The ruse of the rings 

TEN days ago, the courts across the Causeway shot down a bid by John Soh Chee Wen and Quah Su-Ling to have their sentences reduced.

Buried in the avalanche of news about “corporate mafias” in the Malaysian stock market, many missed the decision by Singapore’s Court of Appeal which held that that original prison terms – 36 years for Soh and 20 years for Quah – imposed in 2022 were warranted given the scale, sophistication and market impact of their offences.

Soh was the mastermind behind the S$8bil penny stock scandal in SGX involving the manipulation of the shares of Blumont Group, Asiasons Capital and Liongold Corp.

This elaborate scheme executed between August 2012 and October 2013, involved orchestrating trades through 189 accounts across 20 financial institutions.

Many other Malaysians and Singaporeans were involved in this saga but ultimately, the courts found Soh and Quah primarily responsible, dishing out the harsh custodial sentence.

Soh, now 68, will effectively spend the rest of his life behind bars.

He was once a household name in the 1990s stock market mania up until the Asian financial crisis.

The question I have repeatedly asked some of the industry veterans was why someone of Soh’s intelligence would attempt such a scheme in Singapore of all markets, where the law is strict and unbending.

Market manipulation in various forms

To understand how and why such scandals happen, it is necessary to first understand the types of market manipulation.

The first would be the classic “pump and dump” schemes.

Syndicates push up share price by creating artificial transaction volume across various proxy and controlled CDS or brokerage accounts.

Retail investors who are unaware would then start to trade the shares, following the uptrend. Along the way, the syndicates will exit or sell off shares until levels where they feel they have made enough in gains, and then cash out entirely.

There will be no more buying support and the share price will enter a freefall, becoming valueless overnight. This is the oldest trick in the book, and it is becoming obsolete as retail investors get more savvy.

Second would be front running or insider trading. This approach is commonly adopted by syndicates that have access to privilege or undisclosed corporate exercise information, acting on it by buying into a stock and then dumping on open market once the information becomes public.

The access to privileged information can be via bribery, acting as proxy or collusion.

Third, cross shareholdings across various smaller listed company vehicles propped up by the control in a “mothership” listed company where the value is heavily inflated.

With the “mothership” value inflated through low liquidity and tight control over the free float via proxies, syndicates can use the shares of the “mothership” to exchange for margin facilities, bank loans and other funding with the shares pledged as collateral.

They use the borrowed funds to acquire controlling block in other listed companies then inflating the shares value.

The process is a case of rinse, repeat and recycle. How they profit is via the private placement of shares and direct business transactions (DBT) at inflated value.

Fourth, is embarking on a reverse takeover offer (RTO) exercise of cash rich companies with limited business growth prospects by buying a controlling stake.

With effective board control, they use the cash in the companies for other purposes. Most of the time, the settlement of RTO is a combination of DBT at listed companies share level and under table cash settlement.

Fifth, skirting the mandatory general offer (MGO) rule by using proxies to avoid detection of parties acting in concert.

That way, there is no trigger of the MGO and no need to make an equal buyout offer to other minority shareholders. In effect, they take control of the listed vehicle without appearing to have majority control.

Objective of syndicates

Money motivates people in strange ways. Syndicates or market manipulators have one main objective, that is to get rich quick.

On the other side of the coin, retail investors play into their hands out of greed while pursuing short-term gains. After all, it takes two to tango.

It is much easier to make money transacting shares at inflated valuation and finding a greater fool to hold the bag.

The capital market become a congregation of fools and greater fools seeking to outwit one another with the hope one would not end up as the greatest fool.

This is premised on the “Greater Fool Theory” explained by economics professor Burton Malkiel in his book A Random Walk Down Wall Street.

Same logic, different methods

Over time, we see many different groups of market manipulators.

In the local context, we have seen many aspiring to be the next John Soh. While none have come close to his scale and sophistication, there have been many different groups of syndicates cross-controlling up to 20 to 30 listed companies on Bursa Malaysia.

They often churn trades and do multiple rights issues, placement in return for public funds to support business expansion or projects that end up being a failure or non-completion.

The methods may differ, but the logic is the same, look for a fool who believes in the narrative or the hype of the day.

Two years back, it was AI related projects. Last year, it was all about data centre construction and building.

However, market manipulation is not limited to only penny stocks or small cap companies.

In fact, some of the biggest scandals in our market happens when the scheme runs for a long time and the market cap balloons to billion-dollar valuation. These lead to the most painful repercussions.

Preserving the integrity of the capital markets

Today, we see the Securities Commissions (SC) pursuing people like Serba Dinamik’s founder and former SCIB executive, Datuk Mohd Abdul Karim Abdullah. Previously, there was also the pursuit of Ricky Wong of Asia Media Group Bhd, Mak Siew Wai of AT Systematization Bhd, the charge of Transmile’s Gan Boon Aun and the infamous “Repco Low”.

Some argue that there are syndicates good for the capital markets. They claim market vibrancy is created by volumes generated by syndicates, which makes Bursa Malaysiaan interesting market. I beg to differ.

In the short term, there are benefits from higher average daily trading value. In the long run, it will destroy confidence retail investors have towards the local bourse. Then, they would be scarred for life, never to return.

All the hard work of investor education programmes by the SC and Bursa would be futile.

The same goes to the “corporate mafia” allegation. Everyone who participate in the capital markets is aware of it, and if it continues to be left unaddressed, the damage will be irreparable.

The last thing we want is for foreign investors to think of us as a cowboy stock market.