Dead Men Walking

The following was offered as an open letter to all Noble Group’s shareholders, creditors, bondholders, and employees. The author, Michael Dee, is the ex-CEO of Morgan Stanley South East Asia and a former managing director of Temasek. He has been an early critic of Noble Group’s accounting practices and management.


Noble should not be allowed to continue to operate until they come clean to all investors with a fully independent forensic accounting of its historical finances and management compensation. As someone who has been publicly focused on Noble Group’s finances for almost a decade I have seen nothing to dissuade me from the view that Noble has been running a massive multifaceted accounting fraud for a very long time. This fraud has ultimately cost thousands of employees their jobs, investors have lost billions and billions of their savings, and Singapore’s well deserved reputation for regulatory excellence is a shambles.

The restructuring plan is a sham which should be dead-on-arrival until the full truth of Noble’s alleged malfeasance and self dealing have been fully investigated and exposed. Goldilocks is performing a valuable public service by bringing legal action against Noble. One has to wonder where CIC, Templeton, Orbis and Prudential have been napping during all of this. And bondholders need to lawyer up because all the asset sales you have been reading about are like burning your furniture to heat your home, in short, you are getting screwed!

The SGX and MAS have proven themselves incapable and impotent while greed has blinded the vast array of financial intermediaries who have enabled this tragedy. While I remain open to being proven wrong, Richard Elman, his management, E&Y and every single board member have utterly disgraced themselves through the most appalling lack of transparency, financial controls and governance. This indeed is Asia’s Enron.

What is needed now is for the courts and the legal system to do the regulators job and step in and force the disclosure and transparency the regulators have been unwilling to demand. Until that is done no one should approve this restructuring plan.

The most diabolical and dubious of aspect of this so-called “plan” is the clause whereby shareholders and bondholders release the company, its management and its board from claims of fraud and malfeasance. Do no such thing, for these scoundrels must be held to account. I have been on top of this situation for years now and until it’s proven otherwise such an agreement is providing nothing less than a get out of jail free card.

I believe that when fully transparency is provided on Noble’s finances the financial world will be shocked at how much shareholder and bondholder funds have been paid out to this catastrophic management while the shares have fallen 99%, The perpetuals 90% or so, and the bonds 60-65%. The destruction of value has been truly epic and yet management believes they deserve a large share of a recapitalized New Noble? Never! The sheer audacity is astounding, and the silence from Noble’s leading shareholders, lenders and bondholders is deafening. Is the old saying true? “Sheep deserves to get slaughtered.” I like sheep so I say no. Rise up all you sheep and defend yourselves.

One must sit back and wonder what is going on when some of the most sophisticated of global investors lose so much money without a whimper.

Goldilocks, for whom I cannot have any pity is at least showing they are willing to stand up for their shareholder rights. Personally I would never give my funds to anyone who loses everything and does nothing about it, for years. There must be an explanation because this has been front page news for a full three plus years now. Surely CIC, Prudential, Orbis and Templeton have some explanation for their lack of action, or is the explanation worse than the funds lost?

More than seven years ago while analyzing a different commodity trader I did a comparative analysis with other trading houses including Noble. Noble Group stood out to me because of their negative cash flow while generating book profits. Strange right? It certainly was. Their mark-to-market positions were generating those profits and they were increasing dramatically, and increasingly out of touch with reality. In the early days though, Noble’s opaque financials meant one couldn’t readily ascertain what they were doing to make those paper profits, but it was plausible. I made a mental note to stay away from Noble and went back to the other company occupying my attention.

A few years later I saw an article about Noble Group regarding a report written by an entity called Iceberg Research. The pun was not lost on me. As I devoured the Iceberg report I resolved to pull my old files and update them. To say I was shocked would be an understatement. What I had seen early on as a small dark spot on the X-Ray had become stage four cancer. I was truly shocked at how Noble was bleeding cash and yet reporting massive mark-to-market profits. What once was somewhat plausible now was totally implausible in my view.

