The 'Noble' Hustle

The reason why the article is titled The "Noble" Hustle is because of a documentary which I came across recently and thought that the abovementioned quote in the film is quite applicable in the Noble Group episode. 'The China Hustle' is a documentary directed by Jed Rothstein which talks about how some US investment firms made big profits by getting Chinese companies with inflated financial figures listed on the US exchange through reverse merger, and then selling them to retail investors. 

The film interviewed Muddy Waters which placed short bets before exposing these listed Chinese companies. Muddy Waters got their name from the Chinese proverb "混水摸魚" (to take advantage of a crisis for a gain). On a side note, Muddy Waters had launch an attack on Olam a few years ago and Temasek came in to save the day. Do these investment firms know that the Chinese companies are empty-shell companies? The film quoted another Chinese proverb "水清无鱼" (when a person is too perceptive and strict with details, he won't have any friends) implying that the investment firms are aware but they are only interested in making money so why would they want to scrutinize the figures. If any investment is too good to be true, it is probably a scam. One of the interviewees even suggested that Alibaba figures could be inflated. Do you trust the financial figures provided by Alibaba? 

Back to Noble, Iceberg Research launches an attack on Noble on February 2015 questioning their shady accounting practices. Noble was unable to provide a convincing reply and as a result, their price collapsed and it became short-seller's favorite stock. The investor starts questioning the role of management and auditor in the downfall of Noble. The market regulator, SGX RegCo also came under fire for not doing enough.

SGX RegCo, a subsidiary of SGX, is only formed last year. Before that, the regulatory unit was under SGX's arm and it could be perceived as a conflict of interest as the company is profit driven and the company itself is listed on the mainboard. Imagine such a scenario, if there are any unusual trading activities on the SGX company back then, SGX has to query itself and then SGX has to reply to itself that they are unaware of any news that could resulted in the unusual trading activities. SGX then has to advise investors to trade itself with caution. Does separating the entities make it safer for investor? I doubt so. 

The scope of SGX RegCo is just to ensure the listed company complies with the rulebook. It is not the scope of SGX RegCo to ensure the company's performance. If the company filed an audited financial report by an accredited auditor firm, they are compliant. There is not much the SGX RegCo can do if they are compliant and the liability is thus left to the auditors. As there are no lawsuits against the auditor in the case of Noble, we will have to assume that there was no negligence and everything was in compliance with regulations. The liability is now left to the investor themselves. As you can see, everything could go wrong in an investment and there is not a single party that has to take responsibility for it. The systemic risk is always there and this bring us back to the following quote in the documentary.

"水至清则无鱼, 人至察则无徒"

If they are too stringent, there won't be any business or profit to be made. In the end, it's always the investor who has to bear responsibility for the investment decision they made. You can blame the management, auditors, or regulators, but it does not matter as you will not be able to recover your money.  Noble's shareholder has voted for a debt restructuring plan on 27 August 2018 which provides the company a second chance to continue their business. Will it turn for the better or will the cycle repeats?

Disclaimer: I am not vested in the above mentioned companies and has no intention to perform any transactions, long or short, in the near future.