Signs of Market Top: Financial Felony, Swindles and Fraud: Filinvest-Megawide Collection Troubles? Three Unprecedented Days of PSEi Magic!

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)

Megawide:

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.

Filinvest:

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)

The Php 300 million swindle by an ex-PSE employee in 2016 should be a testament to this.

Metrobank’s unearthing of a Php 1 billion internal fraud by an employee and two others last July 2017 should serve as another manifestation.   

The reported Bullion Buyer Ltd political financial scam, which emerged last week, could be another.

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!

Infographics: The Bre-X Scandal: A History Timeline

From Visual Capitalist

Courtesy of: Visual Capitalist

Insider Trading in Chinese Stock Markets? More on Chinese government’s blowing of her Stock Market Bubble

Chinese stocks reportedly surged prior to the announcement of interest rate cuts.

Has this been out of luck or from insider trading? 

The Wall Street Journal reports

A sudden surge in China’s stocks hours before Beijing cut interest rates on Friday has drawn complaints from some investors who suspect that word of the central bank’s surprise move was leaked to the market ahead of time.

Authorities have in recent years sought to crack down on insider trading in the country’s volatile stock markets. But the unusual rally adds to worries the illegal practice remains, giving big profits to those in the know but leaving an unfair playing field for other investors.

Shanghai’s benchmark index started the Friday morning session virtually flat, but after the midday break climbed 1.4% to just shy of its three-year high despite a lack of substantial market-moving news. Trading volume jumped 31% from the previous day.

The cut to borrowing costs was announced at 6:30 p.m. local time in Shanghai, three-and-a-half hours after the market’s close. Stocks in Shanghai rallied a further 1.9% Monday.

It could be combination of luck, momentum and insider trading.

 

But the following paragraph gives us a clue why the Chinese government has been inflating a stock market bubble. (bold mine)

Retail investors, who account for more than 80% of all transactions in China’s stock markets, have long complained that information appears to be disclosed unevenly. Beijing’s policy on approvals for new share offerings, which favors state-run enterprises rather than more profitable and innovative private firms, has attracted criticism as well.

Given that the housing markets have been on a steep decline, the Chinese government hopes that by providing “gains” on speculative activities to retail investors in the stock market, such would create “demand” for housing, thereby cushioning the current pressures on the housing markets. Of course Chinese retail investors have been noted to use levered money in order to speculate on stocks.

So the Chinese government’s cure to the housing oversupply financed by overleverage has been to entice the retail sector to lever up in order to pump a stock market bubble.

Such manipulated boom has been channeled directly via price controls of the IPO markets, and the HK-China stocks connect, and indirectly via stimulus and bailouts

The Chinese government’s push to stoke a stock market bubble via the IPO market can be seen via additional measures--the announced ‘liberalization’ of fund flows from IPOs conducted abroad. 

Notes the Bloomberg:

China scrapped some approval procedures related to initial public offerings, part of government efforts to cut red tape and spur private-sector investment.

Chinese companies no longer need a go-ahead from the foreign-exchange regulator to bring back money raised in overseas share sales, according to a State Council statement posted on the central government website today and dated Oct. 23. The government will also cancel the certification process for sponsor representatives, a qualification for investment bankers overseeing domestic IPOs, the statement shows.

Making it easier for companies to send proceeds back home may encourage more overseas share sales, easing the backlog of applications for domestic listings

As one would note, the Chinese government has been so desperate to secure funds that they now resort to “liberalization”, which unfortunately when things fail, will get the blame. 

In addition, given the colossal debt by local governments (estimated at $3 trillion as of June 2013) inflating stocks in favor of state-run enterprises as I noted last weekend is a sign that “Chinese government wishes to find alternative avenues for overleveraged companies to access funds”

China’s State owned enterprises according to Wikipedia are “governed by both local governments and, in the central government, the national State-owned Assets Supervision and Administration Commission” or are owned by the local, provincial, and national governments.

The thrust  of the Chinese government hasn’t been to generate real economic growth, but as signs of desperation, to inflate substitute bubbles in the hope to buy time, to meet political goals in the context of statistical growth and of a miracle.

Essentially, the Chinese government’s therapy to the problem of addiction has been to provide more of the substances which one has been addicted to. Doing the same thing (in a slightly different form) over and over again

Oh, those charts above shows resemblance with the “afternoon delight” in the Philippine stock exchange. The difference is that the above may have been a one day event in the Middle Kingdom but in the Philippines has become a norm. 

