Singapore Pledges More Regulatory Action After Winning Share Rigging Suit

[cif5000]

I am sure for some illiquid stocks, one can account for 100% of the traded shares if he wants to.

http://www.bloomberg.com/news/2010-09-20...-suit.html

Singapore's central bank said its victory in the country's first civil lawsuit for stock rigging against fund manager Tan Chong Koay and Pheim Asset Management Sdn. shows its determination to enforce market rules.

Tan and his Malaysian fund management company were fined S$250,000 ($187,000) each for manipulating United Envirotech Ltd.'s share price in December 2004 to maintain their performance benchmarks and boost their reputation, according to a Sept. 17 ruling by Justice Lai Siu Chiu.

The Monetary Authority of Singapore's lawyer, Cavinder Bull, had sought a fine of S$1 million each from Tan and Pheim after they bought almost 90 percent of the traded shares of United Envirotech from Dec. 29 to Dec. 31, 2004. The share purchases had raised the net asset value of Pheim's accounts, triggering outperformance bonuses of S$50,790 and a management fee of S$115. Lai said the gain sought wasn't monetary.

"As this case illustrates, MAS will not hesitate to pursue and take stern action against anyone who attempts to rig our capital markets, regardless of whether the perpetrator is in Singapore or overseas," said Leo Mun Wai, assistant managing director of the capital markets group at the central bank.

Tan, 60, and Pheim declined to comment, saying they are studying the judgment and working out their options before making a decision on an appeal, according to an e-mailed statement on Sept. 18. from Wong Soohow, Tan's spokesman.

"Bona Fide" Deals

The share price movement of United Envirotech was due to a "proper interplay of supply and demand" and the purchases were "bona fide" transactions, lawyers for Tan and Pheim had argued.

A ruling against their clients would send a signal that investors can "no longer exercise value investing, buying shares when others are not," the lawyers Michael Hwang and Foo Maw Shen said in a submission. That could chill trading in illiquid stocks and push them to other markets where they are "less exposed to unintentional incurrence of regulatory sanctions," the lawyers said.

"There are relatively few prosecutions and even fewer convictions in the Commonwealth for market manipulation," as they may be difficult to detect, said Alvin Yeo, senior partner at Singapore-based Wong Partnership LLP. "The lesson that fund managers might take away is that industry practices such as window-dressing, which are assumed to be widely acceptable, may not be."

Industry Expansion

Singapore, which expanded its fund management industry to a record S$1.2 trillion at the end of 2009, joins other financial centers in cracking down on market misconduct. The central bank also won its first civil lawsuit for insider trading against former WBL Corp. chief financial officer Kevin Lew this year.

"Singapore's regulatory regime is sufficiently regulated to give investors comfort that they will be protected," said Dean Collins, a Singapore-based partner at Melveny & Myers LLP. Yet "it's not too onerous that regulation makes business too difficult to carry on. Here's a forward thinking regulator keen to attract fund managers."

Tan, who founded Pheim Group, was in 2002 named one of five successful Singapore-based boutique fund managers by the Government of Singapore Investment Corp., which is one of Pheim's clients.

Tan, who has offices in Singapore and Malaysia, jokingly said in August 2006 that Pheim, which manages about $1 billion, was a made-up word which means Please Help Everyone Invest Money.

The case is Monetary Authority of Singapore and Tan Chong Koay, Pheim Asset Management Sdn Bhd., S658/2008/P in the Singapore High Court.

[Musicwhiz]

This case is pretty interesting.....apparently it will be extremely difficult to actually "prove" share price manipulation if one's intention is simply to accumulate shares in an illiquid company. Assuming a company's shares are hardly traded, this would mean that it would be rather difficult to accumulate a sizeable position without significantly pushing UP the share price.

In this case, these guys were in charge of a Fund; thus it may be proven that by jacking up the share price, they stood to gain monetarily from performance fees; then again it could of course be "just a coincidence" that they decided to accumulate such a large position close to the end of the month, when funds tally up their results and NAV. I would think that they can argue a good case assuming they have the facts to back it up - that they had purchased illiquid securities before, and regardless of timing of purchase (i.e. at any time during the month or quarter).

