As at Dec 31, 2012, both assets were valued at a net book value of RM27.4mil while the company’s market capitalisation is RM55.32mil based on yesterday’s closing price of 50 sen per share.

VCB’s net asset per share is 64 sen for the financial year ending Dec 31, 2013 compared with 56 sen a year earlier.

However the company made a loss of RM3.16mil last year against a profit of RM2.14mil in 2012, with a negative cashflow of RM3.1mil as at end-2013. It was also in the red in financial years 2011, 2010 and 2008.

Apart from the land, VCB has a 6.2% stake in Iris Corp Bhd. The value of this stake has doubled since November last year after Felda Investment Corp took a 26.7% stake in the technology company.

The net book value of this stake or 126.42 million Iris shares is RM62.58mil, based on Iris’ closing market price of 49.5 sen as at the latest practicable date, the shareholder said.

Wednesday, 16 July 2014

Let the cat out of the bag

What do the following names have in common?

  • Colby Nolan
  • George
  • Henrietta
  • Kitty O'Malley
  • Oliver Greenhalgh
  • Oreo Collins
  • Tobias F. Schaeffer
  • Zoe D. Katze
  • Lulu
  • Molly
  • Pete
  • Sassafras Herbert
  • Sonny
  • Wally

The answer is two things, as far as I am aware:

  • First of all they are all the proud owners of degrees;
  • And secondly, they are all animals.

For more background about their astonishing achievements, please read the articles in Wikipedia and Slate.

To return to the field of investing, a relevant question could be: "if animals can attain degrees (and some even a MBA), can they also be a successful stock picker?".

And the answer to that question should be positive, according to this article in The Observer:

"The Observer's panel of stock-picking professionals has been undone in our 2012 investment challenge by a ginger feline called Orlando who spent time paw-ing over the FT.

The Observer portfolio challenge pitted professionals Justin Urquhart Stewart of wealth managers Seven Investment Management, Paul Kavanagh of stockbrokers Killick & Co, and Schroders fund manager Andy Brough against students from John Warner School in Hoddesdon, Hertfordshire – and Orlando.

Each team invested a notional £5,000 in five companies from the FTSE All-Share index at the start of the year. After every three months, they could exchange any stocks, replacing them with others from the index.

By the end of September the professionals had generated £497 of profit compared with £292 managed by Orlando. But an unexpected turnaround in the final quarter has resulted in the cat's portfolio increasing by an average of 4.2% to end the year at £5,542.60, compared with the professionals' £5,176.60.

While the professionals used their decades of investment knowledge and traditional stock-picking methods, the cat selected stocks by throwing his favourite toy mouse on a grid of numbers allocated to different companies."

Tuesday, 15 July 2014

Maemode, RIP

From The Edge of July 14, 2014:

Events have really progressed fast for this company that had once a yearly revenue of RM 600 million, and a decent market cap.

It is only about one year ago (June 20, 2013) that the company announced that a receiver and manager was appointed.

On the same day the company became a "Affected Listed Issuer pursuant to Practice Note 1" and the same for Practice Note 17.

What is left is a bunch of general announcements, that don't shed any light on what really happened:

Will the shareholders of Maemode and the public in general ever know about the exact events that led to the rapid collapse of the company? Are they not entitled to know?

Monday, 14 July 2014

Got ’em, Gotham

Good article in The Economist about the Gowex fraud, some snippets:

Gowex’s dramatic collapse marks one of the biggest victories for a relatively new breed of company-accounts “detectives”: small, independent research-and-investment outfits that revel in unearthing alleged book-cooking. Having focused largely on China’s fraud-filled market until now, they are branching out.

Gotham’s approach is to short and shout: it takes a negative investment position, then noisily publicises its findings. It is cut from the same cloth as Muddy Waters, which is run by Carson Block, a former self-storage entrepreneur. His biggest scalp to date is Sino-Forest, which went bust in 2012 after Muddy Waters accused it of overstating its forest holdings in China. Another such outfit is Citron Research, whose leader, Andrew Left, prides himself on never having been successfully sued for defamation.

