Sunday, 23 September 2012

Of Fakery And Funds

What happens when a fraud spotter goes up against hedge fund star?

You get Carson Block of Muddy Waters bear versus John Paulson of Paulson & Co bull, waged on the theatre of Sino-Forest which,  reported in a BBC article, defiantly announced intentions to sue Muddy Waters, which sounds rather spiteful on the part of Sino-Forest, especially since the title of the same article is, “Sino-Forest Files For Bankruptcy Protection”.

Since then, Muddy Waters has been made out by the media to be something of a financial vigilante, publishing articles on fraudulent accounting by Chinese companies. 

Questionable accounting is not new for Chinese companies, and most investment professionals will readily agree that accounting standards in China are somewhat flexible at best. Taking a quote from Charles Li, Chief Executive Officer of Hong Kong Exchanges & Clearing Ltd, some Chinese companies listed in the US via reverse takeovers “wouldn’t have seen the light of day here.

So what has all this have to do with the Singapore mutual fund scene? The story comes in 3 parts: Muddy Waters vs Focus Media, Bronte Capital, and Eastspring Investments.

Arc 1: Muddy Waters vs Focus Media
November 2011, Muddy Waters released a report, initiating coverage on Focus Media, which it claimed fraudulently overstated the number of LCD screens it owns. You can read the full report, “Muddy Water Initiating Coverage on FMCN – Strong Sell” here. On the day of the report’s release, 21 November 2011, the impact on Focus Media was significant.
image credit: Yahoo! Finance (note added)
Since then, Focus Media has recovered back to 23.76 as at 22 Sep 2012. But that’s just arc 1.

Arc 2: Bronte Capital
Bronte Capital is the name of the blog, written by one John Hempton, CIO (Chief Investment Officer) at Bronte Capital Management

Since August, he’s written approximately 16 articles around Focus Media, which is probably enough to fill a short novel of more than 10,000 words. Granted, it’ll be 10,000 words of financial storytelling which is probably a niche market at best. Still, John writes simply, and more importantly, candidly, which is fairly rare in this industry.

Bronte Capital articles re Focus Media
Source: Bronte Capital,, last accessed 23 Sep 2012
There’s a lot of good reading in the posts, and John goes through, in some detail, the reasons why one might suspect Focus Media of over optimistic at best and outright deceptive at worst. But where my interest gets piqued is in reference to one Ashish Goyal, CIO Asian equities with Eastspring Investments.
John writes, “Finally it is being written for Ashish Goyal from Prudential Investments who is Focus Media's largest shareholder and was quoted in the WSJ stating he wanted more than $30 for his shares. [Someone please forward this to Mr Goyal. He seems a reasonable man.]”

Given I’ve had the opportunity to interview Ashish, he strikes me as a pretty conservative and experienced sort of money manager.

Looking through Eastspring’s annual reports also reveals Ashish doesn’t have any direct positions in the funds under his management, although Eastspring is listed as one of the top holders of shares.
Enter Eastspring Invesments
Turns out Focus Media helpfully compiles a list of top shareholders:
Image credit: Focus media,, last accessed 23 Dep 2012
And right up there with 4.4% ownership is Eastspring Investments Singapore.

Based on Morningstar’s data, Ashish manages Eastspring Investments - Asian Equity Income A Inc. Meanwhile, the two funds listed by Focus media include Eastspring Investments – China Equity Fund, managed by one Nicholas Koh, and Eastspring Investments Unit Trust – Dragon Peacock whose manager is not listed in Morningstar’s database.

Not content with this, looking through Eastspring Investments’ annual reports (as at 30 June 2012) turns up several more funds that hold Focus Media, including the following table.
Eastspring Investments Funds with holdings of Focus Media
Fund name
% of Net Assets
Valued at
Asia Pacific Equity Fund
Andrew Cormie
Asian Equity Fund
Kannan Venkataramani
China Equity Fund
Nicholas Koh
Dragon Peacock Fund
Dr Rao
Greater China Equity Fund
Nicholas Koh
Hong Kong Equity Fund
Nicholas Koh
source: Eastspring Investments Unaudited Semi-Annual Report as at 30 June 2012

manager source:

As at 30 June 2012, Focus Media isn’t found in any funds directly managed by Ashish. I’m guessing the reason why he was quoted as saying he wanted $30 for Focus Media is because he is acting as a spokesperson for Eastspring Investments, speaking on behalf of the firm and quoting a price that was quoted to him.

