Saturday, 18 April 2015

Migme and the Foxconn revaluation fraud

Most new listings on the Australian market are now revaluation frauds rather than genuine enterprises, and are listed for the sole purpose of creating a manipulable "market" price. Investment cartels commonly hold 90% or more of outstanding shares of such schemes and control their price. After ramping the share price, the inflated asset can be used to pad the books of investment cartel members, used to raise debt, or packaged into financial products and offloaded on granny investors.

There is zero justification in economic theory for the assumption that an asset controlled by an investment cartel will trade at a "market" price. Efficient market theory explicitly assumes many buyers and sellers, none of which individually can move prices. But if 90% of the shares of an asset are held by a small group that is incentivized to keep prices up, then the asset will not trade at a market price, but rather at a systematically inflated cartel price. You may call this The Benway Theorem. Efficient market theory deals with the Platonic ideal of a market, a perfect imaginary market, whereas The Benway Theorem deals with markets as they actually are. An increasing number of stocks are held by small investment groups, this is simply an indisputable statement of fact. Efficient market theory does not take into account the rise of financial intermediaries or their incentives, nor does it even consider the control of information by said intermediaries, instead it just assumes an infinite number of perfectly informed traders.

The most egregious example of revaluation fraud was Fifth Element Resources (FTH.AX), previously described in this blog post. FTH recently announced its "voluntary" delisting from ASX, having taken the scam too far even by Australian standards. With all outstanding shares held by 13 entities, ramping the worthless company to a $155m "market" cap just made this fraud a little too obvious even for complicit moron regulators. But FTH almost made it into the All Ordinaries index. As a service to future criminals, ASX has explicitly spelt out the requirements of revaluation frauds. In the announcement, it was revealed that ASX had required FTH to create a spread of 300 small investors holding at least $2,000 worth of shares, but FTH was unable to raise even this $600,000 in dumb money. Criminals should take note of this and plan their future listed securities fraud accordingly.

The business of listing and market manipulation is now more profitable than any actual operations, with even the most catastrophically loss-making enterprise still having utility as a listed securities fraud. The latest and most laughable trend is the listing of companies that are either bankrupt or teetering on the edge of bankruptcy. Migme Limited (MIG.AX) is a newly backdoor-listed fraud scheme on the ASX, dual-listed on the Frankfurt exchange for good measure. Migme was created by agglomerating a dog's breakfast of worthless and consistently loss-making internet companies, some of which already had gone out of business. Migme purportedly is a social media platform, with aspects of multi-level marketing, diversifying into e-commerce with forays into online gambling, recently adding a music service. Migme does a lot of things except make money. Even its core operations has plunging revenues and widening losses, as detailed in its annual report. Between 2013 and 2014, revenue fell from $2.9m to $1.9m, while losses widened from $4.3m to a staggering $28.3m. But operational performance is irrelevant to Migme's utility as a securities fraud.

In a few months after listing in its current form on the ASX, Migme's share price was ramped to $1.06 by the investment cartel controlling its price. According to ASIC, this was not a ramp but rather a magical market mystery, an enigmatic but wonderful occurrence for which an explanation just cannot be found. The ramp brought this joke of a company to a $200m "market" cap, and Migme was included in the All Ordinaries index as a top 500 Australian company. Ladies and gentlemen, this is your Australian stock market, this is where your money goes if your pension fund buys the index. Migme.

The investment cartel controlling Migme has some interesting members. FIH Mobile Limited (PINX:FXCNY), formerly known as Foxconn International Holdings Limited and part of the Foxconn group, holds 20% of Migme shares. Foxconn is predominantly known for working conditions so horrendous it drives its workers to suicide. What is less known is that the Foxconn group cooks its books, using a bewildering array of crossholdings and related party transactions. The Migme ramp allows Cayman-incorporated FIH Mobile to pad its books by making reference to the "market" value of its holding, a level 1 input in terms of IFRS 13. According to Note 19 on page 75 of the FIH Mobile annual report, the "fair value" of its listed investments in associates was US$44m as at 31 December 2014, exceeding the carrying book value by US$9m. However, the vast majority of this US$44m is Migme shares, and in the absence of the ramp, FIH may have been forced to impair the carrying value of its associates.

5 comments:

  1. Putting MIG in the All Ords? Unbelievable!

    What’s next rating junk bonds as AAA?

    Oh, right…

    (I see the auditor rated it with an emphasis of matter)

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    1. Not just Migme. Thanks to that "mysterious" ramp, Panorama Synergy is now part of the All Ords too!

      It's beyond a joke at this point. Not even funny any more.

      Delete
  2. Hi Dr,

    I have been watching SMX lately and there is some strange market action I thought I might mention.

    Rather than manipulating the share price up, as is often presented here, I suspect that SMX is being manipulated down, perhaps to facilitate the company’s current share buyback program:

    Looking at today’s course of sales the vast majority of transactions are in exceeding small lots like 1 or 2 shares that the public could not possibly make, seemingly pushing prices around.

    Their main competitor’s share price DTL is shooting up yet SMX’s price falls; diverging in the last couple of months from their usual strong correlation! It seems profitable, free cash, fair value and they even predicted higher profits to come last report.

    Do you think manipulation in this case, for this purpose, is likely? They still have 2.6 mill shares to buy back and I’m sure they would want to do it at lower prices. Or perhaps something else is going on.

    Cheers.

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    1. Hi TheForms,

      Most share market manipulation is upward, because that's where the money is at. Although it does exist, downward manipulation is very rare. Most fraud relies on selling an inflated asset for more than true worth (rather than buying a suppressed asset for less than true worth.) In general, overpricing is vastly more common than underpricing. There is a reason that the painting you bought in a thrift shop probably is worthless and not a priceless masterpiece. Just as it is rare finding an Albrecht Durer print for ten bucks, or finding a hundred dollar bill on the sidewalk, so it is rare finding an undervalued stock. And this is before even considering systemic sources of market distortion such as market structure, cartelization, the incentives of intermediaries, economic and monetary policy.

      Regarding SMX specifically, here's what I see. I see a company with collapsing profits ($30.6m in 2012, $21.1m in 2013, $12.7m in 2014) with even worse development in cash flows (negative operating cash flow in last six months) with disturbing ballooning receivables ($70m as at 30 Dec). The company engages in distributions and buybacks not sustainably supported by operations. The recent acquisitions and their goodwill blowups scream of value destruction and empire building.

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  3. Yes, thank you for your reply.

    I see that they had negative cash last half (I thought a timing issue) and declining profits. When I spoke of “profitable” I tend to average cash flows and base ‘value’ on that.

    But I agree, receivables rose a lot and cash from operations as it stands is inadequate to keep paying up for dividends and buybacks.

    I might yet rue the day I bought.

    Thanks again for your thoughts.

    ReplyDelete