Signs of Market Top: Financial Felony, Swindles and Fraud: Filinvest-Megawide Collection Troubles? Three Unprecedented Days of PSEi Magic!
In the fifth edition of Manias, Panics, and Crashes: A History of Financial Crises, historian Charles P Kindleberger and author Robert Aliber wrote:
Fraudulent behavior increases in economic booms. Fortunes are made in a boom, individuals become greedy for a share of the increase in wealth and swindlers come forward to exploit that greed. The number of sheep waiting to be shorn increases in booms and an increasing numberoffer themselves as sacrifices to the swindlers. ‘There’s a sucker born every minute.’ In Little Dorrit, Ferdinand Barnacle of the Circumlocution Office tells Arthur Clennam, who had hoped that the exposure of Mr. Merdle’s swindles would serve as a warning to dupes that ‘the next man who has as large a capacity and as genuine a taste for swindling will succeed as well.’ (p. 188)
It appears that tensions have surfaced between former partners both listed firms developer Filinvest Land [PSE: FLI] and contractor Megawide [PSE: MWIDE] on unpaid receivables. The latter reportedly has been considering a legal recourse to demand payment worth about Php 800 million from the developer.
Since the financial kerfuffle was aired by media, both companies were obliged to clarify such untoward developments to the public by the Philippine Stock Exchange.
And in order to avoid muddling the viewpoints of the respective protagonists, please find below their entire response. (bold added)
We confirm that Megawide Construction Corporation (Megawide) had been trying to collect around P800 million worth of receivables for more than a year from five (5) construction projects it completed for FLI. The five (5) projects, mostly high-rise buildings, had been completed, turned over to FLI and were now being occupied by FLI customers. We confirm that there were time extensions approved during the implementation of the projects. The new turnover schedule was based on the approved extension and well within the new turnover schedule. We confirm that the issue had been endorsed to Megawide’s legal counsel for appropriate action. Megawide had sent several demand and follow-up letters. However, Megawide denies the statement made by FLI that “Megawide is liable for damages because of its delays in construction and abandonment of five (5) Filinvest building projects”. As earlier mentioned, the new turnover schedule were based on timeextesnions approved during the implementation of the projects.
We respectfully clarify that Megawide Construction Corporation (“Megawide”) abandoned and/orincurred substantial delays in completing five (5) projects of Filinvest Land, Inc. (“FLI”) and Cyberzone Properties, Inc. (“CPI”), which is a subsidiary of FLI, making Megawide liable for liquidated damages in the total amount of P793,500,000.00. Pursuant to the parties’ respective agreements for these projects, for failure to complete the work on the agreed completion date pursuant to the respective Notices of Award, Megawide shall be charged with liquidated damages and the project owner has the right to deduct such accrued liquidated damages from any sum dueMegawide. Megawide’s statement in the News Article that they are “within the approved new turnover schedule” is false. On the contrary, they exceeded the agreed completion dates even after factoring in the approved extensions of time. This fact is supported by documents and other evidence.
Present conditions signify as consequences from the series of previous actions.
The financial conditions of both companies should give us a clue to the origins of the likely debt/collection lawsuit.
The growth rate of gross revenues, as well as earnings per share, of Filinvest Land, has been floundering since 2012. In 1H 2017, revenues improved by 9.3% year-on-year, but that was after a sharp 8.3% slump in the 2Q mainly due to a 16.6% crash in real estate sales. FLI’s 1H eps grew by 10%.
Because FLI’s revenues and earnings have been strained, the company has resorted to leverage to finance operations and Capex.
The good news is that FLI has been more restrained in the absorption of debt compared to its peers.
FLI’s refusal to make payments to Megawide can be partly traced to its foundering topline, as well as, its earnings performance
Though Megawide has reported a headline earnings bonanza in the 2015 and 2016, the company has been borrowing astoundingly more than it has earned since 2013. The company’s total debt levels have been skyrocketing. The company’s 4 year debt CAGR was at a staggering 67.54% whereas its net income CAGR has only been at 17.34%
Megawide’s possible performance lapse and likely liquidity pressures could be from its increasingly fragile financial conditions.
Strained financial conditions must have established the conditions for such relational fracture.
Because of the exposure to high degree of leverage, a slowdown in the industry will likely spark even more rancorous business relationships involving customers and the supply chain
The unfolding friction between FLI and Megawide should serve as a blueprint.
Mr. Kindleberger and Aliber also wrote: “Greed also induces some of the amateurs to commit fraud, embezzlement, defalcation, and similar misfeasance” (p.188)
Metrobank’s unearthing of a Php 1 billion internal fraud by an employee and two others last July 2017 should serve as another manifestation.
Swindling according to Messrs. Kindleberger and Aliber includes: A traditional form of swindling involvesoverstating the value of commodities held as inventories. (P. 166)…Swindles that involve falsified statements about the value of inventories can be tested when the promises are made…The lenders are taken in by the falsified values of the collateral offered by the borrowers, and initially the lender’s accountants don’t catch the deception. Swindles in financial markets may involve statements about the growth of corporate earnings or about the ‘warranted’ prices of shares of individual firms…Some of the swindles in the financial markets involve ‘excessive optimism’ about the earnings of firms or future stock prices that those making the statements know are not likely to be true.
And swindling is just part of the financial felony that appears at market tops. Financial felony according to Kindleberger and Aliber: There are many forms of financial felony. In addition to stealing, misrepresentation, and lying, other dubious practices include diversion of funds from the stated use to another, paying dividends out of capital or with borrowed funds, dealing in company stock on inside knowledge, selling securities without full disclosure of new knowledge, using company funds for noncompetitive purchases from or loans to insider interests, taking orders but not executing them, altering the company’s books.
DBP’s alleged “wash sale” to hide Php 717 million in losses in 2015 could be an example. Nonetheless, to sanitize this fiasco, DBP officials were cleared of the charges.
Financial problems allegedly brewing at an HMO firm could be another. But the Insurance Commissiondownplayed the company’s predicament.
Of course, the biggest embezzlement and felony so far have been the money laundering by some executives of the RCBC in 2016.
Yet people hardly realize that swindling has been happening almost every day at the PSE!
While Mr. Kindleberger describes forms of swindling as inflating pricing or valuations through misstatements and financial felony through dubious practices, market manipulation should be part of it!
Since marking the close became operational in 2H 2014, I recall of no precedence in terms of the scale of a three-day pump.
The sum of the 3-day pump of 151.77 translates to a massive 1.8% from last Friday’s close! That’s the scale of pumping to prevent the PSEi from falling!
Today’s 70.03 point pump virtually turned lead (losses) into gold (gains)! It’s the biggest in three days!
Moreover, the three days had many similar actors.
In three days, SM was pumped a whopping 3.7%, JGS by an astronomic 6.72% and URC by a colossal 4.31%!!!
This shows the collaboration and design to deliberately push the index higher.
What cannot be achieved in the regular session had to be blasted by the session’s end. And it has not just been the frequency, but the intensity of manipulations just gets bigger and bigger!
Rising stocks have become an ENTITLEMENT!
There is NO stock market that I know of that operates in such manner. And yes, the PSE is a price-fixing mechanism instead of a stock market. The Philippines uniquely holds the tiara for price fixing.
By the way, all these are indicative of massive distortions in the marketplace. We have an IMPAIRED market.
Nevertheless, when fraud, swindles, embezzlement, and lies are seen as virtues….look at below!
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