There’s no telling who is right on this particular call. Muddy Waters has a reputation for shorting fraudsters, and the amount of material put out by Bronte Capital seems to support some sort of accounting irregularities is going on. On the other hand, Eastspring Investments is a solid fund house in its own right– some of its funds are highly rated by various rating agencies.

The difficulty is essentially identifying deception – if a company sets out to intentionally defraud investors, enrich its inner circle of family members, business partners or friends – then there are two ways to establish the truth, either via a confession, or by building a store of facts inconsistent with the story. And humans in general are monumentally bad at spotting liars. 


  1. Without help of the SEC and the OSC, Muddy Waters etc couldn't have done the huge damage to the Chinese companies. Look what the OSC has done in the Sino-forest case:

    The OSC did not know that China had a policy of not issuing the certificates to foreign invested forestry companies and said:"absence (of certificates) is per se evidence of fraud."

    Furthermore, the OSC denies the validity of confirmations issued by the Chinese forestry bureaus, reasoning in the SOA that "certain PRC forestry bureau employees obtained gifts and cash payments from Suppliers of Sino-Forest,further undermining the value of the Confirmations as evidence of ownership."

    The OSC's lacking of trust of or effective communication with the Chinese government has led to a situation that there is no way to prove the ownership of Sino-forest's forestry assets in China, and thus the resignation of the auditor (E&Y), and the consequent delisting of the company's stock from the Toronto Stock Exchange.

    The Independent Committee, established by the Board of Sino-forest immediately following the release by Muddy Waters of the MW report, disproves allegation made in the MW report that Sino-forest is a fraud, and verified the firm's cash balances and confirmed registered title or contractual rights to timber assets. Forestry Experts have also physically inspected the timber.

    The OSC's lacking of trust of or effective communication with the Chinese government also led to uncertainty and difficulty for the sale of the company and estimate of the value of Sino-forest's forestry assets. According to the FTI Consulting, the Monitor appointed by the CCAA court, "to complete any meaningful amount of verification could take years, at a minimum."

    If the current Restructuring Plan is approved, it will be just like the media reported,"Sino-forest's assets far exceed its liabilities, but shareholders are likely to end up with nothing..."

    1. Good information here. I would be curious to know how SinoForest, despite lacking the documentation, got past the OSC in the first place. I'm no stock expert, and certainly not familiar with the listing requirements for Canadian markets.

    2. From the beginning of the Sino-forest case, Mr. Howard Wetston, only 7 month on the position as Chairman of the OSC, has shown his strong determination to put Sino-forest's former CEO Allen Chan and other Chinese executives into jail. Meanwhile he has also shown his lacking of qualifications to deal with this case:

      - In August the OSC ordered former Sino-Forest chairman and chief executive officer Allen Chan to leave the company, along with four other corporate officers.

      Apparently Mr. Wetston was lacking knowledge of the OSC's power limits.

      - Second IC interim report revealed that the OSC "expressed grave concerns as to such absence and surmised in its discussions with the IC that such absence is per se evidence of fraud."

      Apparently Mr. Wetston was lacking knowledge of China's forestry policies.

      - Independent forestry experts have verified the timber assets of sample contracts and physically inspected the timber in China. Sino-forest also asked and received the confirmations from the Chinese forestry bureaus.
      However, the OSC refused to accept the confirmations from the Chinese forestry bureaus as the evidence of the ownership of the company's assets in China and alleged systematic practice of creating deceitful Purchase Contracts of Sino-forest.

      Apparently Mr. Wetston lacks trust of and communication with the Chinese government. Also, the OSC lacks trust of the independent forestry experts and the Independent Committee.

      Let's review the recent BNN interview:
      BNN: I want to go back to the first interview we ever did earlier in your term; you talked about your focus being seeking jail terms, you have record sentences in 2011.... Sino Forest obviously comes to mind, fraud charges against 5 former executives, are you determined that those people go to jail?

      Wetston: Well, I think what we are, we determine in achieving is the appropriate outcome that we can achieve under the circumstances. So when you think about for example when you ask that question hmm the-the much of the activity associated with that matter is overseas, and many of the Officers are overseas. So, our ability to enforce the act overseas is a challenge and as a result of that, well my determination maybe strong to ensure that sanctions meet the conduct which is at issue. Some of the challenges that we have is in enforcing that internationally.

      Yes, Mr. Wetston, we can see your determination. But, do you have an unbiased clear mind, necessary knowledge and communication skills to deal such an international case??