SGX: twice "attacked" in the press

Today the SGX was twice "attacked" in the Business Times (Singapore):

SGX site is now counter-intuitive

Some snippets:

... The most baffling, unannounced change concerns real estate investment trusts (Reits) and business trusts. Previously, someone who wanted to search for the announcements made by, say, Cache Logistics Trust, could go directly to the "company disclosure" section and search immediately for the name of the company. Now, one can only access the information after identifying and searching for the name of the company managing the Reit or trust, which can sometimes be very different.

...... Moreover, the new layout is a design disaster.

The main focus of the page no longer seems to be on the company announcements themselves, but on two large columns devoted to company names and security names. The titles of the actual announcements themselves - which can be significant corporate events like contract wins, debt listings, mergers and acquisitions and financial results - are squished into one tiny column on the right.

..... Mr Webb, by the way, has a great webpage with a formidable database on directors and companies, which he built through the years with just one other person. SGX, with all its resources, can do better here.


In my opinion, Bursa Malaysia has an excellent website regarding the company announcements and thus appears to be doing much better than the SGX. A few things could be improved though:

• When a company changes its name (which does quite often happen), one can only find the old information under the new name. For instance, information regarding "Woo Hing Brothers" is to be found under "Kamdar Group", the 12th page and further.
• Enforcement actions are stored (or rather, hidden) under "Media". There should be an easier way to find all enforcement related news sorted by date or company, combined with those of the Securities Commission.
• I love long term charts, it would be good if Bursa can give the price charts over more than 5 years.
• A database of companies and directors, similar as done by David Webb.

But other than this, an excellent announcements website, that can compete with the best.


The second article regarding SGX is from Mak Yuen Teen:

SGX should be more proactive against potential insider trading

Last week was not a good week for the regulatory side of SGX. On the one hand, it was criticised for not querying Olam, while on the other, it was told that it was too easy on the trigger for "Trade with Caution" (TWC) alerts.

There is a role for TWC alerts, particularly for issuers which have unusual trading activities and which cannot explain them when queried by SGX. From our research, about three-quarters of responses to price queries say that they could not explain the price run-up or decline. SGX should focus on these companies when issuing TWC alerts, rather than companies which have attempted to explain the unusual trading activities. This is not to say that SGX should never issue TWC alerts in other cases but it should be more circumspect in doing so. Otherwise, over time, such alerts may cease to serve any useful purpose and we may then see a new alert in the form of Trade with Extreme Caution to differentiate it from Trade with Caution.

I appreciate that SGX is enhancing its regulatory role and the increase in its surveillance activities should be applauded. However, SGX and other regulators should recognise that surveillance is only part of the system of monitoring and enforcement.

In the case of the 75 per cent of issuers which say that they have no explanation for unusual trading activities, do the regulators track whether these issuers announce significant corporate developments soon after they issue their "no explanation" responses? Do they investigate whether the prior unusual trading activities were the result of leakage of information about these developments?

Olam, which was not queried, is far from being the only stock that has experienced significant price movements before a major corporate announcement. The issue should not primarily be about whether an issuer is queried, but whether there are unusual price or volume movements before major corporate announcements which may indicate possible insider trading. Some markets, such as the US, focus on investigations and enforcement rather than queries and public disclosure around these queries.

SGX and other regulators should examine the balance between surveillance and enforcement and ensure that sufficient resources are put into investigations and enforcement. This may require the government to review the resources allocated to agencies and units which are responsible for investigating and prosecuting capital market-related offences. Surveillance and enforcement need to go hand in hand and it is well accepted that the key to a robust capital market is effective enforcement. If enforcement is improved, we may also see a decline in the need to issue queries and TWC alerts over time as unusual trading activities may become less common.


This article is unfortunately very relevant for Bursa Malaysia, both regarding possible insider trading (which I think is a real problem in the Malaysian market), and regarding the last paragraph (resources allocated to enforcement).

Olam: possible insider trading?

I have written before about Singapore listed Olam, especially about the attacks from Muddy Waters.

Things took an interesting turn when Temasek launched an offer for all of the shares of Olam, at a price of $2.23 per share, as reported by TodayOnline:


The Republic’s state investor Temasek Holdings has offered to buy all shares in Olam owned by minority shareholders in a cash deal that values the commodity trading firm at US$4.3 billion (S$5.45 billion).