Gotham spent eight months studying Gowex, amassing far better information than investment-bank analysts, most of whom were still recommending the shares when it buckled. Gotham spotted that Gowex used a little-known auditor (a classic red flag: see the Bernard Madoff case), whose fees were unusually low, as if they were based on revenue far smaller than Gowex’s books stated. Often, the sleuths comb the books for ratios that are hard to manipulate. Gotham also noted, for instance, that Gowex’s revenue per employee was implausible compared with rivals’—while the revenue could be inflated, it was harder to fake the headcount.

..... market regulators often eye them [short sellers] with suspicion: Spain’s at first reacted to Gotham’s report by investigating its publisher, not Gowex. China has cracked down on shorts, even imprisoning the writer of one negative report.

.... perhaps two-thirds of cases involve improper revenue recognition. New global accounting rules announced in May seek to curb one common ruse, booking sales prematurely, for instance on long-term contracts. But sometimes the revenues are simply invented, often by getting a related party to pose as a customer. Sometimes very closely related: Gotham said in its report on Gowex that it had evidence the firm’s biggest customer “was really itself.”

In the Malaysian context, no case of short sellers "attacking" a company has happened, nor do I expect that in the near future, despite Malaysia having its fair share of accounting frauds. It would be interesting though if something like the above would happen, given the "shoot the messenger" mentality. How would the company, the regulators and the press react?

Sunday, 13 July 2014

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".

Saturday, 12 July 2014

Symphony and Ranhill

I wrote several times about Ranhill Energy, here and here.

Today The Star published an article "Ranhill's utility businesses to anchor Symphony".

Some snippets:

Ranhill Group, whose oil and gas business contributed to its failed listing last year, will now be going to the market without that unit.

Ranhill’s planned reverse takeover (RTO) of Symphony House Bhd will have its water and power businesses that include a valuable water concession in Johor and operation of two power plants in Sabah.

When Ranhill first announced its intention of reversing its businesses into Symphony back in March, it comprised the utility divisions and the oil and gas portfolio.

But in late June, Ranhill said the RM800mil RTO would only include its water and power assets.

Recall that Ranhill had previously pursued an initial public offering (IPO) slated for July 31 last year but withdrew it after a non-disclosure breach relating to a suspension of a Petronas licence of an affiliate company in the oil and gas division.

Ranhill’s major shareholder Tan Sri Hamdan Mohamad was reprimanded and fined RM300,000, while the company that was to have been listed, Ranhill Energy and Resources Bhd was imposed a fine of RM200,000 by the Securities Commission (SC).

In an email reply to StarBizWeek, a Symphony spokesperson explains that the omission of Ranhill’s oil and gas division into the current RTO exercise was because the latter had slipped into the red in 2013.

Ranhill WorleyParsons Sdn Bhd (RWorley) was excluded from the initial assets to be injected into the RTO as it made losses in 2013, and by virtue of this fact we decided not to include it into the RTO,” the spokesperson says.

RWorley is Ranhill’s main O&G asset specialising in engineering procurement and construction services. It is 51%-owned by Ranhill in a joint venture with WorleyParsons Ltd, Australia’s largest oil and gas engineering company. The Australian-listed WorleyParsons holds the balance 49% in company.

According to the Symphony spokesperson, the losses that RWorley incurred was attributed to work for Petronas Gas Bhd’s liquefied natural gas (LNG) regasification plant project in Malacca. In 2011, RWorley together with Muhibbah Engineering Bhd had undertaken the RM1.07bil contract for engineering, procurement, construction and commissioning (EPCC) of topside construction work for regasification plant.

Symphony did not reveal the amount of losses RWorley had made but says that “it has been fully accounted for in 2013.”

A fund manager said that while Ranhill’s oil and gas division was to provide a growth story for its listing, he understood why a decision was made not to include that in the listing now.

A loss-making division in the RTO equation would not have been palatable. While an RTO is a fast track way for a public listing, it is still subject to approvals from the regulators,” says the fund manager.

"A loss-making division in the RTO equation would not have been palatable", I agree, but would a loss-making division in an IPO be palatable? This company was included in the IPO of Ranhill which was only cancelled at the very last moment.

The authorities really should look into this case, since there are quite a few corporate governance issues in this group.

Ranhill was a listed company before, this would be another example of a listing-delisting-relisting exercise, something I am not keen on, to put it mildly.

On another note, Symphony, the listed company which will be used for the RTO, has not exactly been a shining example of profitability. Its results of the last four years:

Year  Revenue   PATMI
2010    175m    -22m
2011    186m     -4m
2012    205m    -38m
2013     52m    -39m

Friday, 11 July 2014

Bond fever grips Singapore's rich

Article in The Edge.

