Iceberg Research

Noble Group is Sinking. This Saga reveals the Complete Failure of the Regulators in Singapore.

August 3, 2017

“I just want to let you know that Noble has not changed; the character, the high degree of morality, the respect, the honesty and all the positive things that built Noble are still in place and are being reinforced on a daily basis.”

Richard Elman, Founder and former Chairman of Noble Group – 11 June 2015


Noble is sinking

Noble expects a massive loss of US$1.8b in its second quarter. The loss is mostly due to the impairment of the commodity contracts (around $1.2b). Our main argument against Noble was that this company fabricated profit by inflating the value of these contracts by billions. Noble had already impaired these contracts by $1.1b in its 2015 results. So the total is now $2.3b, and it’s not over. Noble will also record a $500m operating loss due to wrong speculative positions. In the past, Noble would have fabricated contracts fair values to hide these losses, and nobody would have known. This option is not available to Noble anymore.

When the new Chairman of Noble, Paul Brough, was an “independent director” of this company back in August 2015, he declared: “The (PWC) reports demonstrate clearly that the accusations of bad faith on Noble’s part in the preparation of its mark-to-market valuations have no basis”. So our “accusations” had “no basis” at that time. Mr Brough has apparently changed his mind. Last week, Noble said that “the Board has concluded, as part of the strategic review, that a more conservative balance sheet valuation should be implemented”.

Noble is sinking in a perfect storm. The company is walking toward bankruptcy and liquidation. Its cost of fund is prohibitive. Noble is losing the confidence of its counterparties and of its banks. Key traders are leaving. The stock price is now down 96% since our first report. The sale of the US energy business won’t solve the crisis. The previous sale of Agri, Energy Solutions only borrowed time.

Noble needs billions from a new investor to repair its balance sheet and reverse its huge operating cash outflow. This potential investor has to be rich enough to inject this amount of money, and dumb enough to do it without proper due diligence. Noble has been trying to find this miraculous investor for more than two years. Every candidate who had access to the books walked away. The true accounting situation is probably worse than what we estimated in our reports. Noble may have hidden more losses than we thought.

The lawsuit initiated by Noble against us is ongoing, although progressing at an extremely slow pace. Noble does not have money to pay the coupon of its perpetual bonds but apparently still has money and energy for this lawsuit. Noble’s lawyers should ask for a retainer at this stage. One of the objectives of this lawsuit was to silence us. We don’t write less when we are sued. We write more. We will write more for anybody who wants to sue us. The plaintiff is now dying.

If you lost your retirement money in this fiasco, you probably want to know who is responsible for this debacle and where your money is. Please don’t blame Noble’s management for this situation. It’s not their fault. It has never been their fault. No, it’s the “commodity environment”, which is very, very challenging. Unfortunately, many journalists will give credit to these justifications. Of course, if the environment is so tough for commodity traders, the question is why do Noble’s peers (e.g. Trafigura, Vitol, Mercuria, Gunvor…) record hundreds of millions of profit year after year? Nobody in the commodity industry thinks that Noble is affected by the “environment”, the “downturn in commodity markets” or “downturn in commodity trading”, whatever that means.


The Noble saga reveals the failure of the regulators in Singapore

Thousands of investors bought Noble’s securities because of the confidence they placed in the public information provided by its managers, its auditor, and in the regulatory framework of the Singapore stock exchange. They were the lamb to the slaughter. E&Y has helped Noble deceive investors. The numbers provided by the auditor were meaningless. They are still meaningless. Exactly like Enron, Noble is stuck with its contracts fair values. The company was not able not realise or sell them because many were worth nothing.

These investors won’t get their money back. Even if a last minute white knight puts billions on the table, they will be diluted to irrelevance. Noble’s market cap is still US$385m. This is surprising because in any scenario (liquidation, restructuring, massive investment), shareholders should expect to be wiped out.