The deal will be done through a Temasek unit, Breedens Investments. Breedens, along with Olam’s family share holders, members of its executive committee, and Arandda Investments, another Temasek unit, already hold around 52.5 per cent of Olam shares.
 
“Breedens wishes to increase its shareholding to support Olam’s strategy and growth plans for the long term,” it said in a statement.

The offer price of S$2.23 per share represents an 11.8 per cent premium over Olam’s last traded price.

Breedens is not planning at this point to take the company private, intending to Olam remain listed in Singapore unless it becomes in breach of the exchange’s requirement that at least 10 per cent of shares be freely floated.

Breedens is also offering to buy Olam’s outstanding convertible bonds and warrants.


However, one day later TodayOnline reported the following:


Temasek Holdings’ buyout offer yesterday came after Olam’s share price had accelerated dramatically in recent weeks against the backdrop of a flat market, leading some investors to cry foul and call on regulators to investigate possible insider trading in violation of securities laws.

Shareholder activist Mano Sabnani said in his Facebook posting: “What is upsetting is that there seems to have been a big leak of information on this takeover bid.

“The stock has been steadily rising on increasing trading volume in the past three to four weeks.”
Over the last four weeks, Olam shares have risen 41.1 per cent, compared with the 1.1 per cent gain in the benchmark Straits Times Index during the same period.

“In such a takeover, there will be many people involved in planning it and the chances of a leak are great. An early suspension in trading of the stock would have helped to achieve a level playing field,” said Mr Sabnani.

The six month graph of Olam's share price:

From BusinessInsider comes: "One Of Carson Block’s Big Shorts Is Up Big Today":


It looks like short-seller Carson Block’s just got burned on his short on Singaporean agricultural commodities trading firm Olam International.

Bloomberg News reports that Singapore’s state-owned Temasek Holdings Pte’s unit has offered to buy Olam International Ltd. for $4.2 billion. Temasek was already the largest shareholder.

The stock is on a tear. It was up more than 11.7% following the news.

Block, who runs Muddy Waters Research, revealed that he was shorting Olam back in November 2012. At the Ira Sohn Conference in London, Block questioned the Olam’s accounting practices. He believes the trading firm is booking profits from transactions before the deals are done. He also said he thinks the company will fail.

Shares of stock have climbed more than 14% since then.

Block declined to comment on Olam, Bloomberg reports.

Andrew Barber, chief strategist at Asymmetric Risk Advisors, has been following Olam for a while. Barber, who does not have a position in the stock, explained that these things can happen.

“One of the big problems with shorting a stock is that it can turn into an arm wrestling match with large holders. If they have more capital than you they can rip your face off even if you are correct in your investment thesis.”

Block is well-known for targeting Chinese companies he believes are frauds. He’s best known for his Sino-Forest takedown. Block’s Muddy Waters issued a report that claiming the company overstated its timberland holdings. This caused hedge fund billionaire John Paulson  to lose millions and eventually sell out of the stock. The company ultimately ended up filing for bankruptcy.

To comment on this, I am not sure if Block currently still is short Olam's stock, he might have bought back the shorted shares in the past.

Glaucus vs Minzhong, some observations

The attention for the “Singapore Squeeze” (Financial Times) Glaucus vs Minzhong seems to wane. Probably good, since a lot more is happening in the world these days. Still some observations:


A good article can be found here, comparing the Glaucus vs China Minzhong case with the Muddy Waters vs Olam case.

Some more background of the situation in China can be found here.

"SIAS calls on regulators to punish short sellers", article in The Business Times.

"The heavy weight of the law must be felt by these mischievous perpetrators,” said SIAS President and Chief Executive David Gerald"

(SIAS is more or less the MSWG of Singapore)

Strong words, but the reader probably already know that I completely disagree with this argument. If people buy shares, convince others about their investment case (using subjective or even wrong arguments) and subsequently sell their shares for a tidy profit, that is exactly the same. And if those people would be prosecuted, countries better build a few more jails, since this is happening every day of the year in every country of the world.

In addition to that, Glaucus was very transparent about their interest, and their arguments were backed by a lot of data and arguments. One might not agree with some, but that is something else.

"The SIAS said yesterday that it has had meetings with China Minzhong and is satisfied the company has “vindicated itself”."

