Sabana Reit: shareholder activism

Shareholder activism is still very rare in Singapore (or Malaysia for that matter), so if it happens, we have to take note.

Some disgruntled shareholders of Sabana Reit have started a blog, voicing their discontent with the high fees that the company is paying, and proposing a restructure (bringing the management inside the listed company), which deals with the current conflict of interest between the management and the shareholders of the Reit.

Two snippets:


The Total Fees paid to the External Manager/Property Manager was $8,513,000 in 2013, $9,683,000 in 2014 and $9,288,000 in 2015!!!

On the other hand, the Annual Distribution per Unit paid to us DROPPED FROM 9.38 CENT TO 6.85 CENT in the same period.  We need to do something fast!!!



The share price of Sabana, which has performed badly:

The share price fell further after recently a rights issue was announced. With the money form the proposed rights issue new properties will be acquired which will (I assume) increase the management fees even further.

Felda's recommendations: Bloomberg needs to check its data (2)

One of this blogs regular contributors send me some very helpful comments including a screenshot of the recommendations by the analyst (Ivy Ng from CIMB) as displayed on the Bloomberg terminal.

This does bring a lot of perspective to the story of yesterday.

The share price of Felda plus all the buy/hold/sell recommendations:

First of all a lot of "hold" recommendations starting in August 2012 (the report I linked to yesterday was probably the first research report) until August 2014. At that moment the stock has fallen to about RM 4, so the recommendations so far were not exactly great.

But then, the analyst changed her mind to a "sell", and that looks a good call since the share did drop to about RM 3.

Then things turn rather strange, while the share continues to slide all the way down to the RM 1.50 level, recommendations change from "sell" to "hold" to "sell" to "hold" back to "sell" again. There might be some reason for this (possibly an internal rule in CIMB), but I am not aware of that.

Then somewhere in April 2016 at a price of about RM 1.50 the analyst changes from "sell" to "buy" and at this moment (with hindsight and with the price currently at RM 1.93) that looks like a rather good call.

Rather remarkable, if I might add, seven different recommendations for a four year period.

Regarding the initial "hold" call and the rather high target price of RM 5.05 about which I wrote yesterday: CIMB was one of the brokers supporting the IPO, according to this article:


CIMB Investment Bank (CIMB.KL), Maybank Investment Bank (MBBM.KL) and Morgan Stanley (MS.N) acted as joint global coordinators for Felda Global's flotation, with JPMorgan (JPM.N) and Deutsche Bank (DBKGn.DE) working as joint bookrunners.


Given this, it would have been "near impossible" for an analyst of CIMB to issue a "sell" recommendation.

It is of course a clear conflict of interest situation, and some of that might be found in the disclaimer attached to the report, but it is all rather vaguely described.

I would have preferred that it would have been clearly explained on the first page of the research report.

Regarding "Ng, who is top ranked and has returned 63% for her call on Felda, has the only buy call out of 14 analyst recommendations, according to Bloomberg data": Bloomberg tracks the one year return of a stock assuming an investor followed the recommendations over that period.

I think that is a rather limited tracking of performance, especially if an analyst has followed a company for much longer and had issued many recommendations in the past.

Anyhow, things do look markedly better than I initially thought, I was not aware that the analyst had indeed turned negative somewhere in 2014.

Serious CG issues at SingPost (2)

The one person who wrote a lot about CG issues concerning SingPost is Mak Yuen Teen.

Many of his letters can be found in the "letters" department in the local newspapers. They can also be found on Mak's website.

The articles and letters concerning SingPost can be found here.

One rather remarkable aspect is that this is not the first disclosure lapse by SingPost, as detailed here, some snippets:


The group’s recent admission of disclosure failure may remind some observers of what transpired with ACCS 10 years ago. SingPost had announced its intention to invest in ACCS in early March 2005, after ACCS shocked the market by saying that it had lost almost all its Nokia contracts, had overstated its earnings, and was under CAD investigation.

Soon after, the deal came under intense scrutiny when it was disclosed that three SingPost directors – Mr Goh, Mr Lim and Tan Yam Pin – held stakes in ACCS.

Mr Goh, who had failed to disclose his substantial stake in ACCS, blamed “inadvertence”. Mr Lim revealed that he had bought shares in ACCS after it announced the Nokia contract losses, and that he stopped buying just days before talks on the planned investment started.

A bombshell came when SingPost and Mr Lim said in late March 2005 that they were helping in a CAD probe, triggering speculation that this was linked to Mr Lim’s purchase of ACCS stock. However, this was not confirmed. The CAD cleared Mr Lim of any wrongdoing a few months later, in October 2005.


It appears SingPost, despite the above negative experience, has not put proper processes in place to deal with acquisitions where directors seem to have a conflict of interest.

Serious CG issues at SingPost

Very good article in The Star regarding corporate governance issues regarding a "government-linked logistics and e-commerce group".

We can safely assume that the company in question is non other than SGX listed SingPost.

The article centers around important issues like conflict of interest, independence of directors, “box-ticking corporate governance approach” and the important role of "public outrage".

The special audit report regarding the matter can be found here.

On one side, there is quite a lot of useful information to be found in this report about the process regarding the three acquisitions.

On the other side I think important details have been left out. For instance, a broad background of the three companies could have been given (some key numbers before and after the acquisition of each company plus the price for which they were acquired). The companies were acquired one, two and three years ago, so it would be interesting to know how they have performed since their acquisition.

Also, the money that Tay and his company earned through the transactions would have given more context: was it a tiny amount, or were millions of S$ involved?

And why did the three companies hire Tay's company as advisor, surely there must be hundreds of this kind of financial arrangers/advisors, was it mere coincidence?

It appears that the terms of reference for the special audit were too narrow to provide this kind of information, missing out on an opportunity to clear the air once and for all.

Related Party Transactions, "a national sport in Asia"

I have often warned about Related Party Transactions (and its closely related cousin "Conflict of Interest"). Basically, these should be avoided by companies, and if they are unavoidable due to the nature of the business, they should be done in a very transparent and upfront manner.

In Malaysia, RPTs (and Conflict of Interest situations) are of course almost a way of life, many of the Corporate Governance abuse cases described in this blog handled about them.

GMT did recently some research regarding Hong Kong and Singapore companies.


Over 90% of all companies were engaged in some form of related party transactions in 2014. It makes us wonder if the remaining 7-8% simply forgot to declare them! These transactions averaged 7% of combined sales and expenses which is highly material to profit. A whopping 13% (46 companies) had related party transactions in excess of 20% of combined sales and expenses. However, of these, 31 were state owned enterprises (SOE) which clearly do a lot of business with other SOEs. Who knows whether they conduct business at market prices or in line with government policy? What we’re really interested in are those private companies with a large amount of related party transactions because that’s where minority shareholders are at greatest risk. That leaves us with just 15 companies which we list in alphabetic order below:

Some of GMTs findings (unfortunately the names of the companies are left out, I guess one has to subscribe to their services for that):

• Company 1: The largest related party balances of any company GLOBALLY, at US$6.2bn. It is paid interest income on amounts owed to it but doesn’t pay interest on amounts it owes. This boosted 2014 pre-tax profit by 20%.
• Company 2: Two CEOs have been sent to jail in the last decade.
• Company 3: Around 45% of expenses routed through two companies owned by the founder. One of these paid the founder an estimated US$22m in dividends over the past two financial years.
• Company 4: Building the world’s 5th tallest building in China, financed with a US dollar loan from a related party.
• Company 5: Over 35 pages of connected party transactions.

As a safeguard, RPTs have to be evaluated by the independent directors (INEDs), if the deals are properly done at arms length.

However, as David Webb put it: 

Once appointed by the board, the INEDs are re-elected by shareholders at the next annual general meeting, and thereafter by rotation (typically standing every three years, if they survive that long). Unfortunately, the controlling shareholders are allowed to vote in these elections, so they nearly always determine the outcome. Yes, the sheepdog is appointed by the flock, not by the shepherd. It is a clear absurdity that the controlling shareholders effectively appoint the people who are supposed to prevent them from abusing the company. This is shareholder democracy Hong Kong-style.

In fact, INEDs are often so closely allied to the executive directors that, if the company is taken over, the INEDs resign at the same time as the executive directors, and the new controlling shareholders will appoint new "independent" directors of their choice.

GMT concludes with "Now we’re working on the rest of Asia". I certainly hope they don't skip Malaysia, there will be lots of juicy material to be found.

Research reports: conflict of interest?

Interesting article in The Star: "Cautionary tale of research reports".

Some snippets and some comments by me:


The US$100,000 fine slapped on a former Deutsche Bank analyst for issuing a positive research report on a company when he actually had negative views on it is a stark reminder of why financial opinions should be taken with a pinch of salt.


More information can be found here. It paints a good picture of the often conflicted position for researchers. In this case the researcher wanted to help hedge funds (the best paying clients), but also stay loyal to the company he was writing about. The least served where the "normal" clients of the broker.


In Malaysia, of late, there have been some research reports that are conspicuously “lacking” in terms of material for proper analysis that it makes one wonder if the analysts who had crafted the reports really believe in the financial opinion stated.

The projections and assumptions used in arriving at earnings are long term in nature which makes it hard to justify a research report on the company in the first place. It could have been done when the assumptions had a higher degree of materialising.

The reports are particularly on small-cap stocks that do not have a track record.

For instance, a leading bank-backed research unit recently devoted 20 pages to a small-cap construction company.

The assumptions used in arriving at the profit projections were simply outrageous, to put it mildly.

And the basis of arriving at the profit numbers of the construction company was largely due to its connection with external parties that may pave the way for it to land some large construction jobs.

There was little devoted to the fundamentals of the company itself, its track record in carrying out large jobs and what happens if the “connections” do not pay off.


No names are mentioned in the article of The Star, but a friendly tip pointed at the possibility that this relates to the research report by CIMB on Instacom Group.

In the research report there are sentences like:

• Unleashing the giant
• Asset injection of Neata group to transform sleepy telco tower builder Instacom into construction giant Vivocom
• Explosive two-year EPS CAGR of 456%
• Undiscovered with massive re-rating potential
• The untold story of an emerging construction giant
• Strong orderbook pipeline underpins earnings visibility
• Extraodinary growth outlook with sector-beating margin

The word "giant" is mentioned a whopping 14 times in the article. Will the company really become one? Time will tell, but buyers beware, best is not to rely on outside research and do one's own homework.

At the very least the reader should note that the share price has already risen quite a bit over the last few months before the above report was published. That alone should be of some concern.

Issues regarding INEDs

From the last newsletter of MSWG:


... the Malaysian Code on Corporate Governance 2012 (the Code) recommends a 9-year term limit for INEDs (Independent Non-executive Directors) and the Listing Requirements makes reference to this recommendation where the companies must either comply or explain.

The Code provides under Recommendation 3.3 that there must be strong justifications for the board of a PLC to retain as an INED a person who has served in that capacity for more than 9 years. Also, the prior approval of shareholders is required to be sought.

Over the last 3 years, since the introduction of the Code in June 2012, we observed that the following have been practised:

• INEDs tenure limit of 9 years have been exceeded sometimes as long as 20 or 30 years.
• INEDs have been re-elected over the limit without strong justifications.
• No resolutions were proposed for re-elections.
• Multiple number of INEDs who have exceeded the limit were being put up for re-election simultaneously.

Focus Malaysia wrote an article (partially behind paywall) about the same matter: "Firms don’t fully comply with governance code".

My opinion, for what it is worth:

• Asking Board of Directors to give a justification about the independence of a director whose tenure limit exceeds 9 years is akin to asking companies if their Corporate Governance is any good: both will result in useless, self serving statements.
• With 55% of the listed companies on Bursa having INEDs with a tenure of more than 9 years, the obvious conclusion is that voluntary measures don't work. If the regulators want to be serious about this rule then they should simply enforce it. INEDs who are deemed to be useful to a listed company can still stay on, but as an non-independent director.

David Webb wrote "Principles of Responsible Regulation", one snippet:


As a result of the prevalence of controlling shareholders, investors large and small are usually minority shareholders, and if they are to have any real influence in the ordinary decision-making of companies, then they should have proper representation in the form of truly independent directors in the board room. But they don't.

Under HK listing rules, a so-called "Independent Non-Executive Director" is only as independent as the controlling shareholder wants him (or occasionally her) to be, because the controller gets to vote on the elections in general meetings. The result is often a sham system of illusory checks and balances where rubber stamps fill the required 3 seats on the board (or 1/3, whichever is greater) and form the committees that are supposed to monitor the executive management of the company.


And his recommendation:


"Independent directors should be elected by independent shareholders; any shareholder or the board can nominate candidates, but controlling shareholders must abstain from voting."


Webb's other recommendations also appear to be highly relevant in the Malaysian situation, with the exception of the second (Malaysia does have quarterly reporting).


On another matter, not only INEDs have an important role to perform versus minority shareholders, external auditors also.

Michael Dee wrote an open letter to the employees of Noble Group, his third recommendation being:


" ..... speaking of the now extinct Lehman Brothers, change your auditor, E&Y, who have been auditing Noble’s finances for 20 years now.

This is far, far too long. Auditors are guardians for investors and 20 years breeds too cozy a relationship. E&Y were Lehman’s auditor along with other infamous companies now defunct.

Noble says they rotate E&Y partners every five years but this is just substituting players on the same team. Your management have said E&Y doesn’t have to defend your financials, however they should defend their role in singing off on them.

Here it is instructive to review two aspects of E&Y which are relevant to establishing how much trust one should have in their work. First, as Lehman’s auditor they signed off on the earlier mentioned Repo 105.

Since then, it must be noted, E&Y has paid US$109 million in fines and penalties relating to their Lehman auditing work, including $10 million just recently paid to NY State over their role in the Lehman collapse.

“Auditors will be held accountable when they violate the law, just as they are supposed to hold the companies they audit accountable,” said New York Attorney General Eric Schneiderman.

The Public Companies Accounting Oversight Board (PCAOB), an accounting watchdog established by the US Congress has recently issued scathing comments about E&Y.

As reported by the WSJ in 2012 and 2013 the PCAOB found in their review of over 100 audits that they were deficient about 50 percent of the time.

In half of the audits reviewed, “E&Y hadn’t obtained enough evidence to support its audit opinions giving its clients a clean bill of health“ as reported in the WSJ last year.

But this isn’t a recent problem, the WSJ also reported in 2011 that in over half of the E&Y deficient audits it was because “E&Y was deficient in its testing of how clients applied fair value to their hard-to-value securities”.

This is directly relevant to Iceberg’s charges. Also directly relevant is that in 2012 it was reported E&Y had paid a record US$2 million fine with the PCAOB Chairman saying; “These audit partners and E&Y — the company’s outside auditor for more than 20 years — failed to fulfill their bedrock responsibility”. Not a ringing endorsement I would say."


I think it would be a good idea if listed companies are forced to change auditor every say ten years. It would increase the chance that possible irregularities would be noticed, especially in cases where auditors have become "too cozy" to the companies they are auditing, or when their fees for non-audit related services have become too high.

Goh Ban Huat: connecting the dots

Excellent detective work by Errol Oh in The Star: "From Casio King to King of Coincidences".

This in regard to the acquisition by Goh Ban Huat of 20% in Time Galerie (M) Sdn Bhd for RM 14 Million, as announced here and here.

The detailed work showing possible relationships is much too cumbersome for ordinary retail investors.

Unfortunately, because there are systems out there that would make things much more easy, for instance "Handshakes" and "Webb-site". Pity that Bursa is not making similar systems for retail investors.

Related Party Transactions (RPTs) have a horrific reputation in Malaysia, as detailed in many cases in this blog (and much more cases in "Where is Ze Moola") where minority investors often received the short end of the stick.

But there is one category even worse, RPTs that are dressed up as non-RPTs. With many big players registering their holdings under nominee accounts, in a country where conflict of interest is normal, surely this is happening many times per year.

Unfortunately, enforcement on this aspect is really weak, we hardly hear about relevant cases against major shareholders who do business deals with related parties and fail to report this.

This is very relevant, since RPTs have to follow much more stringent rules and guidelines than non-RPTs. Larger RPTs even require an independent adviser and have to be approved in EGMs where the related parties have to abstain.

That all doesn't mean that Goh Ban Huat's acquisition is a RPT. But it does mean that the regulators actively should look into this deal (and in many similar deals).

It also doesn't mean that it is bad for its shareholders, Time Galerie looks like a very decent, profitable company.

There is one part in the reply to Bursa's query though that I don't like, the comparison to similar transactions. It shows that the PE of Time Galerie (11.8) compares reasonable with five other deals done with listed companies.

However, unlisted companies are sold for much lower PE's, a PE of 5 is often considered reasonable, and a PE of 2 is not unheard of. Shares in unlisted companies are very illiquid, and the standard of the audits is much lower than those of listed companies, hence those companies are trading at a large discount to their listed rivals.

In an unrelated matter, an interesting story about how Robert Tan gained control over Goh Ban Huat can be found here, paragraph 4.3. And for readers who like to know more about Syed Mokhtar (about whom I have written many times in this blog), paragraph 4.2 seems to be interesting.

CIMB selling part of PE business?

Article in Focus Malaysia (partially behind paywall): "CIMB’s ex-CFO to buy its PE biz".

Please note that the article is based on rumours: "It is learnt", "A banker says", etc., no official announcement has been made, so we need to wait for official confirmation.

The deal would be noteworthy since there would be a large conflict of interest the stake being takeover by the people who manage it:


"... former chief financial officer Kenny Kim and senior executives mulling a takeover of the banking group’s private equity business.Under the deal, Kim and his associates are expected to acquire a 70% stake in the CIMB private equity unit, with the balance to be retained by the banking group."


The reasoning behind the possible move seems to be:


" .....a move by CIMB to detach the private equity unit’s financials from the group’s consolidated accounts. This is part of the implementation of Target 2018 or T18, announced in February, that includes the bank’s aim of a return on equity (RoE) of more than 15% by 2018.In FY13, the latest financial year for which its results are available, the CIMB private equity business went into the red with a RM4.68 mil loss after four years of profit. The sale of CIMB’s private equity business may improve some of the T18 financial benchmarks."


That would be kind of reasoning (dressing up of the accounts) of which I am not exactly a fan.

Managers of PE funds normally work under a 2/20 rule, meaning they would get 2% a year (in this case a cool RM 120 Million) and subsequently 20% of the profit after returning the original amount to the investors (since the amount under management is RM 6 Billion, this could be very substantial).

The PE industry in the US is quite controversial, here is a collection of articles from one of my favourite bloggers on this subject.

Weekly roundup

Regarding Cliq: The Edge wrote an article "Potential adjustment to price of Cliq’s QA". Some snippets and comments:


Ahmad Ziyad said that if a disparity between the oil price and the purchase price still exits in March, the assets’ price tag may be adjusted by 5% of the current amount, or no less than US$218.5 million.


Five percent adjustment is not that much, the impact of the lower oil price on the price should be much higher, in my opinion.


When asked why Phystech was willing to sell its assets, Ahmad Ziyad said: “They think that all this while they have not realised the full potential of the field.”


That is not what I hoped to read, better something like: "there is enormous potential, but the company has not enough funds to explore, so Cliq will purchase new shares in the new SPV with which new exploration wells will be drilled, old machinery will be replaced by new, efficient ones".


I have been very critical of SPACs from the start, I am afraid I have not yet seen any reason to change my mind in this matter.


MSWG wrote in their newsletter of March 27, 2015:

That is indeed good news. However, I like to note that Amin is a large shareholder of Integrax. For small shareholder (in the absence of large shareholders fighting to get a better deal) there should also be enough venues to participate in shareholders activism. In some countries I have noted class action suits, taken up by an organisation similar to MSWG, with large amounts of minority investors chipping in. That scenario still appears far away in the Malaysian context.


Kinibiz wrote: "At SP Setia, a conflicted ex-chief judge", a snippet:


Can the chairman of a public-listed company rightly hold shares in another public-listed company — a direct rival at that?

Common sense says no. In fact the law also says this should not be. But this scenario is exactly what has unfolded with regards to SP Setia chairman Zaki Azmi.

Zaki, a former chief justice, holds 19.12 million shares in Eco World Development Group as of Jan 22, according to the latter’s latest annual report. On that date this corresponded to 3.77% of Eco World’s outstanding shares base, making him the third largest shareholder, and was worth RM37.2 million at Friday’s closing price of RM1.95 per share.

And it was not just Zaki. Eco World’s latest annual report also reveals that SP Setia’s two foremost management executive — acting CEO Khor Chap Jen and acting COO Wong Tuck Wai — holding 2.29 million and 1.53 million shares respectively as of Jan 22 this year. The shareholdings come to 0.45% and 0.3% respectively of the outstanding shares base at that point.

This raises pressing questions of conflict. Foremost is why Zaki and company are apparently turning their backs on the obligation for company directors to actively avoid positions of conflicting interests under Section 132 of the Companies Act, which stipulates that directors must use “reasonable diligence” in the discharge of his duties.

Worse, this rubs salt onto SP Setia’s festering wounds after a massive talent drain to Eco World, which is now counting a legion of former SP Setia men — all the way up to the top — as among its directors, top executives and most of its workforce.


It is indeed rather strange and worrisome, the investments in Eco World of the persons mentioned above are substantial. Will that have an impact in their acting in the best interest of SP Setia?

Liew Kee Sin: there is a conflict of interest

For the first time it seems that Liew Kee Sin has admitted that there is a clear conflict of interest in his business dealings.

In an article (page 18) in The Sun:

Liew was of course very much involved in property developer SP Setia, where troubles started about 3.5 years ago when PNB made an offer.

While still at SP Setia Liew was getting involved in another property developer, Eco World.

Later on Liew resigned from SP Setia, but still stayed on as chairman for the Battersea Project Holding in London.

And now Liew is involved in Eco World International Co. Ltd, which will also develop three large scale projects in London.

Liew allegedly said “There is conflict but I declare (to the authorities) and I’m transparent about it,” The Sun reported Liew as saying. “It is up to the shareholders (to decide).”

Not sure which shareholders he was specifically referring to, since he is involved in so many companies.

First and foremost this appears to be an issue that has to be handled by the boards of directors of all companies where Liew is involved.

The question is of course, how does Liew deal with all the inherent conflict of interest situations. For instance:

• If he receives a juicy project proposal, to which company will he refer this deal?
• If a very credible person in the industry reaches out to him for a job, which of his companies will he recommend?
• What will he do is he receives confidential information in a board meeting, which might also apply to any of the other companies he is connected?

All not exactly far fetched scenario's.

Every director has a fiduciary duty to act in the best interest of his company, how can one juggle this duty for so many companies (engaged in the same industry) at the same time?

One publication that has consistently been critical about this conflict of interest is Kinibiz. It's latest article (behind pay wall) in this matter can be found here. A previous 5-part series of articles can be found here, with the most important questions being asked here.

I am afraid I very much agree with the critical comments brought up in those articles.

Unfortunately, in the Malaysian context, this conflict of interest is not exactly unique, it occurs quite often. The many Related Party Transactions (and probably many more transactions that are related but not indicated as such, which is even worse) are a testament to that.

It has always been quite puzzling for me why founders in Malaysia not just focus their efforts on one single company, but seem to be involved in many companies, with large overlaps in business dealings.

Standard & Poor's fined USD 1.37 Billion

Article from the New York Times about the rating agencies that were at the centre of the global financial crisis. As so often, conflict of interest was the cause of all troubles. Some snippets:


It cost $1.37 billion, but Standard & Poor’s has finally appeared to close the darkest chapter in its 150-year history as a rating agency.

Yet that payout announced on Tuesday, which will settle an array of government lawsuits that accused S.&P. of inflating the ratings of subprime mortgage investments, does not represent closure for the broader ratings business. An uncertain future still lies ahead for S.&P. as well as for its main rivals, Moody’s and Fitch.

In the wake of the financial crisis, when rating agencies were blamed for feeding a subprime mortgage frenzy, Congress used the Dodd-Frank Act to adopt a battery of changes for the rating industry. S.&P., Moody’s and Fitch announced their own cultural overhauls and struck a competitive tone about whose ratings were the strictest.

S.&P. settled accusations from the Securities and Exchange Commission that it had misled the public about its approach to rating certain commercial mortgage investments — misconduct that occurred in 2011, years after the crisis. And even as S.&P. has publicly raised concerns about the quality of loans backing subprime auto bonds, it continues to award top ratings to the investments, echoing problems that led to the government settlements on Tuesday.

“The $1.37 billion fine shows that the current system does not work,” said Representative Brad Sherman, a California Democrat who has co-written legislation to crack down on rating agencies.
At the heart of the problem, some lawmakers say, is the rating agency business model. The agencies are paid by the same banks and companies they rate. And when market share declines, a rating agency might lower its standards to attract new business, a concern that underpinned the Justice Department lawsuit that S.&P. settled on Tuesday.

“In reality, the ratings were affected by significant conflicts of interest, and S.&P. was driven by its desire for increased profits and market share to favor the interests of issuers over investors,” Attorney General Eric H. Holder Jr. said at a news conference announcing the settlement.

S.&P. argues that its ratings offer investors a valuable service. While certain ratings might prove to be imperfect, they are meant to be opinions, not fact.

But Senator Al Franken, a Minnesota Democrat who has proposed an overhaul of the ratings business, argues that potential conflicts might impair those opinions.

“As I’ve said since the financial crisis, enforcement after wrongdoing won’t be enough,” Mr. Franken said in a statement on Tuesday, referring to the settlement. He called on the S.E.C. to “fix the fundamental problems of the credit ratings agencies’ conflicts of interest that continue to put everyday Americans and our financial system at risk.”

Protasco's Puzzling Purchase (5)

A pretty shocking (albeit not unexpected, at least for this blogger) announcement by Protasco:


Protasco Berhad (“Protasco” ) wishes to announce that Protasco has today filed a legal suit at the Kuala Lumpur High Court against PT Anglo Slavic Utama (“1st Defendant”) and two of its directors, namely Tey Por Yee (“2nd Defendant”) and Ooi Kock Aun (“3rd Defendant”) (“Legal Proceeding”).

Protasco’s claim against the 1st Defendant is for the refund of the Purchase Price paid under the Restated SPA dated 28 January 2014 and/or damages and/or for damages arising from the breach of contract. Apart from the Restated SPA being void, and as a further or alternative claim, as the Conditions Subsequent were not fulfilled within the Condition Period, Protasco proceeded to terminate the Restated SPA and demanded for the return of the Purchase Price from the 1st Defendant vide its letter dated 4 August 2014.
 
Protasco’s claim against the 2nd Defendant and the 3rd Defendant is premised on the breach of their fiduciary and statutory duties including the duty to disclose their interest in the transaction, conspiracy to defraud Protasco and the making of secret profit. Protasco is seeking damages against the 2nd Defendant and the 3rd Defendant.
 
Protasco wishes to state that the Legal Proceeding it has initiated has no significant immediate adverse impact on the current financial position of Protasco. Protasco will make impairment on the Purchase Price if necessary in consultation with its Auditors.

I wrote many times about Protasco and the rather strange proposed acquisition of the Indonesian oil & gas company which didn't seem to make much sense at all (at least to me), most notably here, here, here and here.

Thanks (of course) to the (anonymous) person who drew my attention to this interesting case in the first place. Keep the good comments coming!

Three articles

Three interesting, but not very positive articles, for the full text please click on the links.


Pump and Dump: How to Rig the Entire IPO Market with just $20 Million

How much does it cost to manipulate an entire market? Not much. And it’s getting cheaper!

It was leaked on Tuesday by “people with knowledge of that matter,” according to the Wall Street Journal, that VC firm Kleiner Perkins Caufield & Byers had decided in May to plow up to $20 million into message-app maker Snapchat, for a tiny portion of ownership. An undisclosed investor also committed some funds. The deal, which apparently hasn’t closed yet, would give Snapchat a valuation of $10 billion.

By strategically deploying less than $30 million, KPCB, and DST Global before it, have ratcheted up Snapchat’s valuation from $2 billion to $10 billion. With the stroke of a pen, in a deal negotiated behind closed doors, they have created an additional $8 billion in “wealth” that is now percolating through the minds of employees with stock options and through the books of the early investment funds.

Inflating Snapchat’s valuation by $8 billion with a few million dollars rigs the entire IPO market that depends on buzz and hype and folly to rationalize these blue-sky valuations. Unnamed people “knowledgeable in the matter” who leak these valuations to the Wall Street Journal are an integral part of the hype machine: It balloons the valuations of other startups. And it creates that “healthy” IPO market where money doesn’t matter, where revenues and profits are replaced by custom-fabricated metrics.


The Lawsuit That Could Legalize Pay-To-Play For Pension Fund Investments

Here’s a scenario to chew on:

An investment firm makes a campaign contribution to a city mayor. Later, the mayor appoints members to the city’s pension board. The pension board decides to hire the aforementioned investment firm to handle the pension fund’s investments.

Does something seem fishy about that situation?

The SEC says yes, and they have rules in place to prevent those “pay-to-play” scenarios.

But a recent lawsuit says no: investment managers should be able to donate money to whichever politicians they choose, even if those donations could present a conflict of interest down the line.