The most common question we heard when we talk to hedge funds about the Noble saga is “What the hell does the regulator?”. In any decently regulated stock exchange, what Noble’s managers and E&Y did would be considered a major scandal. The accounting techniques used by Noble were similar to those used by Enron. In particular, both companies recorded fictitious future income that was being counted as profit. In the case of Enron, the SEC launched a formal investigation, filed civil fraud complaints against the auditor (Andersen), and charged Enron’s CEO with fraud. The CEO of Enron is still in prison. Importantly, the SEC prevented Enron from raising more funds and deceiving even more investors.

The response to the Noble accounting scandal, a repeat of Enron in Asia, could not be more different.

There are officially two regulators in Singapore. The first one, called the “front line” regulator is the SGX, which is the stock exchange operator. The second one is the Monetary authority of Singapore (“MAS”) which regulates the SGX.

What did the SGX do? The SGX issued a “trade with caution” notice. It also made a very weird comment on the PwC review of Noble’s fair values. The SGX “welcomes Noble Group’s initiative to increase transparency… This will address and help bring closure to questions raised by the market on this issue.” That was probably the most awkward comment that a regulator could have made, and it showed how much it wanted to sweep the Noble controversy under the carpet. The PwC review brought closure to nothing. It was a complete joke in fact. PwC never valued these contracts. Noble is impairing the very same contracts that had been “reviewed” by PwC.

Finally, the SGX regularly mentions it is closely monitoring the situation. The passengers of this Titanic will be relieved that the coast guards are closely monitoring the situation while they are swimming in freezing water.

As for the MAS, two days after we published our first report, it announced it would review “the statements in the Iceberg Research report” and will “take appropriate action” if there have been any breaches. Then , the market never heard of the MAS again. So we can assume the MAS found nothing wrong in our reports and found nothing wrong in Noble’s financial statements. Well… there was something a bit wrong with Noble’s financial statements, a few billions wrong. The MAS remained silent.

Of course, before we published our reports, the SGX and the MAS ignored that Noble, a then constituent of the Singapore index, was a major financial deception. But after we published, it was clear that this company had fabricated its financials. All our arguments have been confirmed one by one: Yancoal, Agri, the fair values, etc. The stock price kept plunging and the market lost confidence in Noble’s management.

What is particularly shocking is that the SGX and the MAS have allowed Noble to raise more money based on its fictitious balance sheet, and dupe even more investors. Noble raised $500m from equity holders in June 2016, and a $750m bond in March 2017. This company raised billions from banks. These investors will lose everything or almost everything. Every time, they funded what was clearly an accounting illusion. Every time, part of this money was used to pay the astronomic salaries of Noble’s senior managers. The former CEO, Yusuf Alireza, is suing the former Chairman, Richard Elman for $58m he claims he is owed, so that gives us an idea of how much these people were getting paid. Noble has seen a huge transfer of wealth from the shareholders who were deceived to the people who organised this deception. The SGX and the MAS did nothing to stop this scandal.

In the statement of claim of the lawsuit between Mr Alireza and Mr Elman, there is a very interesting sentence. Mr Alireza claims he approached Mr Elman in May 2016, and “raised his concerns over the future viability of the Noble Group”. This is the same man who explained to the public, his hand on his heart, that everything was fine with Noble’s balance sheet. This sentence is the admission that the former CEO failed to disclose material information about Noble to his stakeholders. The viability of a company is definitely material information. Indeed, Noble was sitting on fake assets that would never be realised, and it is now almost bankrupt. Noble knew it but the company raised $500m one month later.

This lawsuit was reported in the press and we know this sentence was brought to the attention of the SGX and of the MAS. Again, the regulators have not made any public comment.

It is well known that the SGX, a small stock exchange, struggles to attract IPOs in Asia. The Noble saga, that received a lot of attention, is not helping. Why would a foreign investor put money on the Singapore stock exchange when a company like Noble can misrepresent its financial condition for more than two years with impunity? Hedge funds to do not understand how the Noble debacle can last so long without regulatory reaction.

To be fair, the SGX can only fail because its functions are fundamentally contradictory. Nobody would do a much better job. On one hand, the SGX is a for profit company that runs the stock exchange and competes with other stock exchanges. On the other hand, it is supposed to regulate the listed companies whose trading contributes to its profit every day. It is a classic conflict of interest. A for profit company defends its interests. A regulator defends the interests of investors. Since the beginning of the saga, the SGX has failed to put the interests of investors above its interests. The SGX’s move to transfer its regulatory functions to a subsidiary company in 2016 has not changed anything as we can see with Noble.

There will be other Nobles in Singapore. It is simply too easy to raise money there based on financial misrepresentations, and do it with impunity. This fiasco reveals the spectacular failure of the regulatory environment of the Singapore stock exchange.


    1. Not Regulator for SGX but more like Funeral undertaker in the role of burying the collapsed and dead…

  1. 4 yrs on, the public still waiting for an answer and accountability from the overseeing Authorities.

  2. They have messed up with valuations of their derivatives. PwC has messed up when they have signed Noble Financial Statements.

    “Sale of Global Oil Liquids Sales process commenced with shortlist of bidders–bids expected in Q3 2017”-Strategic Review Update–26 July 2017

    The Energy Segment traded at a loss of $226 million during 1H-2017 (excluding financing costs and salaries).

    That’s more than -$1.25 million per business day…
    Monday to Friday but the business is “run smoothly”. Of course no… but in “the world of Noble” shortlisters will rush on a “bargain” 🙂

    90% of Noble Revenues is comprised of the energy Segment. “wow”.
    The firm’s position is irreparably compromised, their leverage futures-physical trading model need too much overheads and patient capital to break-even.

  3. What happened with noble is also seen in the almost complete devastation of the oil and gas sector where the regulators were asleep at the wheel when thesr companies went on a debt binge issuing bonds and other debt instruments. Had they acted sooner to rein in their borrowings a lot of equity investors may not have seen their hard earned saving wiped out. Our regulators should all be fired.

  4. Just before Swiber filed for bankruptcy a year ago, I informed SGX and ACRA of possible overstatement in the balance sheets in one of the offshore marine company. Never heard back from SGX other than an acknowledgement. ACRA told me to file a police report with CAD. Seriously? Regulators in Singapore need to do what they are paid to do instead of passing the buck around. If nothing changes, I can assure everyone that in 10 years time KL, Jakarta, and Bangkok bourses will each have a larger market cap than SGX. SGX will cease to be the leading bourse even in the ASEAN region. Companies and investors have already voted with their feet. Just ask Ron Sim.

  5. Just like Sg does not have a Central Bank Governor; it does not have a Securities Commissioner.

    Its the usual case of the same bunch of guys, playing judge, jury & executioner.

  6. So SGX is really a joke? Would it be fair to say to it is becoming a third world exchange under the new leadership or what is happening? The concerning fact is that they play the role of a regulator leh.

    Since when was the last good news about SGX out?So far IT issues, leadership changes and childish behavior is all we Singaporeans hear. Time for leadership shuffle?

    1. Just take a look at SGX listing of quoted companies on the exchange. Every single page seems to have at least 4 or 5 companies that are suspended. And these are not temporary suspensions pending announcements. These are suspension due to poor financial parametrics and companies in supernova mode soon becoming dying dark stars. Can’t understand why so many companies on the exchange have weak financial performance. A coincidence of weak management figures happening to meet in the same lift? Or could it more likely be the very lenient requirements to qualify for listing?

  7. You are spot on about SGX’s incapability, there are just too many dead wood in there drawing high salaries. Something got to change to restore investor’s confidence otherwise the only way for SG is downhill. I hope MAS will step in to clean up this mess.

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