State investment vehicle 1Malaysia Development Berhad is now the subject of public scrutiny. – The Malaysian Insider pic, May 24, 2015. First, it was said to be cash. And now it is described as units.
Units of what? Mutual funds? Exchange traded funds?
Or maybe units of more sophisticated financial instruments like collaterised debt obligations (CDO) or the exotic ones like weather derivatives?
No answer has been forthcoming.
Why is it so difficult to get a clear and definitive answer from 1 Malaysia Development Bhd (1MDB) about the types of financial assets it has.
We are talking about the US$1.103 billion (RM3.97 billion) kept with the Singapore branch of Swiss private bank BSI, which was first described by 1MDB president and group executive director Arul Kanda Kandasamy as cash, and subsequently confirmed as such to Parliament in March by Prime Minister Datuk Seri Najib Razak.
Last week, it was “clarified” to Parliament that it was not cash but just US dollar assets. Second Finance Minister Datuk Husni Hanadziah said the ministry had “misinterpreted” what was in the BSI account.
Whether the Finance Ministry misinterpreted what 1MDB told it or whether 1MDB misled its shareholder, this has widened even more the trust deficit that has built up in recent months about governance at the debt-laden company and whether all the assets it claims to have are real.
The US$1.103 billion at BSI Singapore is only a portion of the RM13.38 billion (US$3.71 billion) in a group of financial assets classified as “AVAILABLE-FOR-SALE INVESTMENTS” in 1MDB’s audited accounts for financial year March 31, 2014.
The 1MDB accounts did not disclose what these investment assets are but from an accounting perspective, they are classified as Level 3 assets, which is the lowest class of assets. Put it another way, these are high-risk assets whose fair values are the hardest to authenticate.
In the 1MDB accounts, it was clearly stated that the valuation ascribed to these assets was “derived from valuation techniques that include inputs for asset or liability that are not based on observable market data”.
The fair value of Level 1 assets is derived from quoted prices in active markets, for example, a stock or commodities exchange.
Level 2 fair values are those derived from inputs other than quoted prices, either directly as prices or indirectly as prices. This means value can be determined by, for example, the transacted price for the sale of a piece of land or property or the transacted price for the sale of an unlisted company. These transaction prices can be obtained.
In short, the Level 3 fair value of RM13.38 billion that has been given to the available-for-sale Investments owned by 1MDB could be viewed as high risk as the values of the assets are not transparent and apparent.
To get a better understanding of this, we took a look at the prospectus of one of the investment instruments 1MDB had put its money — the Cayman registered Bridge Global Absolute Return Fund — which is managed by Bridge Partners Investment Manager (Cayman) Ltd.
The Bridge Global Absolute Fund is a Segregated Portfolio Company (SPC) and 1MDB had invested US$2.3 billion in the SPC as a shareholder.
The SPC is a high-risk portfolio and investors were warned they could lose everything (see “The High Risk Nature of The Bridge Global Absolute Return Fund” [right], which was published in The Edge, November 7, Issue 1041).
What we found interesting from the prospectus was not just the fact that the SPC’s mandate is to take high risks but also the way the SPC is valued, which is by calculating its net asset value (NAV).
Essentially, the NAV of the SPC is determined by the administrator of the SPC which is Vistra Fund Services Asia Ltd.
More crucially, the prospectus states: “In calculating the NAV, the Administrator may rely upon, and WILL NOT BE RESPONSIBLE, for the accuracy of financial data furnished to it by third parties including automatic processing services, third party financial models, brokers, market makers or intermediaries, the INVESTMENT MANAGER, and any administrator or valuations agent or other collective investments into which the Fund invests.”
It added that the administrator is liable only for the computation of data given to it by these people, including the investment manager, but is not liable for the accuracy of the underlying data provided to it.
In other words, the NAV of the SPC determined by the administrator can be wrong if the data it was provided was wrong.
The prospectus also said that the administrator exercises no discretion in calculating the NAV and relies solely on data provided by third parties.
And this is the most intriguing part: “If and to the extent that the investment manager is responsible for or otherwise involved in the pricing of the Fund’s assets, the Administrator may accept, use and rely on such prices, without verification, in calculating the NAV and shall not be liable to the Fund, any Shareholder or any person in doing so.”
This means that if the administrator accepts the valuation ascribed to the fund by the investment manager and it turns out to be wrong, shareholders of the SPC cannot hold it responsible.
The honesty and integrity or the investment manager is therefore critical.
So who is the investment manager Bridge Partners?
Research by The Edge shows that Bridge Partners (Cayman) is part of the Hong Kong-based Bridge Partners Investment Management Ltd (Bridge Partners), whose track record and pedigree is not exactly top notch.
We found out some interesting links can be established between its management/shareholders and two individuals with a chequered history.
The first is Joseph Wan Chuen Chung, who was suspended by the Hong Kong Securities & Futures Commission (SFC) in 1998 in relation to his role as a financial adviser in a failed general offer for the shares of Tungtex (Holdings) Company Limited, which is listed on the Hong Kong stock exchange. The SFC found that investors, who relied on the public announcements that the acquisition and general offer would proceed, suffered losses when it was announced that the acquisition would not take place.
The SFC also found that Wan failed to meet the standards of commercial conduct and behaviour that the SFC expected of advisers in takeover transactions.
The second individual is James Phang Wah, who was jailed by a Singapore court for nine years in 2010 after being convicted of fraudulent trading, falsifying accounts and criminal breach of trust at Sunshine Empire Pte Ltd.
Before explaining how these two individuals are linked to Bridge Partners, let us take a look at its history.
Bridge Partners was formed after a management buyout of Baron Asset Management Ltd in 2008. Among members of the current Bridge Partners management team and shareholders who were also a part of Baron Asset are Monica Lin Wai Yan and Lobo Lee Kwok Ning.
In its FY2013 accounts, Bridge Partners shareholders were listed as Lin (0.02%) and CNC Investment Holding Limited (CNC) (99.98%). CNC is a British Virgin Islands (BVI) company incorporated on Sept 11, 2006, and is controlled by Lee. Interestingly, its FY2014 accounts show that Lin now holds 99.98% of Bridge Partners while Lee owns 0.02%. It appears that the two have simply swapped their stakes.
To understand the relationship between Lin, Lee and Wan, we have to go back to before the 2008 management buyout.
Historical company filings show that Wan was a direct shareholder of Baron Asset from 2001 to 2007, albeit with a small shareholding of 0.02%. The balance of the shares was held by a few different private companies over the years, including Baron Strategic Holdings Limited, Baron Financial Holdings Limited and CNC.
A 2004 stock exchange filing shows that Wan owned 50% of Baron Strategic Holdings, with the balance owned by his wife. This meant that his direct and indirect stake in Baron Asset was fairly substantial.
Wan was also a director in Baron Asset from 2001–2004, the same period when Lin was on the board. On the other hand, Lee joined the board of Baron Asset in 2004 when Wan was already on it.
In 2008, Lin and Lee led a management buyout of Baron Asset and it appears that Wan does not have any interest in the renamed entity.
In linking Phang to Bridge Partners, one has to go back to a May 2008 proposed deal involving Emcom International Limited (“Emcom”) and Bridge Partners Finance Limited (BPF). Emcom, in which Phang had a beneficial interest, offered to acquire the entire share capital of BPF for HK$180mil and also proposed that the company’s name be changed to “Bridge Partners Holdings Limited”.
At the time, the shareholders of BPF were Lee (70%) and Lin (30%). BPF in turn owned 51% of CNC, which had a 99.8 % stake in Bridge Partners. However, the deal did not go through or else Emcom would have ended up having a beneficial interest of 51% in BPIM.
Clearly, 1MDB had put billions of ringgit that it borrowed at very high cost into high-risk funds managed by companies without a decent track record. And these funds are structured as opaque SPCs in places like Cayman where information is very hard to come by.
The question that has to be asked, therefore, is whether the RM13.38 billion in so called available-for-sale Investments are worth the paper which they are written on. And if they are, why doesn’t 1MDB just cash them in and bring those billions home where it is much needed?
This must be investigated by the auditor-general and the Public Accounts Committee.
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