Surely this has to end badly one day, in my humble opinion. Investors in these bonds do not get properly compensated for the relatively high risk that they take. All thanks to people like Greenspan and Bernanke.

(July 11): Private banks are driving Singapore's bond market to new heights as wealthy individuals clamour for higher returns. Pacific International, a highly leveraged, unlisted shipping company, this week became the latest new issuer to benefit from this apparently insatiable appetite, when it sold a S$300m (US$240.8m) 5.90% unrated three-year bond that attracted S$3.5bn of orders from 93 different buyers. Pacific already has US$2.95bn of debt and an annual interest bill of around US$81m. Despite a weak outlook for the competitive shipping industry, private banks acting on behalf of their clients bought 93% of the deal

This was by no means the only bond to have drawn a crowd in recent weeks. Smaller listed companies have also pulled in big oversubscriptions. A S$75m 4.75% 3.5-year issue from construction company Tiong Seng Holdings received S$650m of orders, while property developer Singhaiyi Group pulled in S$800m for a debut S$100m 2.5-year at a 5.25% yield. Surging appetite for yield is allowing more companies to come to the capital markets, giving some in difficult sectors such as Pacific International additional flexibility compared to bank loans. While the additional demand adds to market liquidity, however, market participants worry that inflated order books may be distorting pricing and leading to a build-up of credit risk. "The private bank clients are adamant about getting their hands on the bonds because they know how hard it is to pick them up in the secondary markets," said a debt syndicate banker."The PBs (private banks) inflate their orders to ensure they get at least 10% of those orders, and that just balloons the entire book. Once you see a deal that is more than three times oversubscribed, you can be sure the rest is inflated."A giant order book typically allows a company to push for a reduced cost of funding. Pacific International, for example, squeezed the final yield on its bond by 35bp to 5.90%, a considerable saving.

Few alternatives
High-net worth individuals are turning to high-yield bonds after a choppy period for the city's stock market and government restrictions that have curbed speculative property investments. Cash rates are low, and the yield on the 10-year Singapore government bond is only 2.3%. "Yields are very low and cash returns are next to nothing," said a Singapore-based debt syndicate banker. "Investors have to re-channel funds somewhere, and they pick high-yield bonds as the returns can sometimes match up to equity dividend yields.

Thursday, 10 July 2014

Gowex and Bloomberg

I have written twice about Gowex's fraud.

Bloomberg, the financial news powerhouse (normally a pretty good source of information) also entered the fray:

"How Gowex CEO Went From Defiant to Disgraced in Five Days"

An interesting and informative article with lots of good stuff in it.

But one "tiny detail" was left out, that in the past Bloomberg also fell for the fraud. Only one year ago it wrote the following article:

"How the Founder of Spain's Gowex Bet the Farm (Twice) and Won"

Some snippets:

One company that has managed to stand out and become a global brand is Let's Gowex SA, a Madrid-based provider of free outdoor Wi-Fi services. Its growth, largely from increasing smartphone and tablet usage, has also been fueled by founder Jenaro Garcia's willingness to bet the farm.

The company makes money from selling roaming, advertising, e-commerce and other services to local governments and mobile carriers. Garcia said business was slow until the iPhone arrived almost six years ago. Last year, Gowex's revenue climbed 71 percent to 114 million euros ($146 million). Profit rose 136 percent to 17 million euros ($22 million).

(the company has admitted it cooked the books over at least the last four years, so the above numbers are extremely unlikely to have been realistic)

To finance that growth, Garcia, who is now renting a 150-square-meter apartment in downtown Madrid, recently turned again to his significant other. He said his wife "went nuts" when he suggested putting all of their savings for a new house into the company once more. As it turns out, the investment has almost doubled in value. "She is very, very happy, even if we still don't have our own house," he said.

Is she still very, very happy?

I noticed the older Bloomberg article in this link:

"Gowex Shows Why Lending is the Best Venue for Accounting Control Fraud"

A classic accounting control fraud, Gowex, has collapsed in Spain.  Gowex was a wi-fi firm.  It was able to run its scam for at least four years.  It was a crude scam that involved simply making up contracts and borrowing to grow rapidly.