I find that a bold and rather naïve statement, I think to give such a definite answer much more work has to be done to give such a definite answer. Somebody on the Valuebuddies forum mentioned:

"China Aviation Oil, ACCS, HongXing and Jurong Technologies had been awarded Transparency award by SIAS and many investors had been hurt by investing into these companies. How many more of such useless awards does the Singapore market need to see before such awards are stopped?"


In my previous posting "And Glaucus responds ...." I wrote several times that it looked like Minzhong admitted that certain things were not in order.

Associate professor Mak Yuen Teen from the NUS Business School puts it more specific in a letter to The Business Times (emphasis mine):

"Is China Minzhong saying it keeps 2 sets of books?"

"China Minzhong has provided a succession of rebuttals to the allegations of US-based short seller Glaucus Research Group, including highly detailed ones on Sept 1 and 3, complete with extracts of source documents. Although its efforts in rebutting the allegations are commendable, they are unlikely to completely dispel the concerns raised by Glaucus. The source documents provided by the company can understandably provide only a partial picture of the true situation.

While the company has cited the fact that it has consistently received clean opinions from its external auditors and that the auditors have not withdrawn their opinions, the auditors themselves have been silent. Given the well-known challenges faced by auditors in China and the fact that all of China Minzhong's business is conducted through subsidiaries there, the auditors may be reluctant to bet their partners' bonuses that the allegations of Glaucus are totally without basis. It is likely that only a comprehensive special audit will be able to dispel all the concerns raised by Glaucus, but we cannot realistically expect a company to commission a special audit each time allegations are made about its financials.

Unfortunately, China Minzhong's latest announcement on Sept 3 contains statements that may not help its cause in dispelling concerns. It stated that "Glaucus's assertion that documents that are publicly available are more reliable than those not in the public domain is flawed. The public information was not obtained independently by the regulators but based on our filings. Where there is inconsistency in information, it is only logical to look to the source documents to verify the truth . . . for SAIC (State Administration for Industry & Commerce) filings, given the purpose and intention of such filings, the key consideration is to ensure that the company operates within its permitted business scope and duly informs SAIC of changes to its registered particulars". It stated that it places great emphasis on the accuracy of accounts which affect its tax liability but appears to admit that its SAIC filings may be inaccurate.

Is this a public admission that it is keeping two sets of books? Rather disconcertingly, it does not seem to see anything wrong with filing inaccurate information in order to comply with regulatory requirements.

Given that the company's filings to SAIC in China may be inaccurate, how can investors be sure that its financial statements and announcements to the Singapore Exchange here are really true and fair, especially when it is clear that regulatory enforcement is easier for Chinese authorities than for Singapore authorities?

China Minzhong's statement also confirms the challenges of doing proper due diligence for Chinese companies using publicly available information, even those filed with regulatory authorities in China, and once again highlights the risks of investing in Chinese companies."

The ABC of a corporate collapse

Good article by Prof Mak Yuen Teen in the Business Times (Singapore) about the collapse of ABC Learning Centres in Australia, and the similarities and differences with Olam.

"The main criticisms of Olam by Muddy Waters were about its business model, accounting, aggressive acquisitions and capital expenditure, leverage and weak operating cash flow. These are very similar to the factors which contributed to ABC's demise."

"Supposedly long-term debt can quickly become repayable in the short term or much more expensive, especially if debt covenants have been breached. Breaches of debt covenants can also have a domino effect."

"Although its profits had been increasing steadily over the last few years, there have been many cases of companies which have failed on the back of positive profits and negative operating cash flow."

"It emerged that the Groves and some of the other ABC directors had pledged their shares to borrow money. As the share price plummeted, they were forced to sell shares equivalent to 5.6 per cent of the company to satisfy margin calls. This flooded the market with shares and pummelled the share price further."

Three interesting developments from the Hong Kong Exchange

[1] The SFC has published its conclusions on proposals concerning initial public offering (IPO) sponsors. The announcement on the SFC's website can be found here, the full article here.

"The changes, along with a streamlined regulatory process, will incentivise sponsors to raise standards, pick the right deals and manage them well which should in turn reduce risks for investors and all those involved in IPOs," said SFC Chief Executive Officer Mr Ashley Alder.  "Although we are now experiencing lower IPO volumes these reforms will underpin market confidence during all market cycles."