I was a Wharton graduate and had been an investment banker at the time for almost 35 years, 26 of them at Morgan Stanley where I was a Managing Director and Regional CEO. My career spanned hundreds of companies. At Wharton I had taken a brilliant course on accounting deception and fraud and how to spot it. It had served me very well in steering clear of many dicey situations. The basic lessons were, 1) if it’s too good to be true then it’s likely not true, 2) one can follow accounting rules and still be guilty of fraud and 3) in the long run there needs to be a correlation between the ability to produce positive cash flow and reported profits. My updated review showed no such correction and a massive amount of borrowing to fill the cash flow shortfalls.

In fact I was surprised that the banks were lending to Noble at all. My work with the rating agencies over the years and reading their Noble reports were vastly inconsistent with the credit I saw. I read every single equity research analyst report I could find. They were virtually all over-weight in their recommendations and not challenging their own recommendations. If that was due to the negligence of the analyst or perhaps directions from the top I don’t know, but I have well founded suspicions. Noble has been a real money maker for a number of financial institutions. I looked for credit research from the houses who were underwriting bonds, there was none. How could banks be selling bonds to Private Banking and institutional clients with no fixed income research? None of it made sense until I called some investors and banking contacts. What they said really shook me.

No need to worry they said, CIC, China’s Sovereign Wealth Fund owned about 15% of Noble’s equity. I checked and sure enough they did. Thus, investors and bankers told me, Noble is as good as gold, given Chinese backing. I had seen this movie before when Temasek, Singapore’s State owned investment company took a large stake in the unrated Olam Corporation. This allowed Olam to have almost unlimited access to the capital markets on the mistaken assumption, likely pushed by the underwriting banks that Temasek would guarantee Olam’s credit. I knew this was not true. I was a Senior Managing Director at Temasek at the time and knew Temasek never guaranteed a portfolio companies debt. This was an overwhelming investment principle as the objective was that portfolio companies should rightly operate on a stand alone basis. However, as often happens the banks were pushing this notion on Olam and investors were buying it with no idea what Olam’s credit rating was.

Interestingly Noble’s investment by CIC came only a few months after the Temasek/Olam investment. It struck me that Noble had watched and learned from Olam and set out to get their own SWF backing despite having an investment grade rating already. It proved to be shrewd move by Noble and a catastrophe for CIC. What was most unusual about the investment however was that one-third of the CIC investment (5% of the company) was secondary shares owned by the founder and Chairman Richard Elman. I still wonder why CIC would do that. The last thing a major investor should want is the founder and Executive Chairman directly reducing his exposure to the company. In any event it was a shrewd move by Elman and provided him with significant amounts of cash at a peak in the share price.

Because Noble’s financial statements were as transparent as mud it was almost impossible to spot the exact mechanism Noble was using to generate book profits from negative cash flow, except for one which proved prescient … Yancoal. Noble owned a small stake in Yancoal, a publicly traded company, which made identifying the market value of that stake simple multiplication. But wait, it was valued on Noble’s books at about 50 times the market value of the stake! In fact the accounting value of Noble’s small stake exceed the entire market value of Yancoal. There was no way to justify that, but Noble tried anyway saying Yancoal was illiquid and thus grossly undervalued.

I publicly offered $10,000 to be donated to the Singapore charity of Noble’s choice if they would release the full model that justified the Yancoal valuation. No response of course because it couldn’t be justified. The liquidity of a stock does not alter the inherent value of that stock by that magnitude. With my banker hat on I thought Noble should be bidding for all of Yancoal if they really believed it was so drastically undervalued, or someone else should. But no one of course did because Yancoal book valuation was phony.

Then Noble did something interesting, they wrote it down to something like 30 times taking a big earnings hit. This prompted me to wonder how they decided on the new mark-to-market value. What model did they use, what crazy ludicrous assumptions could generate these values, and most importantly, how did their auditor E&Y allow and sign off on this? I tried to recreate such a valuation model but it was nuts, the numbers didn’t work at all. It was then I learned that E&Y had been Noble’s auditor for 20-ish years! Now the red lights were flashing and the alarm bells were deafening.