Market Manipulation is undoubtedly a serious crime; but to be able to prove it for illiquid counters is somewhat difficult, and it will be interesting to see if more cases like these surface. Incidentally, I note that this was back in 2004 and the case took 6 years to come to court and for the court to issue a verdict!

[d.o.g.]

In this case, these guys were in charge of a Fund; thus it may be proven that by jacking up the share price, they stood to gain monetarily from performance fees; then again it could of course be "just a coincidence" that they decided to accumulate such a large position close to the end of the month, when funds tally up their results and NAV. I would think that they can argue a good case assuming they have the facts to back it up - that they had purchased illiquid securities before, and regardless of timing of purchase (i.e. at any time during the month or quarter).

As a fellow professional investor, I personally find it hard to believe that Tan Chong Koay was deliberately manipulating the share price of United Envirotech in order to gain $51k in performance fees. Remember that Pheim was managing about $1bn, so the annual management fees alone, at 1% of AUM, would already be about $10m. Why would he bother about $51k?

The other argument made was that by raising the fund's NAV, the fund would have beaten its benchmark for another year. This could have some merit, as boasting rights do carry some weight even among successful fund managers. But with United Envirotech being such a small company, how could it comprise a big enough part of Pheim's fund that manipulating its price could meaningfully affect the fund's NAV?

The 2005 annual report for United Envirotech allows us to compute the largest stake that Pheim could have held.

Total shares on 31 Dec 2004: 248m

Stakes held on 13 Mar 2006:
Lin Yucheng: 72m
Goh Ching Wah: 56m
Liu Jianli: 12m
Zheng Ming: 12m
See Hoy Chan Investment: 12m

Assuming that none of these 5 shareholders increased their shareholdings from 2004, then the most that Pheim could have held would be 84m shares, which would be a 34% stake. First, this would have been extremely hard to accumulate given the poor liquidity. Second, Pheim would have had to make a general offer once it crossed 30%. It didn't make a GO so presumably it didn't cross 30%. It would also have to disclose its ownership once it crossed 5%. I don't recall if it disclosed or not.

But let's take it all the way: suppose Pheim did own 34% of the company and neither disclosed it nor made a general offer. As of 30 Dec 2004 (last trading day of 2004) the share price was $0.45. This would make the stake worth $38m. Pheim's fund was supposedly $1bn. In other words, assuming that Pheim owned 34% of United Envirotech (by itself highly unlikely) it could only affect 4% of its fund. Older news articles put the extent of price manipulation at 17%, so the net effect was at most 17% of 4%, or 0.68% in the overall fund. This kind of effect is not worth manipulating for.

If, as is more likely, the stake held was less than 5%, then it would have been only 0.5% of the fund, and the effect of manipulation would have been 17% of 0.5% or 0.085% of Pheim's fund. Such an effect would be a complete waste of time.

The logical conclusion is that it was not worth it in terms of money or fund NAV for Tan Chong Koay to engage in deliberate manipulation.

Justice Lai obviously had a different view, but it just seems odd given the numbers involved. It's possible that MAS wanted to sound a warning to the entire industry, and that Tan Chong Koay was unlucky enough to be selected as an example.

If I were Tan Chong Koay I would definitely appeal, using the data I compiled above.

[cif5000]

1. If I were to commit the "crime", I would at least also bought some share on the 02 Jan 05 and 03 Jan 05. That would show that I am interested in buying the shares even after "window dressing".
2. It looks like reputation and track record are more important than the fees if there were any motivation at all. The management fee alone on an AUM of a billion dollars would easily come up to several millions. What is the significance of $50k?
3. The transaction volumes were not unusually high on these "manipulation days". Pheim bought only 360 lots.

If I were the investigator, I would minimally
1. Look at Pheim's buying dates together with the offer queue.
2. Look at their selling afterwards.
3. Question on their qualification of this stock against their investment philosophy and approach.

[pianist]

i read about the pheim founder before, he seems like those that apply value investing..

[flinger]

An intelligent man would make a crime look like a normal transaction, like part of everyday life. But humans leave DNA tracks abound that they do not notice. This is where forensics help.