Catching small fry while the big fish dives
Jake van der Kamp
The Eastern Magistracy today sentenced broker Mr Chan Yuk Hing and his client, Mr Paul Frederic Chane Yin, after they were found guilty of manipulating the share price of Multifield International Holdings Limited.
Securities and Futures Commission, July 13
Let me tell you what these two unspeakably vile criminals did. They bought a board lot of this stock at HK$1 a share when it was trading at only 25 HK cents and then made a profit of HK$9,985 by filling in the dupes who came running because they thought something was happening in the stock.
Little did these two know that the SFC possesses an all-knowing computer that ceaselessly scans all trades on the market for just such crimes as these. The computer rang its warning bell and the regulators pounced. Score another victory for truth and justice. What a marvellous computer.
Of course, you may share my view that the market actually benefits when speculators burn their fingers by chasing false bids. You may do no more than laugh, as I do. You may even have noted that our two criminals would have to repeat their offence more than 100 times a year to make as much as the average pay of each of the SFC's more than 500 employees. Yes, there is indeed a cost to society here.
But today let us look instead at a caper that the SFC missed. My attention was called to it by a profit warning posted at the stock exchange earlier this month.
In May 2010, a company called International Elite (stock code 1328), which only the previous year had graduated from the exchange's trivial pursuits board, agreed to buy a privately held company from its controlling shareholders in exchange for about HK$2 billion in new shares and cash.
This was no small acquisition for International Elite. It had the effect of more than tripling the company's issued share capital. We have here a mouse that ate an elephant under the (less than arm's length) instructions of its key directors.
Now, I don't pretend to know much about the business in which this new acquisition, Sunward, is active. My understanding of things electronic does not go much beyond my television's remote control and I have serious difficulties even with that. Sunward does something called RF-SIM, which, from what I can make out, involves paying bills through your mobile phone.
But here is the interesting bit. Sunward's RF-SIM technology operates at a frequency of 2.4 gigahertz, whilst a competing and incompatible technology on the mainland operates at 13.56 megahertz.
We now shift to International Elite's own statement of what happened:
'In the last quarter of 2010, there was an apparent concentration shift in the development strategies of certain mobile operators which was evidenced by revenue generated from the sales of RF-SIM products decreasing significantly as compared to the previous quarters.
'Due to such a change in circumstances, management revised the profit forecast and reassessed the fair value for Sunward. As a result, an impairment charge of approximately HK$4,127,997,000 of goodwill was recognised for the year end 31 December 2010.'
We are given to understand here, I think, that the controlling shareholders who sold this lemon to their listed company didn't have any idea of what would befall it only a few months later. It came as a total surprise, straight out of the blue, blind-sided they were, could happen to anyone.
And now we get this month's additional warning to the exchange that 'it is expected that there would be a significant decrease in the profit of the group for the six months ended June 30'.
At this point, I ask you to pull out a calculator and divide 4,127,997,000 by 9,985. Your answer (I'll give it to you) is 413,419.83. That's how many times more than our two retail traders' criminal gains was involved in International Elite's 'impairment charge'.
Do you now think, as I do, that perhaps the SFC's miracle computer could do with a little reprogramming, or that perhaps those long ranks of its million-dollar-a-year staff members might exert a little more attention in the investing public's interest?
Let me tell you what the SFC will say. It will blame the stock exchange and deny any responsibility on its part. You can see it on their door - Messrs Dodge, Duck and Dive.