No board audit committee should ever allow an audit firm to stay in place for 20 years, the conflicts of interest are simply too big to allow it. Then I looked up the Board’s audit committee and saw none other than Noble’s founder Richard Elman was member of the Audit Committee…. and member of the Compensation Committee and if that wasn’t enough he was also member of the Nominating Committee to the Board. He had total control and absolute power over a weak board unwilling to do their job as representatives of investors.

When Noble issued a four-page press release aimed personally at me I was amused because they did not answer a single concern I expressed. It was a master class on the Octopus Theory of press management, squirt ink and swim away. The stock continued to plunge as any credibility Noble had evaporated. I had been very precise, Laser focused and calculated in the issues I raised and yet Noble just poured more gasoline on the tire fire. At this point I absolutely concluded they were lying and were never going to tell the truth. They have not proven this assumption wrong yet. To me this shredded any hopes of saving the company. The management, board and auditors were unwilling to face reality.

Never had I seen such shoddy and conflicted governance in a public company in 30 years! I was breathless at the broader implications and in light of my concern about their accounts I saw the potential for an unstoppable ability to commit fraud. Yet the board had notable financial and corporate personalities, where were they? They should know better, this was not rocket science. It was also notable that E&Y never really stepped up to defend the accounts. They just took their fee, signed their opinion and crawled back under their rock.

Early on I had decided I would never take a position in a company I decided to write about or comment publicly about. I always demanded this be noted at the end of any articles I wrote. I would never put myself in the position of having a conflict of interest or challenging my integrity by having an economic position and a public voice. While I chose to be public with my views, I never had any economic interest whatsoever in Noble or their fate. I was true to my word.

I was also very protective of the capital markets on which I had built my career and was always a proponent of strong active regulation. While that may seem parochial and counterintuitive in today’s climate, I knew to my core the trust and integrity required in the financial system and the ease with which unscrupulous players could game markets and commit fraud. One only had to read about Enron, Worldcom and Madoff amongst many other scandals.

Yet what amazed me was that no one other than Iceberg seemed to see all these obvious problems, even after we both were writing and talking about them. All the circuit breakers in the financial system were flashing green while I saw what Iceberg saw but through a different lens. I wanted to know why the tsunami warnings were not blaring. Were we just smarter than everyone else? History has proven that we were, but it didn’t feel like that at the time.

I was wondering what I was missing, my confidence was shaken, how could other not see what was so glaringly obvious? The Iceberg report had generated worldwide press but the analysts and the rating agencies kept saying all was well and holding to their target prices, earnings estimates and ratings. I reached out to everyone who was writing and commenting on Noble but no one seemed to care, yet some hinted other internal forces and portions of the banks were at work. I spoke to the regulators to ask what they saw or were doing. They just didn’t pay attention. Then Noble said something else that caught my attention.

They spoke about liquidity and that their inventory was very liquid and could be sold. Noble discussed “sale and purchase” arrangements where they would sell their inventory to banks and purchase it back later. Look up ‘Repo 105 Lehman Brothers’ and you will see why I was shocked even more than ever. Noble seemed to be claiming that they sold physical inventory to the banks for cash where Noble in turn did not have to buy it back, but they always did buy it back. I ran Morgan Stanley’s Asian Financial services practice and had worked with banks my entire career. I did not believe any bank risk committee in the world would buy physical inventory without a solid agreement for it to be repurchased at a higher price, and I still believe that.

Perhaps there was a contract or a document that said as much but behind the scenes was there a handshake, a separate written agreement, an oral agreement, or a wink and a nod that those inventories would be repurchased? And would they be repurchased at a specific price and date so as to generate for the bank an attractive fixed return on the “purchase and sale”? I say yes.

