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Tuesday, November 17, 2009

Cautionary tale from a rogue S-chip

November 17, 2009 Tuesday, 10:59 AM

Goh Eng Yeow comments on the unfolding boardroom scandal at Sino-Environment.

It was with some concerns that I wrote the latest commentary "A cautionary tale for S-chip investors" asking why Sino-Environment was allowed to trade for a further six months when it seemed likely that the firm might not survive the problems that beset it.

The problems faced by Sino-Environment were similar to those that had befallen Fibrechem Technologies and China Sun Bio-chem earlier – and it is difficult to believe that its boss will behave any differently.

For those who have not followed the Sino-Environment saga, a swift recap: Its founder and chairman Sun Jiangrong defaulted on a $120 million loan extended to him by a hedge fund in February. This resulted in his 56 per cent stake in Sino-Environment being seized by the hedge fund and sold on the open market.

His personal financial difficulties plunged the company into turmoil because it was faced with potential early redemption of a $149 million bond.

Under such circumstances, one would have expected someone – anyone in a position of influence in the company – to try to safeguard the company’s precious financial resources and keep it out of harm’s way.

The alarm bells should have been set ringing when the company failed to come out with its first quarter results – due out by mid-May – and had to hire auditors PwC to review "significant cash transactions" between January and March – the period which coincided with Mr Sun’s loan default.

This would have been the first indication of somebody’s suspicions that money might have been moved out of the company – and that an independent party was being hired to track down the transactions.

Instead, our attention was diverted by the charade staged by the management threatening to walk out on the beleaguered company that month, and the independent directors having to beg them to stay to ensure that operations run smoothly.

But buried in a May 25 announcement asking the executive directors to withdraw their resignations was also a "request that the key management co-operate on certain matters in the meantime".

On hindsight, I will not be surprised if these certain matters refer to the suspicious cash transactions that had been made between January and March.

But it will take more than a Sherlock Holmes to decipher all the cryptic meanings in the announcements made by the firm.

It certainly speaks volume about the manner in which Sino-Environment implements the disclosure-based practices. Surely, disclosures should be made in a coherent and transparent manner to let investors make an informed decision – to trade, or in this case, not to trade at all.

We would all be still in the dark about the subsequent report of the PwC findings to the CAD and the boardroom tussle to get rid of Mr Sun, if the management had not sacked the Singapore unit’s financial controller, Mr Raynauld Liang - and caused all these developments to spill into the open.

It makes me wonder once again what can be done if these offshore firms, which are listed here, refuse to play by our rules.

Sino-Environment’s independent directors are clearly out of their depth dealing with a boss who decides to turn roguish.

But I wish that they could have been more forthcoming right from the start about the problems that are festering in the company and not let them suddenly explode in the public eye last week.

Tightening the regulations further or ensuring that the chief financial officer is based here isn’t going to help – if the precious cash resources are out of reach – and in the hands of management far away from Singapore.

The biggest headache now is the sort of redress an investor who bought the stock after May could get from the whole sorry saga when trading should have been stopped after disclosures of the "significant cash transactions" were made by way of the PwC review.

The Bloomberg machine shows that about 15 million Sino-Environment shares were traded daily between March – when Mr Sun’s loan default came to light – and September when trading was suspended.

That is an awfully large number of shares each day during those fateful six months to answer for.