As a side note: Philippine stock operators have been visibly hurt in their plans to break the 7,350 from a ‘dump’ by an unexpected participant/s at the last minute, so they have come back with vengeance this morning with a relentless raw emotion driven manic buying episode to push index above 7,350. 

As historian Charles Kindleberger once noted of the hallmarks of manias (or market tops): The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom…And the signal for panic is often the revelation of some swindle, theft, embezzlement or fraud. 

How germane this has been today.

Side Effects of Inflationism: Rat Meat, Horsemeat and Fake Tuna Scandals

Due to price instability brought about by inflationist policies, one of the major nasty side effects has been to encourage a decline in quality of products (value deflation) or even promote fraud in the marketplace in order for many to survive.

As the great Murray N. Rothbard explained (bold mine)

By creating illusory profits and distorting economic calculation, inflation will suspend the free market's penalizing of inefficient, and rewarding of efficient, firms. Almost all firms will seemingly prosper. The general atmosphere of a "sellers' market" will lead to a decline in the quality of goods and of service to consumers, since consumers often resist price increases less when they occur in the form of downgrading of quality.  The quality of work will decline in an inflation for a more subtle reason: people become enamored of "get-rich-quick" schemes, seemingly within their grasp in an era of ever-rising prices, and often scorn sober effort. Inflation also penalizes thrift and encourages debt, for any sum of money loaned will be repaid in dollars of lower purchasing power than when originally received. The incentive, then, is to borrow and repay later rather than save and lend. Inflation, therefore, lowers the general standard of living in the very course of creating a tinsel atmosphere of "prosperity."

Take for instance the recent horsemeat scandal that hit Europe. UK’s The Guardian offers the origin: (bold mine)

Supermarket buyers and big brands have been driving down prices, seeking special offers on meat products as consumers cut back on their spending in the face of recession. The squeeze on prices has come at a time when manufacturers' costs have been soaring. Beef prices have been at record highs as has the price of grain needed to feed cattle. The cost of energy, heavily used in industrial processing and to fuel centralised distribution chains, has also soared. There has been a mistmatch between the cost of real beef and what companies are prepared to pay.

Such price mismatching gives credence to the economic logic that inflationism encourages value deflation or fraud. The next question is what causes such mismatches?

There has also been reportedly growing incidences of mislabeling of tuna and other growing seafood fraud in the US from 2010-2012.

In China, food scams has become a recent fixture. Some of what has been sold as lamb meat have been substituted with rat meat.

From Washington Post:

BEIJING — Chinese police have broken up a criminal ring accused of taking meat from rats and foxes and selling it as lamb in the country’s latest food safety scandal.

The Ministry of Public Security released results of a three-month crackdown on food safety violators, saying in a statement that authorities investigated more than 380 cases and arrested 904 suspects.

Among those arrested were 63 people who allegedly ran an operation in Shanghai and the coastal city of Wuxi that bought fox, mink, rat and other meat that had not been tested for quality and safety, processed it with additives like gelatin and passed it off as lamb.

The meat was sold to farmers’ markets in Jiangsu province and Shanghai, it said.

Despite years of food scandals — from milk contaminated with an industrial chemical to the use of industrial dyes in eggs — China has been unable to clean up its food supply chain.

There seems to be a coincidence: China’s food scandals emerged at the same period where accounts of seafood fraud in the US surfaced. 

From the same article

The supreme court said 2,088 people have been prosecuted in 2010-2012 in 1,533 food safety cases. It said the number of such cases has grown exponentially in the past several years. For example, Chinese courts prosecuted 861 cases of poisonous food in 2012, compared to 80 cases in 2010.

And all these likewise coincides with accounts of Ponzi and pyramiding scams in the Philippines and the world.

Media predominantly points the finger on individual aberrations or the lack of regulations as source of such misdemeanor, misdeeds or iniquities. Yet such would only signify as dealing with the superficial or the symptoms rather than the cause.

Media either have deliberately overlooked or have been ignorant of the incentives brought about by social policies that has led to such repulsive erosion of the public's moral fiber. Like price controls, culpability has been shifted to the private sector to justify more politicization when such logic gets it backwards. 

In reality, these offenses represent the unintended effects from the distortions of price signals brought about by monetary inflationism, which central banks have employed and which has been growing at accelerating scale, since 2008. (chart from Tradingeconomics.com)