Monday, 25 November 2013

Big fish eat little fish

The fair value of a listed investment company as a going concern is always lower than its liquidation value, since ongoing management costs burn a proportion of the cash generated by assets. This means that smaller LICs are vulnerable to predation by bigger LICs, by nature, if they allow their shares to trade at fair value. To avoid predation, LICs ramp their "market" prices above fair value, form crossholdings with accomplices, and entrench various poison pill measures designed to make it costly or impossible to wrench incumbent management away from the fee frenzy. Shrinking funds are especially susceptible to change of control, with the aggressor LIC not interested in the target's assets, but looking to take over the target's granny investors. A sharemarket listing provides legitimacy, allows the charade of a "market" price, and crucially, allows the investment company to issue inflated shares to granny investors.

The latest "new" Australian listed investment scam and revaluation fraud is Thorney Opportunities (TOP.AX), formerly Wentworth Holdings (WWM.AX), due to issue millions of shares at a purposefully inflated price. Thorney has ensconced its position with an openly exploitative management agreement that gives it 1.5% of gross assets annually and 20% of any increase in net asset value. The "independent expert" hired by Thorney calculated that the takeover would immediately destroy a quarter of shareholder value for non-associates ($0.525 before versus $0.409 after takeover). The "expert" then astoundingly concluded this was "not fair but reasonable", which seems like a perplexing conclusion, until you remember this is what the expert was paid to do.

Thorney and its criminal associates currently control the share price of WWM. WWM had an October 2013 net asset backing of $0.45, and is issuing millions of shares at $0.50, yet its current share price mysteriously has shot up to $0.68, in what ASIC guarantees to be a normal market movement and not a deliberate ramp. The true reason is not magic, however, it is fraud. The reason that WWM now trades at 50% above its latest reported NTA is that it has become a vehicle for securities fraud, with a completely manipulated "market" price.

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