We have heard and read about the collapse of corporations like Enron, Worldcom, and Global Crossing in America, due primarily to financial shenanigans by people entrusted to manage those companies. These scandals were the talk of the corporate world for months, attracting media coverage and galvanising the regulators. It makes us wonder how creative accounting techniques can be used to siphon off millions or billions of ringgit from a company without being detected.

What motivates the deceit?
When times are bad and the stock market is bearish, many investors rush to get out of the market, particularly when they see the price of their shares falling every day. The pinch is greater if the company they invested in has not been performing well, and to the shareholder, likely to suffer even more in a sluggish economic climate. For investors who have one or two lots, they would not feel as much pressure as the loss is not as great as the major shareholders who own thousands of share lots. Some of these major shareholders might want to get out of the market fast. However, the problem arises when their share holdings in certain companies are too large and the demand for their shares in the market is too low, thus making it hard for them to exit at the desired price.

Some shareholders wait it out until the market to be bullish, some don’t. There are people who would stop at nothing to make their gain through unscrupulous means. Here is example of how a substantial shareholder from a public-listed company concocted a scheme to exit from his company with the desired profit – at the expense of minority shareholders.

How minority shareholders get cheated
Mr A was a substantial shareholder of public-listed company (PLC) A, Mr B was the director of PLC B while Mr X was the perpetrator in the scheme, the so-called business consultant.

Mr A, a substantial shareholder of PLC A wanted to sell off his interest in that company. The shares which he bought at RM9 per share had dipped to RM2 per share. The need to cash out fast was pressing as Mr A had previously acquired his shares in PLC A using bank loans and the interest was accumulating. However, as the market was very bearish, Mr A could not sell his shares in the open market at the price he wanted. Furthermore, RM2 a share was insufficient for him to repay his bank borrowings plus interest. So, he scouted for “friends” who were willing to pay for his shares at RM11.00 per share. Logically, you would think that a wise investor would not pay such an exorbitant price for shares worth RM2 in the open market. However, things proved otherwise. Mr. X approached Mr A and offered to pay Mr A his desired price, so long as Mr. X could handle the company’s accounts and assets.

To facilitate his entry to PLC A, Mr X was asked to pay a deposit to Mr A. However, Mr X had no money. So, he approached another individual, Mr B, a director of PLC B for a “personal loan” for which he promised a lucrative interest upon repayment. Mr X then paid the deposit to Mr A and successfully entered PLC A as a business consultant. As a business consultant, he gained access into PLC A which allowed him to run the PLC at his whim and fancy. He then launched his scheme to strip PLC A for funds to repay his deposit to Mr B, the balance of purchase consideration to Mr A, keeping the remaining cash for himself.