Mr Alder further noted that "a high-quality application should mean that the regulatory commenting process is shorter and less intensive." The SFC and the Stock Exchange of Hong Kong Ltd (SEHK) will work on measures to streamline this process so that companies can be listed more efficiently.

The proposals are intended to enable and incentivise sponsors to take a responsible, proactive and constructive role when leading IPOs and, overall, maintain investor confidence in Hong Kong’s IPO market.

Malaysia has long time suffered from bad quality IPO's. I used to subscribe to the SPG (Stock Performance Guide) from Dynaquest, every six months I would go through the just published book searching for counters I might have overlooked. The end result was always the same, I was hugely depressed by the hundreds and hundreds of Malaysian listed companies whose long term ROE (Return On Equity) was way below the return on a simple Fixed Deposit. Malaysia therefore could have benefitted from a much tougher regime, for instance regarding sponsors.

Luckily, things seem to have improved, and the average quality of recent IPO's has risen. Unfortunately, the Bursa Malaysia is still swamped with those old companies of low quality, many of which hardly trade at all.


[2] HKEx published a Guidance Letter (GL46-12) on unrealised fair value gains on valuation of biological assets for the purpose of trading record and profit requirements under Rule 8.05(1)(a); disclosure requirements for IPO applicants with biological assets and due diligence work expected to be performed by sponsor and other professional advisers on biological assets.  It also supersedes paragraphs 17 and 18 of Listing Decision HKEx-LD66-1. The letter can be found here.

"Our treatment described below is unique to applicants engaging in agricultural activities in view of the nature and inherent risks relating to the biological assets and their valuation. It is not appropriate to apply this treatment to all applicants who recognise unrealised fair value gains of their trading/ principal assets under the applicable accounting standards, e.g. investment properties and investments in securities. We consider that the risks in biological assets are higher as they are perishable and their valuation is usually subject to higher uncertainty due to the complex and not easily verifiable assumptions adopted."

As David Webb described it on his website: "In other words, "money doesn't grow on trees". Next up: for inventory purposes, poultry-breeders will not be allowed to count their chickens until they are hatched."

Valuation of biological assets was one of the points raised by Muddy Waters in their report on Olam.

[3] The HK Exchange Published Consultation Conclusions on Board Diversity. The link can be found here.

"We note the overwhelming market support for the Exchange to promote board diversity and to introduce measures in the Code. The amendments are not intended to prescribe particular corporate structures or to require compliance with hard and fast rules. The disclosure, or the explanation, is aimed at securing sufficient information so that investors and stakeholders can understand the company’s performance and governance practices, and act accordingly," said Mark Dickens, HKEx's Head of Listing.

Olam debt concerns persist after cash call

Olam announced a rights issue, the following is taken from Reuters website:

Olam International Ltd's $1.2 billion cash call lifted its shares but failed to ease concerns about the Singapore commodities firm's financial position after its CEO only last week said it would not tap debt markets for the next five to six months.

Olam managed to get full backing from powerful Singapore state investor Temasek Holdings Pte Ltd, its second-biggest shareholder, for a complex bonds-with-warrants issue to battle short-seller Muddy Waters. The move sent its shares up more than 8 percent to a nearly two-week high on Tuesday.

But critics including Muddy Waters and several analysts warned that Olam needs to shore up its weak cash position after piling up debt to finance expansion.

"This rights issue has not addressed ongoing concerns regarding low margins, high leverage, and the need for cheap funding amidst wafer-thin 5 percent EBITDA margins," said Owen Gallimore, ANZ credit strategist.

Olam borrowed heavily to fund its expansion beyond trading into the actual production and processing of agricultural commodities from cotton to coffee to cashew nuts.

Bond markets have grown jittery over debt which totalled S$8.4 billion ($6.9 billion) at the end of September.

And Muddy Waters responded:

Only four days ago, Mr. Verghese vehemently insisted that it would not tap the markets for at least five months. This 180-­‐degree reversal supports our thesis that the Company was in dire straits over the weekend. (This reversal supports another point we have made about Olam – its management should be given no credibility. Its predictions of high returns from its CapEx binge are likely to turn out to be as inaccurate as its five month prediction.)

