Private debt securities: Adviser and arranger just as liable as issuer

Source: Biz Star

Court decision will impact future private debt security issues

PETALING JAYA: In a judgement that will likely send ripples in the private debt securities (PDS) market, the High Court ruled that the adviser and arranger of such issues were just as liable as the issuer for losses suffered by bondholders.

The Singapore Business Times in a recent report said the judgement by Justice Mary Lim, based on an RM149mil lawsuit filed by 10 local financial institutions against bond issuer Pesaka Astana (M) Sdn Bhd, would “radically raise the bar on standards governing private debt issues in Malaysia.”

Although Pesaka Astana and related companies, which were associated with Rafie Sain, had entered into a consent judgement in favour of the financial institutions back in 2008, the lawsuit was unprecedented because it also named the deal’s independent advisers as defendants.

Others named in the suit included Mayban Trustees Bhd and KAF Discounts Bhd, the arranger of the deal, both of whom have opted to go to trial.

Malaysian Rating Corp Bhd chief executive officer Razlan Mohamed said the case underscored the importance of corporate governance.

“I think this case goes to show that the parties advising the bond issues, including the rating agencies, have to emphasise the importance of governance,” he told StarBiz.

According to the newspaper, the plaintiffs’ core argument was that they had gone into the deal on the basis of an information memorandum by KAF Discounts that was “false and misleading” while Mayban failed to exercise the necessary care and due diligence expected of a trustee.

Lim said in a verbal judgement that the plaintiffs had depended on the information memorandum to make informed investment decisions.

She said the information was in the memorandum and “therefore it is KAF’s liability in the event of any misstatement therein.”

In a statement to StarBiz, Mayban said it was reviewing the decision made by the High Court on June 30 in awarding judgement against it and another defendant in a suit filed in 2005 by holders of the bonds issued by Pesaka Astana, and “is actively considering the appropriate course of action.”

Mayban said the judgment delivered by the High Court “has no impact to the business operations of the company and that it has in place a strong team of professionals with priority chiefly on protecting the interest of all stakeholders and upholding best standards of service and management practice.”

Meanwhile, Aberdeen Asset Management Sdn Bhd managing director Gerald Ambrose said it looked like a clear case of a misallignment of the advisers’ and investors’ objectives.

“The judgement is a landmark because the traditional rule of ‘caveat emptor’ has been overruled as the adviser and arranger of the issue were also held culpable. The judge has ruled that the original issue documents were misleading and that the trustees were irresponsible,” he noted.

The local financial institutions had filed the suit in late 2005 against Pesaka Astana, a company that supplied fire-fighting and military vehicles to the Defence Ministry.

The company had defaulted in September 2005 on RM140mil worth of Islamic debt securities issued in April 2004.

According to the newspaper, despite the consent judgement, nothing had been paid and the decision by the court took as long as it did due to claims and counterclaims by various parties.

The 10 plaintiffs included Malaysia Discounts Bhd, CIMB Bank Bhd, Abrar Discounts Bhd, Avenue Invest Bhd, Bank Muamalat Malaysia Bhd, Commerce Life Assurance Bhd, Malaysian Assurance Alliance Bhd, Southern Investment Bank Bhd, Universal Trustee (M) Bhd and BHLB Trustee Bhd.

The Singapore Business Times said the suit underscored a newly-found ruthlessness in Malaysian financial litigation as at least two of the litigants on both sides of the suit were government-linked companies.

“Malayan Banking Bhd and CIMB are both majority state-owned and might have resorted to quiet, and state-brokered, mediation in less competitive times,” the newspaper said.

Gaming sector takes hits

Source: Star Biz

Not only is there no sports betting licence, NFOs also slapped with duty hike

PETALING JAYA: There is never a dull moment in the gaming sector over the past couple of weeks. Within that period, the Government has decided to abort sports betting while number forecast operators (NFOs) were served with a letter informing them that the pool betting duty has been increased.

To recap, the Government announced that no sports betting licence would be issued owing to a public outcry.

Berjaya Corp Bhd (BCorp) had earlier announced that it had entered a sales and purchase agreement to buy 70% stake in Ascot Sports Sdn Bhd, which is jointly owned by Tan Sri Vincent Tan and his son, Datuk Robin Tan. The Government, however, later said that it had yet to award the licence.

Subsequently, BCorp has aborted its proposed acquisition of a 70% stake in Ascot Sports from Tan after the Government decided not to re-issue the sports betting licence to Ascot.

BCorp shares reacted immediately and fell to an almost five-month low after it confirmed that its sports betting deal was off.

In an unprecedented move, the Government surprised the NFOs with a tax hike last week following its decision not to issue the sports betting licence.

According to filings with Bursa Malaysia, Berjaya Sports Toto Bhd (BToto), Tanjong Plc, Multi-Purpose Holdings Bhd (MPHB), Olympia Industries Bhd and Berjaya Assets Bhd received a letter from the Finance Ministry informing them that effective June 1, the pool betting duty has been increased to 8% of net revenue (gross revenues less 8% gaming tax) from 6% previously.

Most NFOs had issued statements on Bursa Malaysia saying that they would not be significantly affected by the tax hike.

MPHB, which operates Magnum, said the group’s performance would not be materially affected by the increase in pool betting duty while Tanjong, which operates Pan Malaysian Pools Sdn Bhd, said the revision was not expected to have any material impact on its results.

Berjaya Assets, which owns 65% of Natural Avenue Sdn Bhd, said the new betting duty was not expected to have any material impact on the group’s results for the financial year ended June 30.

On the other hand, Olympia whose subsidiary Lotteries Corp Sdn Bhd is a NFO in Sabah said the increase was expected to have an adverse financial impact on the operating performance of the group for the financial year ending June 30, 2011.

According to analysts, the demand for gaming was unlikely to be significantly affected by the recent Government’s move to increase betting duty but the effect was more on individual companies having to deal with higher taxes.

Industry sources said three NFO operators (BToto, Magnum and Tanjong) would lobby the Finance Ministry to reduce the 4D first prize payout by RM200 to RM2,300 (4D Big) and RM3,300 (4D Small).

“We do not discount the possibility of more tax or duty increases in the 2011 budget in October,” ECM Libra Investment Research said. It has downgraded the gaming sector to underweight from neutral.

The last time the pool betting duty saw an increase was in November 1998 at the height of the Asian financial crisis (from 7% to 10%). In December 2002, it was decreased to 6%.

ECM Libra said one option for NFOs to preserve their margins was to lower their prize payout ratios.

“In April 1999, the NFOs reduced the first prize on 4D Big and 4D Small by RM200 each to RM2,000 and RM3,000 respectively, in response to the November 1998 pool betting duty increase,” it said.

It said the alternative was to absorb the increase and suffer margin compression in order to maintain revenue growth.

“Of the two companies with NFO businesses under our coverage, Tanjong is the least affected as only 20% of earnings are derived from the NFO business,” ECM Libra said, adding that BToto would be more badly hit.

CIMB Research said a 2% tax increase on an estimated legal market of RM8.5bil would add some RM160mil in tax. The research house said the Government appeared to be signalling that the sin sectors – and gaming in particular – could be in for a round of unfavourable reforms.

Kenanga Research viewed the hike as negative as the man in the street was not expecting any such measures especially when the trend was seemingly for liberalisation with football betting being allowed initially. It agrees with ECM Libra that the impact (of pool betting duty hike) would be felt mostly by pure gaming operators such as BToto.

The research house said a possible RM200mil would be added to government coffers from this exercise.

Should the payout be reduced as a corollary, topline growth could slow as punters switch their preference towards the illegals, it added.

CIMB said the spotlight may later turn to the country’s sole casino operator Genting Malaysia Bhd, whose 25% gaming tax rate had been unchanged since 1999.

However, an analyst said Genting seems to have hedged its position as a regional casino player well.

While the hike has no impact on Genting, the casino operator may have irked some investors with yet another related-party transaction on its plan to acquire the group’s gaming operations in Britain (Genting UK) from Genting Singapore Plc for £340mil, which analysts said was at the higher end of peers’ valuation.

Previously, Genting Malaysia (then known as Resorts World Bhd) has paid Genting group chairman Tan Sri Lim Kok Thay US$69mil for a 10% stake in US gaming patent company Walker Digital Gaming.

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See also the ECMLibra analyst summary HERE.

SC going after directors under new powers

It can now prosecute those who intentionally cause ‘wrongful loss’

Source: Star Biz

KUALA LUMPUR: The Securities Commission (SC) is investigating cases involving breaches of fiduciary duties of directors under new powers given to the regulator under Section 317A of the Capital Markets and Services Act (CMSA).

Section 317A, which came into force only on April 1, 2010, states that the SC can prosecute a director or an officer of a listed company that has done something with the intention of causing wrongful loss to his company.

SC chairman Tan Sri Zarinah Anwar told StarBiz that while no charge had been made yet under this new section, investigations were ongoing and it would “depend very much on the outcome of the investigations.”

“We have to get all the facts of the case before we take appropriate action.

“In the past, we only had power to deal with offences that were related to securities, now we can deal with offences related to dishonest conduct of directors,” Zarinah said.

She added that as an example, cases involving questionable related-party transactions where assets were injected into the company at inflated prices or sold to directors at depressed prices, would fall under Section 317A.

The section carries a punishment of a fine of up to RM10mil and imprisonment of up to 10 years.

According to a corporate lawyer, Section 317A covers instances, which are similar to directors’ fiduciary duties that come under Section 132 of the Companies Act.

The enforcement of the Companies Act, however, comes under the powers of the Companies Commission of Malaysia (SSM).

However there have not been any prosecutions of directors by the SSM under this section. And no director has been sentenced to imprisonment under the Companies Act.

“The new amendment to the CMSA gives the SC new teeth,” said the corporate lawyer, who pointed out that sentencing was ultimately in the hands of the courts.

__________________________

The new section 317A of the Capital Markets and Services Act reads as follows:

Prohibited conduct of director or officer of a listed corporation

317A. (1) A director or an officer of a listed corporation or any of its related corporations shall not do or cause anyone to do anything with the intention of causing wrongful loss to the listed corporation or any of its related corporations irrespective of whether the conduct causes actual wrongful loss.

(2) This section is in addition to and not in derogation of any law relating to the duties or liabilities of directors or officers of a listed corporation.

(3) A person who contravenes subsection (1) commits an offence and shall, on conviction, be punished with imprisonment for a term not exceeding ten years and be liable to a fine not exceeding ten million ringgit.

(4) For the purpose of this section—

―"director" includes a person who is a director, chief executive officer, chief operating officer, chief financial controller or any other person primarily responsible for the operations or financial management of a company, by whatever name called;

―"property" has the same meaning as in section 138;

―"wrongful loss" means loss of property by unlawful means to which the person losing is legally entitled.

Amended by Act A1370 P.U. (B) 142/2010 w.e.f. 1/4/2010

Gaming firms slapped with higher duties

But impact depends on how operators manage marketing strategies

Source: Star Biz

PETALING JAYA: Gaming companies have been hit with higher betting duties which will apply to draws held from June 2010.

In separate filings with Bursa Malaysia yesterday, Multi-Purpose Holdings Bhd (MPHB), Tanjong plc and Berjaya Sports Toto Bhd (BToto) said their subsidiaries had been notified by the Finance Ministry on June 29 that betting duties had been raised to 8% from 6% previously.

The respective subsidiaries are Magnum Corp Sdn Bhd, Pan Malaysian Pools Sdn Bhd and Sports Toto Malaysia Sdn Bhd.

Betting duties are based on gross sales proceeds after deducting gaming tax of 8%.

Tanjong said with the revision, the effective rate of betting duties would be increased to 7.36% from 5.52% previously.

A file picture shows a Tanjong plc’s gaming business outlet. Multi-Purpose Holdings, Tanjong and BToto say the Government has notified their subsidiaries that betting duties have been rai sed to 8% from 6%.

“This revision is not expected to have any material impact on the results of Tanjong group.”

Despite the duty hike, BToto said it was optimistic that the group’s operating performance for the financial year ending April 30, 2011 would be good.

This is barring any other unforeseen circumstances and taking into account the launch of its new game, Supreme Toto 6/58, in March.

Nevertheless, a research head with a local stockbroking firm said the rise in betting duties would have an initial impact on gaming companies’ earnings.

“To compensate for the hike, these companies will have to improve revenue and bottomline by attracting more people to gamble. It all depends on how they manage their marketing strategies,” he said.

An analyst with a bank-backed research house remains positive about the gaming sector.

He believes more people will continue to be attracted to numbers-forecast activities and casino games in the hope of winning high money prizes, especially when times are bad.

This bodes well for gaming companies, as they can expect better ticket sales.

“Hence, earnings of these gaming companies are expected to remain intact despite the hike,” the analyst said.

However, shares of MPHB, Tanjong and BToto were in the red yesterday prior to the announcement.

MPHB lost 8 sen to close at RM1.96 with 3.78 million shares traded, Tanjong fell 14 sen to RM17.30 with 1.3 million shares changing hands and BToto slipped 5 sen to RM4.22 with 16.6 million shares transacted.

NV Multi Corporation Berhad vs Suruhanjaya Syarikat Malaysia

In a landmark decision, the Malaysian Federal Court handed down a 2:1 decision favouring the Companies Commission of Malaysia's case against a company that sold burial plots and urn compartments. In essence the CCM's case was that the company was selling interests that required regulation under Part IV Division 5 of the Malaysian Companies Act, 1965. The case is listed as 01( )-15-2008 (W). The media report from Malaysian Insider is as follows:

PUTRAJAYA, June 8 — Purchasers of burial lots and urn compartments in memorial parks can heave a sigh of relief as they are now protected from losing their investment should the company go into liquidation or if the land is transferred to another party.

The Federal Court, in a landmark ruling today, declared that NV Multi Corporation Bhd and 10 of its subsidiaries must register their business prospectus and the companies’ approved trustees with the Companies Commission of Malaysia (CCM) to enable the body to regulate the companies’ activities and to safeguard the public from losing their investment.

NV Multi Corporation is the operator of the Nirvana Memorial Parks which deal with cemetery development by providing services to the public to acquire burial lots and compartments for storage of urns containing ashes of the cremated, on land developed by the company as memorial parks.

A purchaser is required to execute a standard form of contract when acquiring a burial lot or an urn compartment in these parks.

Chief Judge of Sabah and Sarawak Tan Sri Richard Malanjum, who led a three-man Bench, held that this was because the company’s business fell within the definition of “interest” in section 84 (1) of the Companies Act 1965.

“Interest” is defined in section 84 (1) of the Act as any profit and asset of any financial or business undertaking or scheme or in any common enterprise in which the holder of the right or interest is led to expect profits or interest from the efforts of the promoter of the enterprise.

A company, whose business falls under that section, would be committing an offence and can be subjected to penalties of up to five years’ imprisonment and a fine of up to RM100,000 under section 94 of the Act if it fails to comply with the requirements of that section.

Malanjum, who presided together with Federal Court judges Datuk Hashim Yusoff and Tan Sri James Foong Cheng Yuen, in a 2-1 majority, dismissed the appeal brought by NV Multi Corporation, NV Alliance Sdn Bhd, Nirvana Memorial Park Sdn Bhd, Nirvana Memorial Park (Johor) Sdn Bhd, Nirvana Memorial Park (Kuching) Sdn Bhd, Nirvana Memorial Park (Klang) Sdn Bhd, NV Multi Resources Sdn Bhd, Asia Premier Propartners Sdn Bhd, Nirvana Memorial Park (Sabah) Sdn Bhd, Nirvana Memorial Park (Shah Alam) Sdn Bhd and Nirvana Memorial Park (Sibu) Sdn Bhd.

The court also ordered the companies to pay RM50,000 in costs.

Foong, in his judgment, said the company’s business fell within the definition of “interest” under section 84 (1) because both the companies and their purchasers participated in a common enterprise which involved the use of land in perpetuity and purchasers continuing to pay upkeep and maintenance costs.

In a dissenting judgment, Hashim said NV Multi Corporation’s business was basically a simple sale of burial plots and urn compartments and not an investment per se.

“There is no relationship between the purchasers of the burial plots and urn compartments among themselves and no common enterprise to re-sell their plots and urn compartments collectively. There is no sharing of profits,” Hashim said.

In 2005, the High Court ruled that the companies need not register their prospectus with CCM and also their trustees after the latter (the companies) obtained a declaration that their business in relation to the sales of urn compartments and burial lots did not fall under the definition of “interest” in that section of the Act.

However, in 2008, the Court of Appeal reversed the High Court’s decision after allowing CCM’s appeal.

Legal sports betting in Malaysia soon?

Sourced from NST Online:

Sports betting may soon be legalised, probably in time for the Fifa World Cup finals in South Africa from June 11 to July 11.

It is understood that the Berjaya Group is seeking approval from the authorities to operate sports betting activities in the country, although it is unclear which betting system will be used.

A spokesman for Berjaya Corp Bhd group corporate communications told the New Straits Times that the company "would like to decline comment on this matter at this point of time".

This is not the first time that Berjaya Group has approached the government to make sports betting legal in the country.

In October 2004, Berjaya Group head Tan Sri Vincent Tan Chee Yioun's privately-owned Ascot Sports Sdn Bhd was reported to have received approval to operate sports betting activities from the Finance Ministry in June 2003, in which it paid RM25 million for a 20-year concession.

However, then prime minister Datuk Seri (now Tun) Abdullah Ahmad Badawi shot down the proposal, saying the government would not give any licence to legalise football betting in the country.

While the Berjaya Group's second attempt is likely to stir protests from certain quarters, others have said that it should be allowed and taxed by the government, seeing that many Malaysians are already betting illegally on sports.

"It will likely divert money from illegal football betting. It will also take some of the gaming market share lost to Singapore with the opening of its first casino recently," said an industry observer.

In a report dated May 26, 2006, Mayban Securities had estimated that the value of daily legal gaming was RM850 million, with illegal gambling estimated at around the same amount. This gives the total size of estimated daily gambling in Malaysia at around RM1.7 billion.

"Assuming that this amount is doubled during the World Cup month, there may be an additional RM1.7 billion being gambled daily," the report had said.

Gaming analysts said Berjaya Sports Toto Bhd (BToto) was most likely to benefit if sports betting was legalised here. BToto is one of the country's three listed numbers forecast operators (NFO), which include Magnum Corp Bhd and Tanjong plc.

While betting on football is illegal in Malaysia, Singapore has legalised it since 1999.

It was reported that Singapore first introduced legalised football betting on S-League games in 1999.

In 2002, sports betting was extended beyond S- League games to include matches played in the World Club 2002.

Sports betting was subsequently further extended to allow for legalised betting on international football matches, the English Premier League and other European and Asian football leagues as well.

Sports betting has today gained widespread acceptance in Singapore.

Italy’s players celebrating their World Cup triumph in Germany in 2006. Malaysians may be able to share in their joy soon once sports betting is legalised in country in time for World Cup 2010 in South Africa in June.

Laid-off lawyers, cast-off consultants

Sourced from The Economist:

The downturn is sorting the best professional-services firms from the rest

Jan 21st 2010 | NEW YORK | From The Economist print edition

Illustration by David Simonds

WHAT do you say to a recent law-school graduate? “A skinny double-shot latte to go, please.” From New York to Los Angeles, Edinburgh to Sydney, the downturn of the past two years has hit the legal profession with unprecedented severity. As even some leading law firms struggle for survival, recruitment has dried up. The lucky few who get jobs are often being told to find something else to do for now, and report for duty on some far-off date. The same is true for MBA graduates seeking jobs in management consulting. Even the mighty McKinsey is said to be postponing start dates by several months.

Given that new graduates are the grunts of the professional-services industries, earning less than anyone else and working the longest hours, the lack of demand for their services is the clearest indicator of how bad things are. Although a deeper-than-usual cyclical downturn is largely to blame—and is hitting hardest those firms that specialised in financial-market activities such as mergers and acquisitions, and private equity—it is already clear that there will be long-term structural consequences, not least a growing gap between the best firms and the rest.

Cutting lawyers’ jobs used to be frowned upon in the profession and thus rarely happened, even in recessions. But last year was the “worst year ever for law-firm lay-offs”, reckons Law Shucks, a legal-industry blog. It counted 218 reports of lay-offs at 138 big firms, including no less than ten rounds of cuts at Clifford Chance, a British firm whose ambitious global expansion before the crisis now seems a big mistake. Thacher, Proffitt & Wood, a New York firm which by 2007 earned around half its revenues from structured finance, was devastated by the bursting of the subprime mortgage bubble and ended up being dissolved in December 2008. It was followed in March 2009 by the venerable but property-exposed Philadelphia firm of Wolf, Block, Schorr and Solis-Cohen.

As for management consulting, in the third quarter of last year Marsh & McLennan reported a 10% decline in its consulting revenues, in line with the overall shrinkage of the industry. Figures from other big firms are patchy, since they are private partnerships. Still, in 2009, to ensure they had enough cash to weather the financial storm, even leading firms such as McKinsey and BCG held back a chunk of their partners’ bonuses. Of the big three, McKinsey and Bain are said to have suffered slight falls in revenues last year, while BCG, after a strong second half, was slightly up. All three deny making lay-offs—although it is said that they made their “attrition rates” increase, by significantly raising the bar on their traditional “up or out” policy. McKinsey now has 10% fewer consultants.

The experience of some once-booming boutique consultancies has been even worse. Marakon Associates was bought for a song by CRA International after the bankruptcy last January of its parent, Trinsum; and Katzenbach Partners was saved by Booz & Company after shrinking alarmingly in the first six months of 2009.

Perhaps the hardest hit of the professional services has been human-resources consulting, where revenues fell by 20% in Britain last year. Pay-and-benefits consultants also suffered: sharply falling revenues were one reason why Towers Perrin and Watson Wyatt decided to merge last year. And although accounting firms are less exposed to the cycle than most professional-services firms—annual reports still have to be prepared and audited, whatever the state of the economy—in the year to last June the two biggest accountants, PricewaterhouseCoopers and Ernst & Young, each suffered 7% falls in revenues.

Of course, firms with countercyclical activities, such as bankruptcy work, have fared better. Consultants offering outsourced services, like IBM and Accenture, have also done well as cost pressures have driven other companies to use their services. In particular, legal-process outsourcing is booming, as law firms parcel out some of their more basic work to reduce costs. One of the leaders of this nascent market, Pangea3, whose offices in Delhi and Mumbai take on work from clients worldwide, expects to earn twice as much revenue this month as in January 2009.

Another booming business is helping the government sort out the economic mess. This is favouring the market leaders most, says Heidi Gardner of Harvard Business School, because the crisis has made governments risk-averse about whom they hire. Slaughter and May, a big London law firm, earned £33m ($54m) for its work on the financial crisis, including on the nationalised Northern Rock bank. Sullivan & Cromwell in New York has also done nicely from helping the American government with troubled banks. Big management consultancies have done well too, despite their poor record in the public sector (see Schumpeter). BCG, for instance, has advised the quango created to oversee America’s state-rescued car firms.

Under the knife

Though the best will gain at the expense of the rest throughout professional services, the legal profession seems likely to undergo the most profound structural changes. For the first time—long after IT and finance departments went through the same experience—the corporate legal departments that hire law firms are under great budgetary pressure, and are thus demanding much better value from them.

In a recent paper, “The Death of Big Law”, Larry Ribstein, a law professor at the University of Illinois, argued that after decades without changing, law firms are likely to have an outburst of experimentation with different business models: even the venerable and lucrative “billable hour” method of charging clients is in doubt. The experimentation may include more firms abandoning their traditional partnership model to go public, following in the footsteps of an Australian law firm, Slater & Gordon, which went public in 2007.

Not everyone is excited by this idea. “At firms like McKinsey it was the partnership ethos that helped them through the crisis, as partners believed they were in it for the long term. At some law firms too,” says Jay Lorsch of Harvard Business School. Contrast that with the investment banks that switched from being partnerships to public companies, such as Goldman Sachs. “If you talk to some older Goldman partners they are unhappy with the behaviour of those now running the firm, who have abandoned the partnership ethos in favour of aggressively pursuing profits and have ended up looking like greedy bastards.” As they adapt to survive a tougher climate, lawyers and consultants will need to ensure that any changes do not put their culture of professionalism at risk.