Bamboo Innovator Insight (Issue 70)

• The weekly insight is a teaser into the opportunities – and pitfalls! – in the Asian capital jungles.
• Get The Moat Report Asia a monthly in-depth presentation report of around 30-40 pages covering the business model of the company, why it has a wide moat and why the moat may continue to widen, a special section on “Inside the Leader’s Mind” to understand their thinking process in building up the business, the context – why now (certain corporate or industry events or groundbreaking news), valuations (why it can compound 2-3x in the next 5 years), potential risks and how it is part of the systematic process in the Bamboo Innovator Index of 200+ companies out of 15,000+ in the Asia ex-Japan universe.
• Our paid Members from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing.

Dear Friends,

The Asian Snake Charmer and Stock Manipulation Scheme (Weeks 7-9 of SMU course Accounting Fraud in Asia)

Over the next two weeks, we will dance with the Asian Snake Charmers to learn the dark art of stock manipulation and its unsettling relationship with accounting fraud in the Asian capital jungles.

The Asian Snake Charmer wields seductive power and influence with his or her pagi-like (“wind instrument”) manipulation methods in “painting the tape” to engender the “pump-and-dump” scheme. Through trade-based manipulation in “wash sales” and “matched orders” using nominee accounts and recycling short-term financing, we will see how Snake Charmers manipulate share price and share volume pattern to lure technical charting and momentum traders and investors to fall into the spell. Through information-based manipulation, we get to see how market participants, including sophisticated institutional investors, fall under the sway of the multiple false market catalysts, capital market events and corporate announcements released to the market. We will also learn about market making (e.g. artificially restricting the supply of IPO shares in the allocation process and creating significant aftermarket demand for the shares to create an artificial increase in the price of shares once aftermarket trading commenced), IPO/SEO laddering, the PRIN manipulation measure, order limit cancellation manipulation, working with underwriters to sell before lockup expiry, cashing out of shares by controlling owners to syndicates and pool operators at a discount, etc.

Vivid cases of Asian Snake Charmers include Harshad Mehta, Ketan Parekh, Tang Wan Xing (唐万新), Pin Chakkaphak and many more. The Asian Snake Charmer becomes one with the Asian Snake and is a manipulator of thoughts. In a timely fashion the evil one inserts thoughts into our minds hoping that we would adopt them for ourselves. If we can understand temptations and the Truth, we can break the spellbound enchantment.

We are pleased to present the course presentation materials exclusively for our Moat Report Asia subscribers:

asianextractor.com/2015/02/10/potential-accounting-tunneling-fraud-at-china-environment/

In the words of the late economic architect Dr. Goh Keng Swee, we desire to “explain, inform and educate” our abhorrence of stock manipulation schemes and potential accounting frauds in the Asian capital jungle.

We hope that the regulatory authorities in Asia will take a more serious and proactive (as opposed to reactive) approach to tackling stock manipulation and potential accounting frauds and restore trust in the capital markets. The large transfer of wealth from outsiders to insider manipulation significantly discourages how much and how many outside investors choose to invest in the market. The presence of manipulators impose large participation costs for genuine participants trying to either invest or raise capital in equity markets and explain why market reforms are hard to implement and emerging equity markets remain a fertile playground for the professional manipulators and insiders who have the incentive and power to manipulate prices, volumes, information and to inject “action” to lure investors and then offloading in a pump-and-dump scheme via related-party and accounting money-go-round transactions.

We need to make right the capital market phenomenon that the sagacious Peter Bernstein aptly described: “The ‘gulls amongst the public to feed the maws of professionals’ seem to replenish itself with remarkable regularity regardless of how many gulls drop out along the way.”

The following presentations are authored by students from the Singapore Management University (SMU) who are currently taking the course ACCT004 Accounting Fraud in Asia taught by KB Kee, managing editor of  The Moat Report Asia  and faculty (accounting) in SMU :

(1)    Potential Accounting Tunneling Fraud at China Environment (CENY SP, MV S$170M)? by Terence CHUA Tong Liang and YEO Shan Rui

(2)    Debt Covenant Violation and Earnings Manipulation: The Case of Tata Power. by YEO Shu Wen

(3)    Shell Games of Chinese Reverse Merger Firms: The Case of CleanTech Innovations by Jelvin TAN Xiang Rong

(4)    Changes to the Ownership and Control of East Asian Corporations: The Case of Indonesia’s Media Company Media Nusantara Citra Tbk PT (MNCN IJ, MV $3.4bn), by Adhitia B. Sembiring

Past presentations shared with our subscribers:

(5)    Zhongmin Baihui SELL, Overvalued S-Chip Retailer with Questionable Related Party Transactions, by Eugene SAY Gui Hua, Desmond LIN Liye, Adhitia Budiarjo SEMBIRING

(6)    Hiding Behind the China Wall and the case of Longtop Financial. by Katharine TAN Pei Shi

The following presentation is by Mr. Jarrod Baker, the Senior Managing Director at NYSE-listed forensic specialist FTI Consulting Inc (NYSE: FCN, MV $1.5bn) for the Singapore Management University students in the course ACCT004 Accounting Fraud in Asia taught by KB Kee, managing editor of The Moat Report Asia and faculty (accounting) in SMU:

Thank you very much, Jarrod and Jason, for taking time to share your knowledge and wisdom with the SMU students about the meaningful and fulfilling forensic work that you do at FTI Consulting.

Happy Chinese New Year to everyone – we wish you Health and Happiness in the year of the Sheep!

PS1: We will resume on 2 March 2015.

PS2: We are in very preliminary and basic discussion with an established fund house with an illustrious hundred-year-old history and an Asian listed company about a potential collaborative effort to employ the Bamboo Innovator methodology to systematically identify and invest in neglected, misunderstood and underappreciated wide-moat resilient business models. Heavy lifting work is done in eliminating Asian companies with a higher likelihood of Asian-style accounting tunneling fraud via related-party transactions, misgovernance risks and the alluring value traps without a resilient and innovative business model. The portfolio investments in the top Asian Bamboo Innovators will be housed in the ETF-index and fund products with disciplined stock selection process and scalable fund capacity build-up. We sincerely hope that this potential long-term project can materialize for the investment community and public. We are grateful to have your kind patience and valuable support and we like to express our heartfelt thanks to you, our Subscribers to the Moat Report Asia. We assure you that we are thinking and working hard to continually add value and bring authenticity for you, our Moat Report Asia Subscribers.