“The US firm Gotham City Research had described Gowex as a ‘charade’ and said that its revenues were ‘at most’ 10% of those reported.”

As soon as Gotham City Research blew the whistle on Gowex it made it impossible for Gowex to borrow additional funds and avoid collapse.

The whole article is pretty interesting, for instance that Gowex received several awards. It is written by William Black, about whom I blogged before.

Monday, 7 July 2014

And Gowex admits it had indeed cooked the books

Yesterday Gowex admitted that is had indeed cooked the books, as alleged by Gotham City Research. In an official announcement it stated:

"The Board of Directors of the Company announces that on July 5 2014, at 16’00, at the Company's offices, Mr. Jenaro García Martin, Chief Executive Officer and President of the Board, has declared in the presence of different Board Members that the financial accounts of the Company for the last four years, at least, do not show a full and fair view of the Company’s situation, taking responsibility for this falsity.

The Board, as stated in the minutes of the meeting, signed by the Board Members attending the session (Mrs. Solsona Piera, Martínez Marugán and García (attending the meeting both on his own behalf and representing the Board Member Ms. Maté),has revoked all powers and delegations granted to the Chief Executive Officer and has accepted his resignation.

The Board, anticipating that the Company might not be in a position to face its ongoing debts when they become due, has agreed to file for a declaration of voluntary insolvency, without prejudice of other measure that it may adopt for the best protection of the Company’s interests, regarding which it will immediately inform the market as soon as it might  adopt them."

More information about this matter:


Thursday, 3 July 2014

Gotham strikes Gowex

Let’s Gowex SA trading was suspended in Madrid as Spain’s regulator investigates potential “market abuse” after a report by Gotham City Research LLC wiped about 870 million euros ($1.2 billion) off the company’s market value.

Today’s suspension came after the regulator said in a statement last night that it asked the U.S. Securities and Exchange Commission and the U.K.’s Financial Conduct Authority to provide information on short-seller Gotham City and its managers. The regulator is also investigating trading in Gowex shares in recent days to “determine if there have been illegal operations,” according to the statement.

Gowex announced yesterday that it will seek tenders to hire “a prestigious” auditor after Gotham City published a report on July 1 criticizing its use of an “unknown” auditor. The Gotham report also claimed that Gowex’s real value is “zero,” that some of the company’s units have revenues that are 10 percent of that reported and that Gowex declares clients it doesn’t have. Gowex has said the report is “false.”

Gowex shares fell 60 percent in two days after the report to 7.92 euros yesterday in Madrid. Trading is suspended until Gowex responds to a request “to present a plan, as detailed as possible, with the actions it considers necessary regarding the Gotham City Research LLC report,” specifying the reach and duration of each action, the regulator said in a statement today.

The above comes from Bloomberg.

The report by Gotham City Research can be found here.

More from FT AlphaVille (comments are also interesting).

And the official response (in Spanish) and here (in English).

The logo of Gowex is:

Gotham gave it a spin:

Unfortunately (for Gowex and its shareholders), there seems to be quite a lot of substance in the allegations, at least, that is my first impression.

If the allegations are indeed (substantially) true, then the Spanish exchange also has some explanation to do. Why did they not notice the below:

Wednesday, 2 July 2014

China Stationary to be suspended

China Stationary announced that "the trading of CSL's securities will be suspended with effect from 9.00 a.m., Wednesday, 9 July 2014 until further notice."

On the same day a non-executive independent director announced his resignation "Due to his advanced age and health condition".

The share price took a dive.

Tuesday, 1 July 2014

Maemode, Golden Plus, China Stationary, HB Global

I wrote about the possible delisting of Maemode. I am afraid that nothing has happened (as was expected), the company didn't announce any plans or objection against the delisting, and thus it was announced that Maemode will be delisted on July 2, 2014.

This is in contrast with Golden Plus, about which I wrote here. The company again announced delays in all their financial reporting, but still remains listed (although the share is suspended).

China Stationary announced that Bursa "rejected the Company’s application for a further extension of time of one (1) month from the Extended Deadline till 31 July 2014."

HB Global announced  "that the Company requires an additional time of approximately two to three weeks to finalise its Audited Financial Statements for the financial year ended 31 December 2013 (“AFS 2013”) and the Company is expecting the said AFS 2013 will be completed on or before 21 July 2014."