FT Acquisition, Toshiba, Diageo, Healthcare Locums, False Accounting, Chinese Companies, and AIM

This blog gives you the latest topical news plus some informal comments on them from ShareSoc’s directors and other contributors. These are the personal comments of the authors and not necessarily the considered views of ShareSoc. The writers may hold shares in the companies mentioned. You can add your own comments on the blog posts, but note that ShareSoc reserves the right to remove or edit comments where they are inappropriate or defamatory.

The Financial Times is being sold by Pearson to Japanese media group Nikkei Group. The Chairman of Nikkei was quoted as saying it will be “business as usual” (in the FT of course) and that the “philosophy and values of the FT are the same as ours”. Clearly they are still in the honeymoon period but let us hope that is true as the FT provides excellent factual news and commentary in general. Here’s just some of the news they have covered recently that is worth highlighting.

Toshiba. Perhaps we will get more coverage in future on Japanese companies. The latest big news story was the resignation of the CEO of Toshiba over accounts that falsely inflated profits by US$ 1.2 billion over the last seven years. This follows a similar problem at Olympus, another major Japanese corporation, in 2011.

Diageo. But if you think this is a peculiarly Japanese problem, think again. Another FT report on 25/7/2015 was on UK company Diageo who are being investigated by the SEC for “channel stuffing”. In other words, encouraging distributors to take more stock than they need thus inflating reported sales figures. Why would distributors do this? Because the supplier promises they won’t have to pay for them any time soon, or provides for cancellation/return options, or otherwise finesses accounting rules. We will see in due course whether this applies to Diageo.

Healthcare Locums. The former CFO of Healthcare Locums, Diane Jarvis, was fined £25,000 by the Financial Reporting Council (FRC) and recommended for exclusion from her professional accounting body for ten years. Healthcare Locums was an AIM listed staffing company which had to restate their accounts in 2011. Indeed it was commented on in the very first edition of the ShareSoc Informer Newsletter in February 2011 and was the first of many such reports on dubious AIM stocks that were favourites of investors for a while but then fell back to earth. This is what we said in that first edition: “Let us hope that this does not turn into another AIM debacle related to accounting as has happened in a number of AIM companies. Torex Retail was one example, but another outrageous case was Aero Inventory”. Silverdell and Quindell were later examples. Our hopes for Healthcare Locums were misplaced and it later became apparent that the accounts were in essence false. The FRC simply said that Ms Jarvis “dishonestly manipulated” the accounts to increase the company’s apparent profitability. Among other things she allocated staff costs to reorganisation costs and over-capitalised staff costs.

The fine may seem derisory to investors who lost most of their money on this stock (the listing was suspended and the business later sold at a low valuation), but it seems Ms Jarvis did apparently co-operate with the investigation and “demonstrated contrition”.

Some investors might consider the former CEO Kate Bleasdale might be partly to blame for these events, although she claimed to have reported the accounting irregularities to the board. The new board denied that. Ms Bleasdale and her husband were declared bankrupt in May this year after running up large legal costs, partly on losing law suits.

Gate Ventures. A good example of excellent reporting by the FT was on the 24th July when they ran an article on Chinese company Gate Ventures. This was an AIM listed company which listed in March and by June its market valuation had surged by 1,500 per cent as Chinese investors allegedly piled in making it apparently one of the most successful AIM listings. But it seemed to be primarily a cash shell (£3m backing) with its only significant asset being UK rights to a musical called “Being Woody Allen”. The Nomad recently resigned and the shares have now been delisted as the company said they could not find another Nomad in time to meet the regulations (market cap nominally £103m at the time of suspension). Just reading the article would put you off most investors from ever buying shares in the company.

The FT has done a great job of highlighting the problems of AIM and Chinese companies listed thereon in particular. For example, they report in the article that 3,000 companies have joined AIM but 2,160 have never produced a return. They quote Colin McLean of SVM Asset Management as saying “AIM may not be the only market to lose money, but few have parties to celebrate it“. Presumably he was referring to the recent 20-year anniversary of the launch of AIM. He also criticised the light regulation of AIM.

ShareSoc has published many articles in the past on AIM and its deficiencies. Although some investors only have themselves to blame for over enthusiasm about early stage companies, the regulatory structure of AIM is a substantial problem. In addition the kind of companies that are encouraged to list on AIM seem to be run by characters who often have odd or inappropriate backgrounds (Gate Ventures Executive Chairman had a past successful career as a songwriter for Elvis Presley, et al, you will be amused to hear). The investors who control the company are also often dubious – for example in Gate Ventures a handful of British Virgin Islands registered companies. The key problems with AIM are that the LSE makes money out of listings, and seems to have little regard to the quality of the businesses that list. They rely on Nomads, who are paid by the companies, to do due diligence and undertake the regulatory role. In addition Nomads often act as the company’s broker so there are obvious conflicts of interest there. A self-regulating market has always proved to result in weak regulation – the main LSE market was changed in that regards many years ago.

ShareSoc would certainly like to see a tighter and different regulatory regime on AIM, which might ensure there were less accounting scandals and corporate governance issues. Unfortunately some investors and many company promoters seem to like the “free for all” that epitomises AIM at present.

Roger Lawson

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