The Simplified Resource for Everything Money: Protection of Retail Investors in Singapore - Noble and Hyflux

Disclaimer: I am not an investment advisor or lawyer. Heck, i am not even working in the financial industry. Below are my interpretation and i am grateful if you will let me know if anything i say is wrong and i will correct it in a reasonable time. I am not an expert and don't wish to be assumed to be one. I make losses frequently.

"......The SGX and MAS have proven themselves incapable and impotent while greed has blinded the vast array of financial intermediaries who have enabled this tragedy. While I remain open to being proven wrong, Richard Elman, his management, EY and every single board member have utterly disgraced themselves through the most appalling lack of transparency, financial controls and governance. This indeed is Asia’s Enron.
What is needed now is for the courts and the legal system to do the regulators job and step in and force the disclosure and transparency the regulators have been unwilling to demand......."
- Micheal Dee ( Ex-CEO of Morgan Stanley South East Asia and a former managing director of Temasek). Emphasis mine.
source: https://iceberg-research.com/2018/05/08/dead-men-walking/

Above is about Noble. I did not invest in Noble, instead i invested in the 2016 Hyflux Perpetual Securities. I see similarities between Noble and Hyflux, most notably, the lack of any accountability enforced by regulators. With reason, i am of the opinion that there are grounds for enforcement action in Hyflux and in Noble's case. I am not a lawyer, neither am i educated in law. From my experience with this Hyflux episode, i am utterly disappointed with the current state of protection for retail investors.

In my opinion, there is neither an effective regulatory system nor legal avenue in Singapore that protects retail investors against corporations and their significant stakeholders.

Legal Avenues For Retail Investors

1) Unlike in the United States, Singapore does not allow class action. A class action is one in which a group of people with the same or similar injuries caused by the same product or action sue the defendant as a group. Anyone who doesn't want to join the class can choose to opt out, otherwise, they are automatically in it.

Class action enables the vindication of claims that otherwise could never be litigated, no matter how meritorious. Class actions can also be a way of leveling the playing field for poor or economically less powerful individuals.
Read here for class action case ( Yahoo) in US.

2) Unlike the US, Singapore also does not allow contingency fees where a lawyer is allowed to take a cut from the winnings. This is seen in ( Law Society of Singapore v Kurubalan s/o Manickam Rengaraju ) where a lawyer was punished for doing so in 2013.

3) Representative action ( different from class action) has happened in Singapore.
Representative action is a kind of group action, similar to class action, however, it is based on an opt in system where only those who wish to be represented join the suit and any recovery or cost is theirs alone. However, there are stumbling blocks to how it can benefit retail investor.

An example is ( Koh Chong Chiah v Treasure Resort ) The representative action was thrown out by the judge initially as it did not fulfil certain tests. On appeal to the Court of Appeal, the higher judge allowed the representative action, based on tests again. In my opinion, this just takes additional time and cost, to determine whether the claimants can form a representative action before the real case is fought.

4) In recent years ,there is an initiative to allow litigation funding. However, it seems that the litigation funding cases here are primarily to fund liquidators in the name of companies during insolvency. Recovery from such cases are on behalf of companies which would then distribute the proceeds according to ranking of the creditors.

Legal fees in Singapore are notoriously expensive. By allowing lawyers to take a cut from the winnings without retail investors having to fork out much money would allow access to justice and a fairer society. I do not agree with naysayers who say that allowing such a structure will lead to a litigious society because lawyers would not agree to frivolous suits as they are vested. Instead, lawyers will be more motivated and this solves the principal-agent problem where some lawyers just act to drag cases to earn fees even when they know the case has a low chance of winning.

The only recourse to retail investors are through representative actions. The obstacles are great due to the need for gathering claimants and determining the fees each claimant should pay. This is on top of the need to satisfy the various tests/criteria. This will certainly drag the case, lining the pockets of lawyers, to the detriment of retail investors.

On the surface, liquidation funding seems like an improvement. However, on deeper look, it actually serves to advance the needs of corporations or people with resources, to the detriment of retail investors. Retail investors are generally ranked behind the other creditors( corporations and the rich) and they would get nothing or very little since such cases are fought on behalf of the company and recovery goes to the company. Besides, it only applies to insolvency. If the rogue company drags its restructuring, liquidation funding is not applicable.

In the Singapore Constitution - Article 12(1) - Equal Protection
'All persons are equal before the law and entitled to the equal protection of the law.

However, if the lack of resources hinders retail investors' access to avenues of justice identical to what rich corporations and rich people are able to, is this a fair society?

Hence, in my view, allowing of class actions as punitive deterrence and also allowing contingency fees by lawyers, would make Singapore a much fairer society. It is in the public interest to do so.

The Regulatory System

Noble
Iceberg research, issued their first report in Feb 2015. Muddy Waters, another similar research outfit, issued another report in April 2015. In their reports, they stated very clearly what was wrong with Noble.

It was only in Dec 2018 that there was an official joint statement by MAS, CAD and SGX Regco. Three and a half years later........Yet, this joint statement was only about investigations ongoing and it was "imprudent" to allow the re-listing of New Noble. The ship has sailed...for goodness sake!

The funny thing was that even after the comprehensive reports by the two research houses have been released in early 2015, Noble was still allowed to raise $500m from equity holders in June 2016, and a $750m bond in March 2017. I am not a Noble investor. The corporate announcements of the old Noble has been taken down, so it is better to read here for the specifics of the case.

Up till date, i don't remember hearing anyone being held accountable. Noble has been likened to Asia's Enron but contrast this with the real Enron, where the US Securities and Exchange Commission (SEC) charged the CEO who was sentenced to 24 years imprisonment. In Singapore, no one is accountable as of now, to my knowledge!

“....In the Noble case, however, they were well informed and yet have failed miserably over 3½ years to protect investors and maintain the integrity of their financial markets. Their excuses are lame and misleading, their investors have lost billions and, worst of all, they have shown others who would deceive that there is little risk of being held to account"
- Micheal Dee ( Ex-CEO of Morgan Stanley South East Asia and a former managing director of Temasek). Emphasis mine.
source: https://www.theedgesingapore.com/former-temasek-director-michael-dee-calls-forensic-accountant-look-noble

Hyflux
The snail pace of investigations in Noble's case is utterly in contrast to the speed at which MAS has taken to defend DBS bank, the issue manager for both the 2011 and 2016 Hyflux Preference shares and Perpetual Securities ( PnPs). As far as i know, there was no research report or general big hooha in the news that DBS is to be blamed, yet, the speedy action of MAS to jump to the defence of DBS is uncalled for. To me, MAS chose to rely on a single statement, neither bold, underlined or emphasized and inconspicuously stated on page 119 of the 197 pages of the Hyflux 2016 prospectus to seemingly release DBS of any impropriety.

"If the current challenging market landscape of low Singapore electricity prices continues, the Tuaspring power plant is expected to incur losses in 2016. "

197 pages for goodness sake! And one statement on page 119 is deemed sufficient for adequate and accurate disclosure for retail investors to make an informed choice. With the target audience of retail investors made up of retirees and the working class, many unsophisticated investors!

Why was MAS so quick to jump to DBS's defence when no one accused it publicly of any impropriety? I understand the systemic importance of banks to the whole financial ecosystem. Very recently, in an unrelated case to Hyflux's one, the regulators in Australia fined the National Australian Bank (NAB) A$1.05 billion. They also fined ANZ bank A$928 million. Westpac and Commonwealth banks were also not spared. Total fines for the sector amounted to A$6 billion. Surely, punitive fines will not cause systemic failures. Why the need for the quick defence leaves one to wonder.....

Also, within 2 months of an unqualified audited Annual Report 2017 based on a going-concern basis, Hyflux filed for court protection. Isn't it weird?

Many people that i know have emailed facts and evidences to the various regulatory agencies. Hyflux and the various stakeholders are all based in Singapore. I wonder if the ship will again sail off .......

I will leave some phrases from experts for your consideration. This phrases may not be specific to Hyflux's case.

"....A debt capital markets lawyer here told The Business Times: "When I first came in, I was actually very shocked by the whole process of how easy it is to raise a bond. Issuers want to issue bonds quickly but don't want to spend on fees, so that comes at the expense of credit ratings, and the due diligence process....." - Published in July 2018
Source:
https://www.businesstimes.com.sg/brunch/insolvency-limbo-the-sgd-bond-market

"....Lim Sin Teck, partner at Morgan Lewis, flags that due diligence and disclosure standards in the international high-yield market are more robust than here: "Right now we're seeing a whole range of standards in disclosure in the Singapore market...." - Published in July 2018
Source:
https://www.businesstimes.com.sg/brunch/insolvency-limbo-the-sgd-bond-market

It seems to me that the welfare of companies take precedence over the welfare of retail investors when companies are allowed to easily and quickly raise money from retail investors and have ample leeway in terms of disclosure.

Where are the safeguards for retail investors?

My comments

Retail investors in Singapore, in my opinion, are left utterly defenseless. A David with a slingshot agaisnt a Goliath with a shield, a spear and a sword. The regulators have to step up, or the legal system have to change to make investing in the Singapore Exchange a much fairer and safer investing place. We now have Noble, Hyflux ...what next?

“Singapore’s regulators, if they really care about investors, and their own reputation, should halt the restructuring agreement, demand full disclosure of the last 10 years of management and board compensation, and appoint a world-class, fully independent forensic accounting firm to [investigate whether] Noble has been running a criminally fraudulent accounting programme that has precipitated the collapse of the company,” Micheal Dee ( Ex-CEO of Morgan Stanley South East Asia and a former managing director of Temasek). Emphasis mine.
source: https://www.theedgesingapore.com/former-temasek-director-michael-dee-calls-forensic-accountant-look-noble

If a less litigious society is preferred , then The Authority in charge of MAS has to make sure that MAS does it's job of enforcement effectively and corporations are effectively deterred.

As representative action seems like the only way now for retail investors to fend for themselves and do the regulator's job of seeking accountability and to serve as a deterrent.

To Noble Investors
I have created a Noble Telegram group for Noble Investors to join. In my opinion, Noble investors are a less unlucky bunch compared to Hyflux because it has Big players on their side. Iceberg has set up a webpage to join them in the lawsuit. I have also reached out to Iceberg and they have responded positively to me.

I am not a Noble Investor and i do not know the specifics of the suit, but i thought the old saying of
"Strength in numbers. Divided we fall, United we stand" is wise. I do not know if it will succeed but let's see how it goes.

To Hyflux Investors
For Hyflux investors, even those ordinary shareholders, we need you. Hyflux posted an announcement on 3 May 2019, finally revealing the name of the mystery new investor, albeit, still a non-binding offer. In it, it stated the current management will be retained. In the recent extension of court moratorium, Hyflux proposed a New Hyflux and Old Hyflux arrangement. This reminds me of what Iceberg said in May 2015 on their website about Noble.

“The new Noble looks a lot like the old Noble: same management, same director (Elman), about the same financing costs,”

The Hyflux ordinary shareholders hold about 60% voting rights. An extremely uphill battle to vote out the current management definitely, but its worth a shot. And to put things in perspective, at least Noble Chairman Richard Elman stepped down eventually. Noble's Board of Directors, CEO and CFO were also changed, finally, at the very end. How about Olivia Lum (Chairman and CEO) and Lim Suat Wah (CFO)?

For Other Investors of other companies
A level playing field between corporations and retail investors can only be good for everyone. In a large scattered group, differing messages will be sent out. I can only speak for myself. It is the corporate entities and significant stakeholders whom accountability and recovery from is seeked. Understanding what happened along the way was also necessary in the process of reaching my conclusion. I hope you read it the right way.

It would serve as a good read to understand more about the state of regulatory governance in Singapore by this subject matter expert, a NUS Professor.
David Vs Goliath
No Sign of Governance - March 2019
Administrative oversight, inadvertent omissions, administrative inadvertences: what next? - January 2019

" Inadvertent Omissions" Another Blot On Our Disclosure-Based Regime - Nov 2018

More can be done despite surge in sgx regulatory action - May 2018

Further reading