Olam’s effective cost of this debt is likely over 10%, which should indicate that this raise was not a luxury for Olam. The yield without the warrant is 8.08%, and with the cost of the warrant, the effective cost to Olam is likely in excess of 10%. The proceeds from this issuance are not intended for CapEx. The Company has stated that the funds raised will be for working capital and to repay existing debt. Its existing debt is presumably much less expensive than this new debt.

The war of words between Olam and Muddy Waters will most likely continue for some time. One thing is important to note, if Olam does survive, then it doesn't mean there wasn't any merit in the reports of Muddy Research. But the opposite also holds.

The last paragraph of Muddy Research's paper is unrelated to Olam but interesting towards China listed stocks, it mentions all the top accounting firms:

"the Ontario Securities Commission has charged Ernst & Young with securities violations for  allegedly not performing its audits on Sino-­‐Forest with proper diligence. E&Y also agreed to pay US$117.6 to settle class action claims resulting from its audits of Sino-­‐Forest. Separately, the United States Securities and Exchange Commission has also announced that it is suing the PRC affiliates of E&Y, KPMG, BDO, PwC, and Deloitte for failing to comply with requests for their audit papers of various US-­‐listed China companies."

And Olam responded .....

Olam defended itself with the following 44-page report. It looks pretty solid, at least they did a good job responding in detail and fast. I expect some follow-up from Muddy Waters, it is their move.

The jury is not yet out, but some investors sold their shares, just to be on the safe side, the share has fallen about 40 cent in November.

The Valuebuddies forum drew attention to the fact that Olam has been buying back its shares, for instance here. Companies that have large debts and constantly have to issue new notes should not embark on a share buyback program, in my opinion. They should first strengthen their balance sheet, and only then, if the share is indeed trading at a huge discount to its net asset value, it could consider buying back its shares. But even then, I prefer a simple, transparent dividend, the higher dividend yield will automatically attract attention, so the result will be the same.

The Wall Street Journal detailed Muddy Water's track record so far in this article.

Muddy Waters released its report about Olam

Muddy Water released its 133-page report about Olam, the link can be found here. Many issues are very (accounting) technical in nature, and it will take time to digest the information. Also, we need to see the official reaction from Olam on the report. In the Business Times (Singapore) a lot of attention for the report, which contains quite a lot of recycled old articles, critical comments made by other analysts in the past.


Carson Block, founder of Muddy Waters Research LLC, talks about Olam International Ltd.'s accounting methods, risk of failure and business planning. Block, speaking with Stephanie Ruhle and Tom Keene on Bloomberg Television's "Market Makers," also discusses short-selling strategies.



More can be found here: "Why Short Seller Carson Block Is Done Exposing Chinese Frauds"

Olam takes legal action against Muddy Waters

According to this statement, Olam International has taken legal action against Muddy Waters and its founder Carson Block. It looks like things are starting to escalate.

On one hand I am very much in favour for freedom of speech (which is anyhow much too low in Asia) and until now, I haven't read anything serious by Muddy Waters yet. But I don't know what exactly has been said on the Sohn London Investment Conference in London, details of the allegations have not been forthcoming. So I would be interested what exactly the case is about.

Olam's reaction so far looks rather extreme, as pointed out by Muddy Waters. A solid blue chip should just shrug its shoulders and move on, producing steady quarterly profits, it should not be bothered by criticism.

On the other hand, I am also not much of a fan of companies like Muddy Waters: first shorting a certain stock and then releasing negative information about the company.

But first buying a stock and then releasing positive information is basically the same, and that is happening all the time.

Court cases are always good for outsiders to get a glimpse of what is really going on, so I would be quite interested to read further about the on goings of this case. But because of the court case, Muddy Waters might not reveal more information and keep its bullets dry.

Channel News Asia's story about the events.

Muddy Waters response to Olam

Muddy Waters has responded to Olam reactions:


In the two and one-half years Muddy Waters, LLC has been openly criticizing publicly-traded companies, we have not seen a response as defensive as yours – not even from Sino-Forest. On Monday, our Director of Research gave a brief talk on Olam at a well-respected charity event. He presented facts about Olam along with Muddy Waters’s opinion that Olam is at risk of collapsing due multiple factors, including its debt load. As Olam has since said, his comments were not overly substantive. But based on this alone, Olam halted its stock, scheduled two conference calls, discussed buying back shares, and issued statements that included saying it is not a “fly-by-night company”. It has further evidenced a bizarre fixation on baseball caps.

