Raking Muck, part 5 & 6

David Webb published the 5th part and 6th part of the "Raking Muck" series.

From the last part:

"We'll bring this hexalogy to a close. We've given you enough reasons to avoid investing in all of the listed companies named at the top of this article, as well as any company which uses the same advisers, particularly on a regular basis. We've also laid out evidence surrounding a substantial number of dubious transactions that the SFC, ICAC or CCB should investigate, and we've drawn attention in the "regulatory notes" boxes to a number of deficiencies in HK's regulatory framework which facilitate some of these schemes.

Once in a while, the authorities do actually listen and act. Examples include our article Cooking with Gas (4-Apr-2004) which was eventually followed by an ICAC investigation and convictions in 2010, and a trilogy of articles about the Styland Network in 2002. Just last week, 10 years later, the SFC won a landmark ruling ordering the former Chairman and his wife (who was an executive director) to pay HK$85m in compensation (plus a lot of interest since 2000). The case was actually heard in Jan-2011 but it took 14 months for Justice Aarif Barma to issue his judgment, which says something about the strain the courts are under and the need to raise the budget for the judiciary. It will be interesting to see whether the couple pay up. The court has disqualified them as directors for 12 years, but their son is now CEO of Styland and they still own 22.72% of it. No criminal charges were brought against the couple.

Other series include the tetralogy of articles in 2009 on China Public Procurement Ltd (1094) and China Railway Logistics Ltd (8089), amongst others. No public action has been taken on those. There was also our articles on EganaGoldpfeil, after which the company collapsed. The SFC has commenced action against the directors seeking disqualification orders and HK$2.13bn of compensation, but no criminal charges have yet been brought despite an investigation by the Commercial Crime Bureau."

David Webb is doing all the work, free of charge, and "Once in a while, the authorities do actually listen and act". For a high-income country like Hong Kong, that is very disappointing. One reason why they are only rated a "B" country in Corporate Governance, similar to Singapore.

Raking Muck, Part 3 & 4

David Webb continued with his series "Raking Muck", Part 3 and Part 4.

In the latter one the following text, describing the situation in Hong Kong:

"Regulatory note: the "Independent Financial Adviser" system in the Listing Rules and Takeovers Code is a waste of shareholders' money and gives investors false comfort. However bad a company's proposal is, the company will almost always be able to find an "IFA of last resort" to say that the proposal is fair and reasonable, and investors may then be misled into voting in favour. When investors do vote a proposal down, it is usually against the advice of the IFA. The system is a gravy train for shoddy IFAs. It would be better to scrap the requirement for an IFA, and require the company to justify its proposal on its own, taking whatever advice it wants to prepare the circular. If the company can't convince shareholders of the merits, then it risks being voted down.An alternative would be a jury-pool system where IFAs are randomly assigned to deals by the regulator. Pricing for the work could be determined by an annual tendering exercise. A firm would only qualify for the next year's jury pool if investors had actually agreed with the firm's recommendations by passing or rejecting proposals at least (say) 80% of the time. We proposed a similar such system in 2001."

It all sounds very similar compared to the situation in Malaysia. Independent advice in Malaysia is also not worth the paper it is written on. It actually often does more damage than it does good: it costs time (the delay to write the report) and money (paid for by the shareholders), and can be used as an excuse by Government Linked Funds to vote in favour, regardless how bad the deal is.

Raking Muck, Part 2

David Webb published the second part of this entertaining investigation.

I received a comment on the previous blogging from "Imenwe":

"The article is very confusing. Maybe a picture involves the beneficiary parties will be better.".

It has been noted, and Webb made this helpful scheme:

Webb constructed a very helpful database on his website with which visitors can track all the connections between companies, directors and professionals. Although the Bursa Malaysia website is good regarding announcements, annual year reports etc, these kind of connections don't show up. If Webb can provide this service free of charge with a small but very dedicated team of two persons, surely Bursa Malaysia should be able to match this?

From a presentation by Webb, given May 27, 2011: