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Monday, April 27, 2009

Confession of an S-chip boss

April 27, 2009 Monday, 03:50 PM

Goh Eng Yeow receives an e-mail on the rise and fall of an unnamed player.


AS A market writer, I get plenty of e-mails everyday – research reports, feedback from readers and ideas for story leads occasionally.

Once in a while, an interesting read will also crop up in my inbox which spices up the working day considerably.

Last week, I got an intriguing e-mail headlined “Confessions of an S-chip CEO” which purportedly came from the boss of a fallen S-chip darling much admired during the heyday of the stock market boom.

Since then, it has become one of the hottest topics for discussion in the stock market.

While the writer did not identify either himself or his company, it is not difficult to surmise from his account which firm was being referred to.

I could not verify the authenticity of his story. What I can say is that it must have been crafted by someone who has been intimately involved in a S-chip firm and knows it inside out.

But it may well turn out to be another red herring like the fake Hilter diaries which fooled even the learned Master of Peterhouse College in Cambridge University when I was a student in England many years ago.

I will not repeat the allegations which he made surrounding the circumstances which led up to the listing of his firm. The full email has been reproduced in a number of blogs.

What caught my eye was the story relating to his downfall. It was also extensively discussed in a column written by Teh Hooi Ling in Business Times last Saturday.

The writer claimed that their world began to unravel at the end of the third quarter of 2007 as they were still “busily feasting on the spoils of the capital market excesses” when the sub-prime crisis exploded in the US.

Many of them were leveraged to the hilt, borrowing from mainland banks to punt the Chinese stock market and property market in the mistaken belief that they would have no problems repaying their loans as they were sitting on huge paper gains on their investment holdings.

But I feel the account which he gave, regarding the huge loans he had taken from the mainland banks, should not go unchallenged. The truth of the matter may be slightly complicated.

The writer blamed the managers of Chinese banks for his plight.

“They were definitely not friends in need. They simply deducted the amount I owed personally from our company accounts two days before their auditors came in, which was, of course, a few days before our company auditors came in,” he wrote.

Their action explained why the company’s auditors could not reconcile the missing cash from the company’s accounts which led to the trading of its shares being halted in Singapore.

From my limited understanding of Chinese corporate laws, each mainland firm has to appoint a “legal representative” which is authorised to carry out transactions like signing contracts on behalf of the firm with the banks, customers and suppliers. Each transaction must be formalised by a stamp with the company seal.

To prevent abuses of the system, some foreign firms operating in China have ensured that the company seal is kept separately from the legal representative.

Is there a similar separation of power among S-chip firms for good corporate governance practices? I wonder.

The problem is also compounded by the fact that the holding company for S-chips is almost invariably a shell company incorporated in a tax haven such as Bermuda or the Cayman Islands which do not have robust company laws in place to protect investors’ interests.

I would not be surprised if mainland banks are able to produce documentary evidence to show that the personal loans they made out to the bosses of the S-chips, which have run aground, have been backed by guarantees given by the company and formalised by the use of the company seal.

Given the jitters over the use of the funds which were used to punt the Shanghai stock market which fell by 60 per cent last year, these bank managers might simply be being prudent by enforcing the guarantees to get their money back.

What is chilling is the last part of the e-mail where he claimed that nothing could be done to him so long as he did not set foot in Singapore, even if he was found guilty in the Singapore court for breaching the law, because there is no extradition treaty between Singapore and China.

In her article last Saturday, Ms Teh raised a similar concern to mine, when I earlier raised the question as to whether S-chip failures are fast becoming our own subprime nightmare.

She noted that in the US, almost everyone in the chain had a part to play in causing the crisis which originated from sub-prime loans. If there is a Singapore analogy, it would be S-chip failure, she said.

But a fraud is a fraud whether it is committed in Singapore or China.

I am confident that justice will prevail for the thousands of small investors in Singapore who had invested their nesteggs in what have now turned out to be a giant can of worms.