Detecting fraud a risk in China

It can be very risky to do things in China that are taken for granted in other countries.
Kun Huang, a Chinese-born Canadian citizen, is back in Vancouver after spending two years in a Chinese jail. His crime was contributing to research that led his employer to recommend short sales of Silvercorp Metals, a silver producer that is based in Canada but does its mining in China.

Mr Huang, now 37, returned to his native China in 2006 after graduating from the University of British Columbia with a degree in commerce. His parents immigrated to Vancouver in 1997, when he was 20 years old, and he became a Canadian citizen in 2002.

His job was to research Chinese companies, which were beginning to list on stock markets in the United States and Canada. He had been hired by Eos, a hedge fund run by Jon Carnes, a Canadian money manager, to “go through all the financial records in Chinese, talk to management and customers and suppliers,” he said in an interview.

At first, Eos looked for good stocks to buy, but Mr Carnes eventually gained a reputation for spotting Chinese frauds, which he publicised online under the name Alfred Little.

Mr Huang had worked on some of those reports but had no run-ins with the Chinese authorities until 2011. In June of that year, he was asked to look into Silvercorp. He said he found that some Silvercorp reports to the Chinese government showed its mines were not doing as well as they were in reports that the company issued in Canada.

He sent associates to the Ying Mine, Silvercorp’s largest operation, in Henan Province, about 500 miles southwest of Beijing. They filmed trucks leaving the mine with ore and picked up samples of the ore that fell off trucks.

In September, an Arthur Little report questioned whether Silvercorp had exaggerated the mine’s production. It said the samples it had picked up had substantially less silver in each ton of rock than the company claimed and that the volume of truck traffic was too light to account for all the ore Silvercorp said it had mined.

The company responded indignantly and demanded investigations into those who had attacked it.

Mr Huang was arrested on December 28 when he tried to fly to Hong Kong from Beijing. A police officer from Luoyang, the city closest to the mine, warned him that if he did not cooperate he could spend four or five years in jail. The officers questioning him took frequent calls – Mr Huang says he believes they were from Silvercorp officials – and then demanded such information as “the password to the Eos mail server”.

Within a few days, Mr Huang was released on bail, prohibited from leaving China. But that status ended abruptly in July 2012 after a column I [Floyd Norris] wrote for The New York Times appeared, quoting Mr Carnes as saying the Luoyang police “arrested, terrorised and forbid my researchers from communicating with me or performing any further research on Chinese companies”.

Mr Huang was rearrested, he told me, with police officers making clear that action was “directly in retaliation” for the column. He spent the next two years in the Luoyang detention centre, in a 300-square-foot cell that held as many as 34 other prisoners, according to a lawsuit Mr Huang filed this month against Silvercorp in Vancouver.

The previous articles about Silvercorp in The New York Times can be found here and here. A website by supporters of Mr Huang can be found here.

Conflict of interest when regulators sit on company boards

Good article from The Malaysian Insider, see below.

Regulators should not sit on the boards of companies, be they listed or not, be they GLC or not.

Best is if this would be extended after retirement or quitting their job.

From the Hong Kong Civil Service Bureau:


"To maintain the integrity and standing of the Civil Service, it is important that civil servants on final leave and former civil servants should continue to act with good sense and propriety when pursuing post-service outside work as their actions will be seen by the public as a reflection of the culture and character of the Civil Service. They should avoid work which might be construed as being in conflict with their previous duties in the Government, or might bring the Civil Service into disrepute or cause public controversy."


If Malaysia is serious about combatting corruption (I am not convinced because the absence of any "big fish" being caught is painfully clear, I hope I will be proven wrong) then conflict of interest has to be avoided, whenever and wherever possible. It could take an example of Hong Kong, once one of the most corrupt cities in the world, that has significantly cleaned up its act.


"Question: Should regulators be on the board of government-linked companies (GLC)?

Datuk Seri Idris Jala (pic), the minister in charge of transformation unit Pemandu, does not think so and said so at an event yesterday.

The government's GLC Green Book recommends that regulators do not sit on board of GLCs. The reasons are simple: to avoid a conflict of interest and to make sure that there is fairness in decision-making and allocation of resources.

Actually, common sense should dictate that the people tasked with the job of making sure taxpayers funds are used prudently and government policies benefit the public should do so without being influenced by pecuniary or other considerations.

And yet, right across boards of GLCs, officials from various ministries are sitting pretty, and collecting hefty allowances on top of their monthly salaries, raising questions whether they can be seriously expected to function as regulators.

This is evident at Malaysia Airports Holdings Berhad (MAHB) where a couple of senior Transport Ministry officials are board members. They are paid between RM48,000 and just under RM170,000 in directors fees and other emoluments. This is in addition to the salaries they earn as senior Transport Ministry officials.

The problem with this arrangement is what are these individuals from Transport Ministry wearing: that of a regulator or that of a ministry official?

Put it more simply: did these individuals warn the government of the numerous problems at klia2 ranging from cost overruns to shoddy work? Did they raise red flags during MAHB board meetings on klia2 or even warn Prime Minister Najib Razak that more delays were expected, preventing him from making a premature announcement on the budget terminal's opening?

And when they deal with private airlines or deal with the combative Tan Sri Tony Fernandes and his AirAsia Group, are they acting as regulators or a GLC that pays them?

In short, who do they owe their allegiance to? Regulators have to be fair and must always look at the big picture."

Director interlocks and conflicts of interest

Excellent article by Eugene Kang in the Business Times (Singapore), even more important in the Malaysian business context, where situations like conflict of interest, related party transactions, holding shares under trustees, mixing politics and business etc. is all very common. Some snippets:


"Interlocks between firms in the same industry are referred to as horizontal interlocks. From a governance perspective, directors are required to discharge their duties and responsibilities as fiduciaries of their firms. However, an interlock between rival firms can create serious conflicts of interest if it prevents an interlocking director from exercising his objective judgement and discharging his fiduciary duties to both firms. In certain jurisdictions, horizontal interlocks attract anti-trust scrutiny. For instance, the Clayton Antitrust Act in the US currently prohibits, with certain exceptions, one person from serving as a director of two rival firms."