Olam’s disproportionate reaction is extraordinary in our experience. Should Olam come to collapse (as we believe it will), its use of much-needed cash to buy back shares at this time should give rise to questions about whether fiduciary responsibilities have been breached – particularly given the possible existence of individual motivations that are not necessarily aligned with those of Olam’s lenders. We also note Olam’s attempts to impugn our credibility.

You and your investors should note that attempting to silence critics is not a plan of corrective action. In no way does it make Olam stronger. The February 2011 CLSA report, which raised far fewer concerns than we have identified internally, and that Olam itself made so controversial, should have caused you to work toward repairing what ails your business and your balance sheet. Instead, Olam has since increased its a) debt load by approximately S$900 million, b) cumulative investment cash burn by approximately S$2 billion, and c) cumulative operating cash burn by approximately S$500 million. In other words, you did the exact opposite of what you should have done. Your actions have been an abject failure of leadership.

Companies that attack criticism the way Olam does fail to understand that raising money from the public is a privilege. Because Olam has received significant investment from the government of Singapore, Olam’s mismanagement of the public trust is that much less forgivable. Know this: You voluntarily came to the market, you subjected yourselves to its forces, and you must bear the consequences of your ineptitude.

We do not work for an investment bank, and cannot be bullied the way other analysts can. Our research into Olam has been exhaustive, and we plan to resolutely stand by it regardless of any attempts you might make to discredit it or us.

We therefore suggest you find better uses of your time than focusing on criticism. For instance, you might want to work on plans to reign in your CapEx and de-leverage. The clock is likely ticking.

Olam's shares suspended after Muddy Water allegations (2)

The Olam issue seems to be very "hot" in Singapore. Many investors have exposure either through their equity or bond holdings. Valuebuddies has the following thread on it. From other sources I received the following information.


The most well publicized Muddy Waters success is Sino Forest where the trees obviously weren't where they were supposed to be. However, he's tried it 3 other times and here's the track record:

Company    MW RPRT     Pre-report  Day-after    Curr. PX
SPRD US    28/6/11     $18         $13          $18
FMCN US    21/11/11    $25         $15          $25  
EDU US     18/7/12     $22         $9.5         $19

Outside of Sino Forest, the last 3 target stocks are higher or at similar levels within months of MW reports. Just stating a fact here.


The OLAM 4.07% Senior Bond maturing on 12-Feb-2013 is yielding 18.72% to maturity!  Current Offer price at 97...

OLAM 6% 2018 now offer at 90.  Yield to maturity is 8.22%.  

The million dollar question is, will OLAM default in the next 2.5 months?


The primary issue is their recognition of biological gains (Olam has booked SGD191m of these gains in the past 2-years; 24% of report PAT). Biological gains are the yearly changes in net present value of future income flows on the group’s upstream crop and livestock investments. These valuations use assumptions on commodities prices, productive life of assets, yields, inflation and discount rates. According to Muddy Waters, if Olam does not deliver on their investments, the profits recognized as biological gains will amount to nothing. Muddy Waters also claims the valuations assumptions are aggressive.

Biological gains are a requirement under IFRS for Singapore-listed companies and have been in place for the past 4-years. The aim of this standard is to make a fair-representation of a company’s biological investments as these typically have long gestation periods before revenue delivery while costs are incurred from the start.

All palm oil plantation companies listed on SGX follow this. In our view, whether the assumptions used are aggressive or whether biological gains are recognized as earnings is a moot point. These gains (and losses) are stripped out by a majority of the Street in arriving at core-earnings for Olam as well as all other SGX listed plantations. Further, in their annual report (p142 in 2012), Olam discloses all the assumptions that go in to coming up with their valuations – which are signed off by the auditors (Ernst & Young) and also in the case of livestock by independent valuers.

Biological gains come in two forms: (a) operational – changes in yields assumptions etc and (b) non-operational – changes in pricing assumptions, discount rates. Olam is the only company in our coverage that actually discloses these separately. We will comment further once we have a look at the Muddy Waters report which is scheduled to be released Tuesday morning US time.

Olam's shares suspended after Muddy Water allegations

Muddy Waters has targeted Olam (listed in Singapore) for "short selling". Temasek is a 15% shareholder of Olam, which makes this case even more interesting. At the moment the share is suspended, pending clarifications.

Muddy Waters has had some succes in some cases (Sino Forest comes to mind), but other cases were not clear cut at all (to say the least).

"Buyer beware", but also "Seller beware".


By Jesse Westbrook and Shruti Date Singh

    Nov. 20 (Bloomberg) -- Olam International Ltd., the commodities trader part owned by Singapore’s state-owned investment company, plunged the most in four years after short seller Carson Block said he’s betting against the shares because he questions the company’s accounting methods.

    The supplier of 20 agricultural goods from cocoa to rubber fell 21 percent in over-the-counter trading in New York yesterday, according to data compiled by Bloomberg, after Block said the company is booking profits on transactions before it’s clear how the deals will work out over time. Singapore-based Olam is “heavily” indebted and aggressive in how it reports what the company calls biological gains on investments, he told the Ira Sohn Investment Conference in London.

    Olam is “dismayed at the nature and lack of substance” of Block’s comments and wasn’t contacted before by him or his Muddy Waters LLC research firm, Chief Executive Officer Sunny Verghese said in an e-mailed statement. He’s waiting for a report from Muddy Waters and “will strongly defend Olam’s excellent reputation for transparency and good governance,” he said.

    Block, 36, has successfully bet against Chinese companies that trade in North America after questioning their accounting methods. One target, tree-plantation operator Sino-Forest Corp., slumped 74 percent before eventually filing for bankruptcy protection in March last year.

                        ‘Leap of Faith’

    Olam will fail and recoveries for investors will be “negligible,” Block said. “It’s a leap of faith to think the company is being honest with its valuation” gains, he said.

    It fell 0.9 percent in Singapore yesterday to S$1.74 before the 29 cent plunge to $1.10 in New York. It has fallen 18 percent in Singapore this year compared with a 12 percent gain in the benchmark Straits Times Index.

    Hong Kong- and Mississauga, Ontario-based Sino-Forest Corp. plunged before being suspended in August last year after a June 2011 report from Muddy Waters accused it of fraud.

    Block took a short position in Sino-Forest by borrowing and selling the stock, aiming to profit by repaying the borrowed shares at a lower price. Sino-Forest filed for bankruptcy protection in March. The Ontario Securities Commission accused several executives including the former CEO Allen Chan of involvement in a “complex fraudulent scheme” to inflate assets and revenue.

                         Block Targets

    Other companies targeted by Muddy Waters include New Oriental Education & Technology Group Inc. Block said last month he’s “more convinced than ever” that the Beijing-based company is misleading investors. In February, Muddy Waters issued its fifth report on Focus Media Holding Ltd., claiming the Chinese advertising company overstated its network.

    “As it pertains to Sino-Forest, he was able to unearth something others weren’t,” said John Goldsmith, deputy head of equities at Montrusco Bolton Investments Inc. in Toronto, who sold his Sino-Forest shares for a loss in June 2011, seven days after Muddy Waters published its report on the company. “He, ultimately, was proven correct. You have to at least listen.”

    Olam was founded in 1989 in Nigeria by the Kewalram Chanrai Group as an export company to secure foreign currency, according to Olam’s website. Today, Olam is the fifth-largest publicly traded global wholesaler of agricultural products ranked by revenue, after Bunge Ltd., Archer-Daniels-Midland Co., Noble Group Ltd. and Glencore International Plc., according to data compiled by Bloomberg.

                       Biological Assets

    The company supplies food to 12,300 customers in 65 countries and employs more than 18,000 people, the website says. Temasek Holdings Pte, Singapore’s state-owned investment company, holds 16 percent of Olam, according to data compiled by Bloomberg.

    The company’s first-quarter net income of S$43.2 million ($35.3 million) included an operation gain of S$10.1 million on account of “fair valuation of biological assets,” Olam said in a Nov. 14 statement. It said then that it started making such valuations in the third quarter of fiscal 2012 and “hence there was no operational gain/loss booked in the corresponding period” a year earlier.

    Overall, Olam said its quarterly profit rose 26 percent while sales gained 45 percent to S$4.69 billion. Net debt was $5.7 billion as of Sept. 30, according to data compiled by Bloomberg.