A few investing rules that will help you avoid financial frauds

"Those who cannot remember the past are condemned to repeat it."  
American philosopher George Santayana

To save you from financial ruin, here are a few investing rules that will help you avoid financial frauds:

1.  Do not invest in arcane schemes with promoters who will not explain the investments clearly.  Make sure you understand exactly where the investment costs and returns will come from and at what risk.

2.  Beware the "quick buck" or getting "something for nothing."  Promises of "too good to be true" returns are just that.

3.  Always do reference checking before investing.  Charlatans spend much time, money and effort in trying to appear legitimate.  Beware.  Do not be fooled.

Unfortunately, just following these three rules doesn't guarantee you will never be fleeced.  So do not 'put all your eggs in one basket.'  That way, even if you are duped, not everything is lost.  Diversify your investments.

Buffett (2000): The risks associated with the twin issues of CEO's lofty projections and sustainable long-term profit growth.

Warren Buffett talked about wealth transfers to greedy promoters during IPOs in the letter for the year 2000. Let us go further down the same letter and see what other investment wisdom the master has to offer.

The master's macro bet

Usually, Buffett refrains from making precise comments about the future especially at the macro level. But if he is willing to bet a large sum on the likeliness of an event happening, then indeed we must sit up and take notice. In the letter for the year 2000, the master has made one such prediction and was willing to bet a large sum on it. The prediction was about the magnitude of growth in profits that would take place among the 200 most profitable companies in the US at that time. Since the master does not believe in short term predictions, the time horizon that was assumed was ten years.

The CEO with a crystal ball

The letter for the year 2000 came out at a time when the practice of a CEO predicting the growth rate of his company publicly was becoming commonplace. Although Buffett did not have an issue with a CEO setting internal goals and even making public some broad assumptions with proper warnings thrown in, it did annoy him when CEOs started making lofty assumptions about future profit growth.

This is because the likelihood of the CEO meeting his aggressive targets year after year on a consistent basis and well into the future was very low and hence this amounted to misleading the investors. After having spent decades researching and analyzing companies, the master had come to the conclusion that there are indeed a very small number of large businesses that could grow its per share earnings by 15% annually over a period of 10 years. Infact, as mentioned in the above paragraph, the master was even willing a bet a large sum on it.

The reasons may not be difficult to find. In free markets, the intensity of competition is so high that it is very difficult for profitable players to maintain high growth rates for consistently long periods of time. Unless the business is endowed with some extremely strong competitive advantages, competition is likely to nibble away at its market share and cut into its profit margins, thus making high growth rates difficult.

Let us hear in the master's own words his take on the twin issues of

• CEO's lofty projections and 
• sustainable long-term profit growth.

The golden words

"Charlie and I think it is both deceptive and dangerous for CEOs to predict growth rates for their companies. They are, of course, frequently egged on to do so by both analysts and their own investor relations departments. They should resist, however, because too often these predictions lead to trouble."

He further adds, "It's fine for a CEO to have his own internal goals and, in our view, it's even appropriate for the CEO to publicly express some hopes about the future, if these expectations are accompanied by sensible caveats. But for a major corporation to predict that its per-share earnings will grow over the long term at, say, 15% annually is to court trouble."

The master reasons, "That's true because a growth rate of that magnitude can only be maintained by a very small percentage of large businesses. Here's a test: Examine the record of, say, the 200 highest earning companies from 1970 or 1980 and tabulate how many have increased per-share earnings by 15% annually since those dates. You will find that only a handful have. I would wager you a very significant sum that fewer than 10 of the 200 most profitable companies in 2000 will attain 15% annual growth in earnings-per-share over the next 20 years."

Adding further, the master says, "The problem arising from lofty predictions is not just that they spread unwarranted optimism. Even more troublesome is the fact that they corrode CEO behavior. Over the years, Charlie and I have observed many instances in which CEOs engaged in uneconomic operating maneuvers so that they could meet earnings targets they had announced. Worse still, after exhausting all that operating acrobatics would do, they sometimes played a wide variety of accounting games to "make the numbers." These accounting shenanigans have a way of snowballing: Once a company moves earnings from one period to another, operating shortfalls that occur thereafter require it to engage in further accounting maneuvers that must be even more "heroic." These can turn fudging into fraud. (More money, it has been noted, has been stolen with the point of a pen than at the point of a gun.)"

Transmile still grappling with turnaround

Transmile still grappling with turnaround

Transmile Group MD Liu Tai Shin (right), and Group COO Robert Hyslop at the press conference today. — Picture by Choo Choy May

By Lee Wei Lian

KUALA LUMPUR, April 29 — Cargo airline Transmile Group Bhd is working on resolving its debt woes and was given till April 16 to settle its debts with Malaysian Trustees Bhd (MTB), failing which the latter would seek a winding up petition.

Transmile Managing Director Liu Tai Shin said today that although the April 16 deadline had lapsed, the company had yet to receive a winding up notice from MTB.

“We’ve not received any further notice,” he told reporters after the company’s annual general meeting today.

Transmile’s debts amounting to RM532 million with some 20 local and foreign banks have been in default for 30 months and Liu said the company is working with advisors to restructure the debt.

Liu said that Transmile’s focus will be on resolving its debt issues.

“Our target is to get rid of all our debt problems,” he said.

He also said that the lawsuit filed against the former management that was announced on Tuesday was partly to help the company regain credibility.

“We have a bad reputation which we need to address,” he said. “It is not about getting money back. From the company’s perspective, we need a closure.”

Transmile came into the spotlight after an accounting scandal was exposed in mid-2007 which resulted in a steep drop in the company’s share price.

The company said on Tuesday that its board of directors is suing former chief executive officer Gan Boon Aun and former chief financial officer Lo Chok Ping for breaching their duties by grossly overstating the company’s revenue.

Liu declined to give a timeframe on when Transmile — which recorded a pre-tax loss of RM270.6 million in 2009 as compared with a loss of RM121.2 million in 2008 — is expected to be turned around.

He said that the company faced difficulty in disposing four planes worth an estimated RM386 million as potential customers faced troubles in obtaining financing.

“We have four planes on the tarmac that are not flying,” he said.

In terms of expansion plans, the company is branching out to the oil and gas sector, and started a Singapore to Labuan service which it hopes will help it return to profitability.

It also intends to open a new route to Balikpapan in Kalimantan.

In Transmile’s press statement, Liu said: “Despite major issues faced we are still doing business and developing new routes to strengthen the group’s presence in the region and generate revenue.”

Transmile files suit against former execs

Published: 2010/04/28
Transmile Group Bhd (7000) has filed its first civil suit against its former chief executive officer, Gan Boon Aun and chief financial officer, Lo Chok Ping, after spending three years clearing up the mess left behind from an accounting scandal.

The former industry darling is seeking compensatory damages to be determined by the High Court, special damages of RM10.6 million, costs on a full indemnity basis and interest on special and/or general damages as may be awarded by the High Court.

Transmile and Transmile Management Sdn Bhd are suing Gan and Lo for grossly overstating the group's revenue and causing questionable payments and receipts in relation to the affairs of two wholly-owned subsidiaries - Transmile Air Services Sdn Bhd and Grouptech Sdn Bhd.

The writ of summons and statement of claim were filed in the Kuala Lumpur High Court yesterday, which also claimed that the former executives had breached their duty of care to the group for failing to put in place proper internal controls.
These breaches caused the group to suffer loss and damage, such as exposing the group to inquiries and prosecution by regulatory authorities and causing it to suffer reputational loss thereby affecting its future business prospects and ability to generate income.

It also caused the group to be classified as an affected company under Practice Note 17 of Bursa Malaysia as a result of it defaulting on its loan repayments.

In 2007, a special audit by Moores Rowland Risk Management revealed that the group had overstated its revenue from 2004 to 2006 by RM622 million.

The air cargo firm has been struggling to regain its financial footing ever since the debacle, charting a net loss of RM272.4 million for the financial year ended December 31 2010.

Read more: 
Transmile files suit against former execs 
http://www.btimes.com.my/Current_News/BTIMES/articles/tmile27/Article/#ixzz0mOZ0GJgG

DIS Technology - Check List: What can we learn from this ugly saga?

As with Transmile, it is sad that the investors are again caught in such a fraud.  There must be heavy penalties for those involved, not least, to emphasize the seriousness of this matter and to deter future such happenings.

Could this fiasco, of false accounting, be predicted looking at the latest quarterly reported results?  Often the answer is NO, though it was obvious that the company's business was deteriorating and the balance sheet was not good quality. 

The revenues and earnings were manipulated in the accounting.  However, the cash flow statement would have indicated that not all is well with the company.  The CFO was strongly negative.

http://spreadsheets.google.com/pub?key=tZmdsnrXUbsFVCAmAaQRW4g&output=html

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Blogger Wisdom Wise has written a nice article on reading the annual report which I have copied and paste here:

Tuesday, March 09, 2010

Reading the Annual Report

When you look at a woman, which part of her anatomy do you look at first? Is it her face, her bosom or her bottom? It is all a matter of choice. It doesn't matter so long as you get to look at the whole picture. Now, when you look into an annual report, it is the same. Which statement do you prefer to see first. Is it the income statement, the cash flow statement or the balance sheet? Personally, I go straight for the balance sheet to find out what the company has and what it owes others. If I don't find things attractive there, I will just close the report, avoid the stock and move on.
The things that I pay attention in the balance sheet are: Paid-up capital, par value per share, retained earnings, current assets, and current liabilities. I pay special attention to its cash position and how much debt it has. If its debt is too high, when compared to its equity, I will normally lower the grading of the stock. Don't forget that all companies that folded are those with very high debt.
From the balance sheet, I go to the income statement , the cash flow statement, and then the CEO's statement, or Chairman's statement. If both are available, I'll read them both and also the notes in the annual report to ascertain that the company is not involved in any litigation. Lastly, I will go to the page that shows the names of the majority shareholders. A strong major shareholder is a advantage. Take the case of YTL Cement whose major shareholder is YTL Corp.
Things to consider when assessing a company are as follows: a) Calibre of management; b) Modal of business; c) Earnings per share; d) Dividend yield; e) Cash and debt position; f) Barrier of entry; and g) sustainability of profit.

A Little Knowledge Is a Dangerous Thing

Financial Fraud: Don't Let It Happen To You
Posted: October 9, 2009 1:20PM
by Andrew Beattie




If viewed as an industry, fraud is pretty resilient. It does well when the economy is up and people have speculative cash combined with big, optimistic dreams. It also does well when the economy is low and people are trying desperately to recoup losses, regain retirement nest eggs and generally stay afloat. Fraud cuts investors deep at the best of times, but with the current economy pushing baby boomers to the edge of desperate measures to assure retirement, the damage is potentially on a larger scale. The key to avoiding the growing legion of scams out there is to temper your desperate hopes with a healthy dose of sober second thought and careful research.

A Little Knowledge Is a Dangerous Thing
It's unfair to see victims of fraud as thoughtless people caught up by modern snake oil salesman. Many people who get caught by investment frauds are financially capable. At the very least, they have the habits that have allowed them to accumulate the wealth that makes them a target for people selling genuine investments as well as fraudulent ones.

In many cases, the people caught in frauds are sophisticated investors – Bernie Madoff among others have beguiled professionals right along with regular folks – and the failure is not a lack of knowledge but a lapse in due diligence. Afterwards, almost everyone hurt in a fraud realizes they should have known better, but they get caught up in the same way as investors in a bubble. (Identity thieves are using home equity lines of credit to commit their crimes. Find out more in Protect Yourself From HELOC Fraud.)

Count to Three
Hindsight is pretty useless when it comes to your portfolio, so there are three basic steps that can help you avoid getting caught up in an investment scam. They take time and, much like counting to ten when you're angry, can help dampen some of the emotion that can cloud an investors head when phrases like "iron-clad, double-digit returns" are being thrown about.
1) Research the Company and the People Involved.
You can find out a lot now by simply running an internet search, although an internet search isn't enough in itself. People often build up to big frauds and have a paper trail of their previous attempts. You might want to know if the guy selling you condos in Barbados has been the subject of any investigations or angry complaints. Asking for credentials, checking them, and looking up names in regulatory filings can uncover a host of interesting facts, including whether or not the person wanting to sell you investments is in anyway certified. Being certified isn't a badge of virtue, but a lack of any formal training can be a red flag.

2) Dig Into the Numbers
Revolutionary forms of investing that are so complex, yet so sure in yielding results should be viewed skeptically. Ask for a prospectus or explanation of any such investment in writing and work through it until you understand how the profits are made. If you don't, and no one around you does, then you have another red flag. Most highly complex investments aren't sold door-to-door, so don't underestimate your own smarts. When you don't understand where the money comes from, the chances are good that the person selling the investment doesn't either.

3) Delay
One of the easiest ways to avoid fraud is to delay. High-pressure sales tactics are at the heart of most frauds, as if this superb investment opportunity that is so solid that you'll be drinking daiquiris in a New York high-rise by years end will paradoxically vanish in moments. When someone is insistent that you don't have time to think about things, it's usually because they're afraid of what you'll figure out. People who are confident that they're selling a great investment should be happy to explain it in detail rather than imposing time deadlines and talking about you "missing the chance of a lifetime."

Scammers generally go for the easy and quick money to maximize their profits, consequently giving up fast in the face of delaying. If someone tells you they'll be sold out in a week, then wish him the best and let him go on to people who are less cautious with their money. (These fraudsters were the first to commit fraud, participate in insider trading and manipulate stock. Read more in The Pioneers Of Financial Fraud.)

A Truly Great Investment
The best investments are the ones you feel completely comfortable holding, whether land, stock, precious gems or anything else. Part of being comfortable is knowing the facts behind an investment and understanding the economic machinery that makes it tick. Taking your time and discovering all you can is the surest way to protect against fraud and build an investment portfolio you can truly believe in.

http://financialedge.investopedia.com/financial-edge/1009/Dont-Be-A-Victim-Of-Fraud.aspx?partner=ntu10