One prime example in the Malaysian context was the joining of forces between AirAsia and MAS and the huge conflict of interest that occurred, about which I wrote here and here.


"Vertical interlocks are formed between firms in a buyer-seller relationship. A director that represents a buyer owes a duty to secure the lowest possible price from the seller. Conversely, a director that represents a seller owes a duty to secure the highest possible price from the buyer. When the same director represents both firms, it is easy to see how a conflict of interest arises."


The Tune Group is a prime example of a network of both horizontal and vertical interlocks, owning a travel agency through which one can book an hotel room from Tune Hotels, can book an AirAsia X ticket, which is branded by and using a long list of other services from AirAsia (which itself has other daughter companies in Thailand and Indonesia), using Tune Insurance as the insurance company, etc.

One example how things can go horribly wrong is Metronic Global, about which I wrote several articles. Metronic  Global was basically a sub-contractor for a related party and had a huge amount of receivables from that party, which it still hasn't been able to receive after many years. Worrisome is that the current management hardly seems to do anything about it, although the amount of money involved is huge (more than RM 40 million). The investigative accountant report highlighted some very serious issues.

A similar situation of vertical interlock arises at Ranhill Energy, about which I wrote here.


The authorities (Securities Commission and Bursa Malaysia) should play a much more active role in these kind of cases. Conflict of interest was one of the primary reasons behind the huge destruction of capital in the Asian Crisis in 1997/98.

Minorities' right to expect full value (3)

Michael Dee (former regional CEO of Morgan Stanley and senior managing director of Temasek Holdings) wrote another excellent article in The Business Times (Singapore):

"Offer for CMA is still undervalued"

"Minorities need to speak up for their rights"

The first few paragraphs can be found here, I will give some snippets regarding the whole article.


"Capitaland (CL) has revised upward its offer for CapitaMalls Asia (CMA) to S$2.35 in the hope that this will allow CL to acquire 90 per cent and delist CMA. Game over, right? Well not quite yet. CMA minority investors were smart enough to see through the fact that the original price was too low, leaving CL in an untenable situation of having only 2.6 per cent acceptances. But the revised offer is also questionable.

It is my hope this misguided situation and others ongoing will serve as a wake-up call for regulators (Monetary Authority of Singapore, Singapore Exchange, Securities Industry Council) and third-party groups (Securities Investors Association (Singapore), Singapore Institute of Directors) over governance lapses and loopholes which disadvantage minority investors, thus leading to significant reforms in the protection of minority investors. In the meantime, investors are taking matters into their own hands."


"Second is the broader issue of the independence of independent directors, which is essential to the protection of minority shareholders. MAS "guidelines" (not proper rules) do not consider directors on the CMA board to be independent if they also sit on the CL board. However, these are just guidelines and a company can explain its deviation if not in compliance, and CMA is not in compliance. The guidelines further stipulate that if the chairman of CMA is not independent then at least 50 per cent of the board should be independent. As the chairman of CL is also the chairman of CMA, he is correctly not listed as independent. Yet two of the six independent directors of CMA also sit on the board of the CL board and yet are still classified independent. In my opinion this is not right.

Minority shareholders should never be put in a situation where there are such obvious conflicts of interest in particular when even the perception of conflicts is so easily avoided. None of this is to say that anyone has acted improperly but rather point out that in situations of majority/minority shareholding, there should be firm regulations and rules that expressly prohibit such conflicts, and guidelines which have no meaningful enforcement or oversight should be eliminated.

Given the relatively disadvantageous position of minority shareholders, they have the right to expect that independent directors have no conflicts whatsoever. In particular, in the event of an offer from the majority shareholder, the Independent Board Committee (IBC) simply should have no issues that may be perceived as impairing its ability to act as an advocate for minority shareholders. That SIAS (of which I am a member) has vigorously defended these interlocking relationships and conflicts, without discussing its own conflict of having CL as a major corporate sponsor, is also unfortunate."


"I conclude by saying to minority investors that the decision to sell or hold CMA or any of the other minority offers is yours and yours alone. You have rights and you must speak up for them or they will be eroded or abdicated. CMA is a great company with a bright future and as China moves to stimulate domestic demand, quality malls in good locations in China will command a good premium. Online retailing is unlikely to displace quality shopping locations and experiences. I would not be surprised if a third-party investor would pay more for the CMA portfolio than the offer currently on the table. Remember, the very reason CapitaLand wants your CapitalMalls Asia shares is the very reason you should also."


For those who are interested in shareholders activism, there is a great series of lectures to be found here, from the Rock Centre for Corporate Governance, Stanford University. Interesting is the historic perspective and lots of specific cases (all in US).

Ranhill Energy: is the fine really adequate? (2)

I wrote before about Ranhill Energy and the fines and reprimands that were handed out by the Securities Commission. Fast and good action, although I questioned the size of the fines, which appears to be extremely small compared to the size of the deal that was on the table.

According to this article in The Star "Ranhill Energy to retry IPO":


"Tan Sri Hamdan Mohamad is re-submitting the listing application of Ranhill Energy and Resources Bhd to the authorities in a second attempt at floating his water and power assets, sources said.

The move comes just after four months of Ranhill Energy’s initial public offering (IPO) being withdrawn, after it emerged that there had been a disclosure breach related to the suspension of the licences of its affiliate company, Perunding Ranhill Worley Sdn Bhd (PRW), by Petroliam Nasional Bhd for an indefinite period.

Subsequently, the Securities Commission (SC) imposed a fine of RM200,000 on the company, while Hamdan, who is Ranhill Energy’s substantial shareholder, was reprimanded and fined RM300,000 for the failure to disclose the licensing issue.

To recap, Ranhill Energy was supposed to list on Bursa Malaysia on July 31, with about 70% of its RM753mil IPO proceeds to be utilised for the repayment of borrowings. The SC instructed Ranhill Energy to postpone its IPO indefinitely on July 25 in view of the non-disclosure issue. On July 26, Ranhill Energy announced that it had terminated its IPO.

