Noble case underscores need for regulatory reform, new growth strategy for local market

Among the pieces we had run around that time was an interview with Michael Dee, a onetime head of Morgan Stanley’s business in Southeast Asia and a former senior official at Temasek Holdings. Dee had said in the interview that Noble was not properly addressing the issues raised by Iceberg Research. He also poured scorn on the job that its auditor EY was doing. And, he called on regulators to suspend Noble’s stock until all doubt about the valuation of the assets and liabilities on its books could be cleared up.

I do not recall whether the individual from Noble’s public relations firm explicitly stated what I could do to avert the supposed lawsuit. And, I certainly made him no offers or promises, other than that we would publish anything the company cared to say about the issues that had been raised. So far, Noble’s lawyers have not been in touch.

Now, it seems that Noble will have to explain its financial statements and disclosures to more than just the readers of The Edge Singapore. On Nov 20, the Commercial Affairs Department (CAD) of the Singapore Police Force, the Monetary Authority of Singapore (MAS) and the Accounting and Corporate Regulatory Authority (ACRA) said they were jointly investigating suspected false and misleading statements and breaches of disclosure requirements by Noble, and potential non-compliance with accounting standards by its subsidiary Noble Resources International.

CAD, MAS and ACRA have also stated this past week that they had been working together since 2015, reviewing the allegations that had been raised against Noble. Even though Noble’s auditors found nothing wrong with the company, the authorities continued to gather and review information to establish a basis for a deeper probe. In the end, information related to the write-downs Noble took in 2017 and 2018, as well as other information gathered, provided the basis for the investigation now underway, according to a statement by CAD, MAS and ACRA.

This does not reflect well on Singapore’s regulatory prowess. For more than three years, it seemed that the authorities simply did not suspect anything untoward was happening at Noble, even though the likes of Iceberg and Dee raised the alarm. That was bad enough. But it now seems that the authorities actually did not have enough evidence to pursue a proper investigation, until Noble had lost 98% of its market value. That is no better.

The whole episode raises questions about whether Singapore has the appropriate regulations and enforcement mechanisms to ensure honest dealing by all parties in a modern financial market. And, it casts doubt on the effectiveness of the traditional protections that investors rely on, such as independent directors and external auditors.

Nimbler regulator needed?

To be fair, it does appear that Singapore’s regulators are evolving with the times, cooperating with one another to effectively handle increasingly complicated financial crimes.

Notably, in March 2015, CAD and MAS said they would begin jointly investigating market misconduct offences such as insider trading and market manipulation. At the time, CAD and MAS were already jointly investigating the trading irregularities that led to the crash of shares in Blumont Group, LionGold Corp and Asiasons Capital (now Attilan Group). Prior to this, MAS and CAD had generally investigated market misconduct offences independently, based on an initial assessment of whether the offence was likely to be a civil penalty or criminal prosecution case.

Under the joint investigation arrangement, MAS and CAD consolidated their investigative resources and expertise. MAS officers participating in the joint investigations were also accorded the same criminal powers of investigation as CAD officers. Such powers include the ability to search premises and seize items, and to order financial institutions to monitor customer accounts.

In March this year, CAD and MAS said they would extend their joint investigation arrangement to cover all offences under the Securities and Futures Act and Financial Advisers Act (FAA). This would allow for greater efficiency and more effective enforcement of capital markets and financial advisory offences, they said.

With ACRA joining CAD and MAS in the joint probe into Noble, perhaps the time has come for Singapore to start thinking about forming a dedicated capital markets regulatory agency capable of acting quickly to disrupt illicit activities. The risks to investors of the authorities not acting fast enough were clear not only in the Noble case but also in the penny stock manipulation case. Investigations by CAD and MAS into the trading irregularities surrounding Blumont, LionGold and Asiasons started some six months after these counters crashed in October 2013, which was surely more than enough time for any of the perpetrators to have destroyed at least some of the evidence of their wrongdoing.

It was also more than two years after those investigations began that the alleged mastermind — John Soh Chee Wen — was actually arrested and charged. And, by then, the authorities were looking into whether shares in ISR Capital were being manipulated. Prosecutors have publicly linked Soh to the ISR case.

Fostering better governance

There is, of course, only so much even the most zealous market regulator can do to bring stock manipulators and fraudsters to book, before their efforts begin to adversely affect the vibrancy of the market. Investors ultimately have to be responsible for their own investments. Regulators can help by ensuring that issuers of securities provide consistent and reliable information, and properly respond to questions raised by investors.

The first thing that ought to be done on this front is perhaps to clearly state that companies wanting to list here must be prepared to produce quarterly financial statements. Lowering the cost of a public listing should not come at the expense of providing information for investors who are holding or trading a company’s stock. Some effort should also be made to improve the quality and usefulness of the financial information made available by companies.

More generally, policymakers should look into ways of ensuring that the mechanisms for investors to monitor and control the management of their companies are working efficiently. In theory, investors have ample avenues to question the top management of their companies at shareholder meetings, and boot out boards that underperform. Yet, replacing a board is serious business, and fraught with practical hurdles. And, it is not really an option for minority investors of companies with a dominant shareholder.

Meanwhile, asking tough questions does not always go down well. Freedom of expression might be a constitutional right in the US, with limits that have been tested repeatedly in the courts. But the culture in this part of the world is for more circumspect expression of one’s views, especially towards people of elevated status. Moreover, in Singapore, the mindset is to seize every opportunity to sue for defamation, lest it appear that one’s critics have a point. That can have a chilling effect on robust conversations about the performance of a company and its top executives.

Any move to spur more debate in the market would be a good thing, in my view. But it might be better to formulate and promote shareholder-friendly practices that conform to our local culture. Singapore’s abiding faith in meritocracy could be a good place to start. While it might be unwise for top executive pay and bonuses to be subject to a shareholder vote, all of the information should at least be made public. After all, public companies belong to public investors.

An interesting further measure could be to put executive compensation plans to a “non-binding” shareholder vote. In keeping with our meritocratic system, it would force top executives at public-listed companies to hear what the owners of their company really think of the value they bring to the business.

Play to natural strengths

A new regulatory agency, and the introduction of a raft of shareholder- friendly practices, could help foster a much-needed sense of reform in the local market. In the past 15 years, the market has been beset by fraudulent S-chips, the involvement of Keppel Corp in a major bribery scandal in Brazil, a major penny stock manipulation case, as well as the doubts about Noble’s accounting. This may well be no worse than what has happened in most developed markets worldwide. But it is not good enough for Singapore.

For half a century, an independent Singapore has made its mark in the world by setting standards that other cities could not match. And, in instances in which it has played to its natural strengths, it succeeded beyond even its own expectations. Real estate investment trusts are a case in point. With accommodating regulations, homegrown sponsors with pipelines of high-quality assets and investors eager for steady returns, REITs have been perhaps the biggest success story for the local market in the last couple of decades. And, the handful of failures and corporate governance lapses along the way have not detracted from that overall success of the sector.

So, what could the next big opportunity be for the local market? Perhaps instead of going after capital-hungry companies on the cusp of fast growth that other major markets are pursuing, Singapore should hunt for family-controlled companies that are passing into the hands of the second and third generation of owners. With a thriving private banking sector, and a reputation of stability and rule of law, Singapore seems like a natural home for these companies and the wealth of their controlling families.

While it is unclear whether the authorities will actually discover any wrongdoing at Noble, the whole episode is a timely reminder that Singapore needs to raise its game on the regulatory and corporate governance fronts, and come up with a sustainable strategy to grow its capital markets.

This story appears in The Edge Singapore (Issue 858, week of Nov 26) which is on sale now. Subscribe here