Scams in Quoted Equities


Last week was a busy week for corporate governance experts, as they were trotted out to talk about three equity price plunges in Hong Kong and a fourth in London. Of Goldin, the apparently well-known financial services, property, polo and wine conglomerate, with two quoted arms,  I know little, but the combination would have made little sense, even to James Hanson. Last week’s events in London at Plus500 reminded me of Refco, and that did not end well; it requires a longer write-up, and I plan to return to that subject (although it's worth noting that the chart looks nothing like as meteroic as the Chinese stocks).

One of these was rather obvious - Chinese solar play Hanergy had been extensively written about in the FT which had done some first rate detective work. When the founder failed to appear at the AGM, rumours swirled around the market and Hanergy shares fell 47% in one day. It could not have been much of a surprise – the company had reached a market capitalisation of c.$40bn yet its main business partner was its parent and there were rumours of failed payments.

The FT also discovered that the founder had pledged shares in exchange for loans, as much as $200m recently. I have little sympathy for banks and financial institutions lending money on flimsy credit; I even have limited sympathy for private investors chasing the latest hot stock – if you don’t do your homework, you will get your fingers burned from time to time, and even the best and strictest market regulatory mechanisms are fairly vulnerable to crooks and charlatans (assuming that the Hanergy founder is, as the FT suggests, not exactly above board – I clearly cannot comment).

Where I do have sympathy is for people who invested in solar ETFs. A few months ago, I had cause to look at solar ETFs to see if there was a palatable option; when I investigated, two of the larger ETFs had between 10 and 20% of their funds invested in Hanergy.  When I looked at Hanergy, which I had never heard of and which I thought I should at least check out, it turned out that it looked quite an odd company and there was NO BORROW on offer. Further investigation (not anything in-depth, but something any competent investor could do), it was obvious that the ETFs should be avoided.

Surely someone offering an active-passive product of this nature should be required to do some basic due diligence on such an investment? I find it extraordinary that these two large ETF providers should have allowed their clients to lose money by failing to do even the most cursory of checks on the largest stock in these portfolio products. Incidentally, I would have shorted the ETFs but the solar stocks looked so cheap that it seemed dangerous, and of course so it transpired. But the fact that investors made money on the remaining holdings does not excuse the providers in my view.

I believe that this trend to passive investment is understandable, but risky and that we shall come to regret the period that active providers took so much money from their clients without really being very active. We shall pay in the end by having less efficient capital markets.