According to Ranhill Energy’s prospectus, it had debts of RM1.93bil and a gearing of 1.61 times as at the end of December 2012.

Investment bankers said that for the listing to be approved this time, Ranhill Energy would have to convince the authorities that the chief executive officer and its directors would not repeat the kind of mistakes they had made with regard to the disclosure of that contract.

They added that it could be an uphill task to garner sufficient investor interest in the company’s listing, considering the recent episode."


First of all, this is one of the articles citing unnamed "sources", we need to wait first for official conformation, to often these "rumours" turn out to be not true at all.

Secondly, it mentions "Ranhill Energy would have to convince the authorities that the chief executive officer and its directors would not repeat the kind of mistakes they had made with regard to the disclosure of that contract".

I think another, more important, matter on hand is that they have to convince the SC if it would be appropriate to apply for a listing so soon again. I actually strongly doubt that, I think it simply undermines the credibility of the market if a company can reapply for an IPO so soon after it made serious mistakes in disclosure. If that would be allowed, then the punishment as meted out by the SC definitely looks insufficient and doesn't act as a deterrent at all.

There is also another matter at hand, according to this article in The Star:

• Perunding Ranhill Worley Sdn Bhd (PRW), a company controlled by Hamdan.
• Ranhill Energy relies on PRW for contracts secured from Petronas and that this contract represented a material contribution to Ranhill group’s revenue.

In other words, Hamdan controls PRW, whichs secures contracts from PETRONAS, and (part of) these contracts are then passed through (after marking it up, I assume) to Ranhill Energy.

That means there is a large conflict of interest for Hamdan in dealing with PRW and Ranhill Energy. It would have been much better if PRW and Ranhill Energy would merge, to remove this conflict of interest situation.

A similar, unsatisfactory, situation happened in Metronic Global, which dealt with a company controlled by two directors, about which I wrote here. The additional problem there was that the receivables were "not able to receive", and that Metronic Global didn't seem to be very urgent in proceeding with that matter.

MAS and AirAsia fined, but what about the other issues?

The Malaysian Insider (TMI) has an article on the fines that MAS and AirAsia received from Malaysia Competition Commission:


"In August 2011, loss-making flag carrier Malaysia Airlines (MAS) and AirAsia went into a share-swap deal that promised synergies and growth for both rival Malaysian carriers in Asia's nascent open skies regime.

There was no mention of how it would benefit consumers, leading the Malaysia Competition Commission (MyCC) to investigate the now-aborted deal and slap a RM10-million fine on each carrier."


But TMI has more on the story (emphasis mine):


"Perhaps it is time for other regulators and the Public Accounts Committee (PAC) to move in and put Khazanah and other government-linked companies (GLCs) under the spotlight for their business practices.

The PAC should review how these GLCs hire consultants and banks to carry out mergers and acquisitions and other deals that later cost rather than bring in money.

After all, it is public funds that have led to the creation of Khazanah, MAS and other GLCs. And Khazanah's money is in both MAS and AirAsia, and for that matter, CIMB.

Both airlines are public-listed companies. Their shareholders need to know that the share swap was scrutinised to comply with all laws and regulations, not face a fine years later because someone overlooked the anti-trust elements of sharing resources and markets.

MyCC has done its part in protecting the Malaysian consumer. Now it is time for Putrajaya or PAC to do its part in protecting the Malaysian taxpayers' monies."


And with that I can only agree. I think there is much too much financial engineering going on in Malaysia, which does not create any value to the public or to the minority shareholders. If any value is being made, it is by the controlling shareholders and of course to the consultants themselves, in the form of lucrative contracts.

By the way, I think that the high amount of financial engineering clearly indicates a market top. Malaysia had (and will have) some of the largest IPO's in the world, that does look impressive, until one takes into account that many of these companies are (partly) delisted companies. In other words, again the consequences of (too much) financial engineering.


I wrote three articles that are relevant regarding the controversial share swap between MAS and AirAsia:

AirAsia & MAS: conflict of interest?
Probe on AirAsia, MAS share price trends
AirAsia to MAS: Your Loss is my Gain

Highlighted was (amongst other issues) the conflict of interest for the directors involved.

Imagine Tony Fernandes joining a directors meeting with MAS, where he will hear confidential information regarding important issues like future strategy, pricing etc., and where he has a fiduciary duty to act in the best interest of the MAS shareholders.

Some time later he joins a AirAsia directors meeting where he will again hear confidential information, and where again he is expected to act in the best interest of the shareholders, this time those of AirAsia.

Is it actually possible to do that, act in the best interest of two companies that strongly compete with each other? I strongly doubt it.

Next to that, it is quite common that employees (and definitely the higher management) will have a non-compete clause in their employment contract. Does Fernandes have such a clause, working for AirAsia, being an executive director?

Or are we to believe that MAS and AirAsia borrow the following device from Will Smith to erase Tony Fernandes' memory after each board meeting?

Listing panel lacks investors

In Singapore an eleven man committee is formed to review the listing rules. Its members consists of:

SGX's deputy chief regulatory officer, bankers, lawyers, auditors and corporate services and corporate finance professionals. There is also a representative from the Singapore Institute of Directors.

Not a single representative from institutional or retail investors. But they are the ones who will lose money if governance issues crop up in listed firms, say observers.

From the Business Times article (in full to be found on the Singapore Law website):


Because of this alleged conflict of interest, the rules could, in the end, tip the scales towards lower entry standards and letting more firms list, which could be dangerous for investors, they argue.

In recent years, thousands of investors have lost cash in some S-chips - China companies listed here. These firms were allowed to list here but several of them were later caught up in accounting or governance scandals.

"Most of them (the committee members) will benefit from more listings," said corporate governance expert Mak Yuen Teen, an associate professor at the National University of Singapore.

"I'm not saying they are not people of integrity but it's a fact that most of them will benefit from more listings. Investors' representation is sorely lacking."