Repos of course occur every day in the tens if not hundreds of billions of dollars. The catch though is that if Noble in any way had any form of agreement to repurchase that inventory then they were nothing more than Repos which are nothing more than debt and debt must be reported on the balance sheet. If Noble structurally was executing Repos and not showing it as debt then their balance sheet was a fraud. I believe it was an exercise in showing less debt than they really had.

My question was whether the banks were booking these the same way, because I doubted that regulators would look kindly on a bank speculating in commodities without an ironclad repurchase arrangement. This remains an essential unanswered question as to whether the auditors at E&Y and the Audit Committee were in essence hiding off balance sheet debt and thus committing balance sheet fraud in addition to income statement fraud through false mark-to-market transactions.

There was more that bothered me but these were the big three; (i) the negative free cash flow combined with mark-to-market accounting profits, (ii) the vastly inflated Yancoal valuation, and (iii) and the so-called “sale & purchase” arrangements. On top of all this Noble did not disclose management compensation on the shaky grounds of competitive reasons. Well, surely the disclosure of compensation for senior executives at thousands of other public firms don’t seem to be a problem for them, yet Noble’s senior management and board had wrapped itself in an invisibility cloak which remains in place to this day. It’s a lot easier for a teller to rob a bank if no one knows how much money is missing.

It was breathtaking to learn that the former CEO, Yusuf Alireza, was suing Richard Elman personally for about $50 million in promised compensation. Read that again … $50 MILLION! Was that ever disclosed? Nope! And why was Alireza suing Richard Elman? One can only suspect it is because he knows Noble doesn’t have the funds but Elman does.

What other outrageous deals like this exist at Noble? In all the vampire movies I saw as a kid the vampire killed the victim right away by drinking all their blood. Could it be that the Noble vampires had found a new model whereby they kept the victim alive while only drinking enough blood to keep them alive and waiting for rights issues, bond sales, bank lines, sale and purchase agreements and asset sales to regenerate the prodigious quantities of blood they were consuming in secret? We don’t know because the SGX allowed Noble to keep secret the perhaps voracious compensation appetites of Richard Elman and his senior team as evidenced by the Alireza lawsuit disclosures.

I can almost rationalize the terrible performance of the rating agencies who have been so slow to catch up to what was going on at Noble given their unquenchable thirst for fees so amply demonstrated by their rating of worthless mortgage securities AAA. The overweight research analysts and bankers seem to have been motivated by the massive fees Noble paid out to the bankers for access to their oxygen (ie capital). Noble desperately needed capital to fill the negative cash flow hole and paid massive fees and interest rates to get it, much to the joy of the bonkers bankers making money hand-over-fist. Noble always seemed to me to be completely desperate in their search for funds and when banks dropped one by one it seemed the fees and profits went up for those who remained, creating a kind of musical chairs, or perhaps more appropriately Russian Roulette.

The Board of course has Directors and Officers Insurance and thus virtually no liability. I continue to wonder if Elman hadn’t already limited his financial exposure in some way. E&Y in my book has no excuses, they have never stepped out front to resolve these accounting questions and after over 20 years as Noble’s auditors I wonder if a full forensic accounting would render them the fate of Arthur Andersen. The media kept writing about this story but did limited deep investigation which is on them. The story was there to be done but Noble hired the now disgraced firm of Bell Pottinger to spin Noble’s story of being wronged and to strong-arm, threaten and intimidate the press. I heard this from numerous reporters some of whom had to get articles cleared by legal to avoid the threat of lawsuits. One pines for the days of Katherine Graham.

However, it is the regulatory infrastructure in which I am the most disappointed. I lived in Singapore for eleven years, at one point the SGX was a client who sought my advice as to whether to reopen immediately after 911 (they showed great character in doing so), and when I left Singapore the first time the MAS senior management threw me a going away lunch to thank me for our working relationship. While I have the highest and deepest regard for the people and policies of the regulatory regime in Singapore at the SGX and MAS I do believe they miserably failed the investment community in the Noble case. They should be judged by the cataclysm known as Noble. I do hope at some point they stiffen up and demand a fully independent forensic accounting review of Noble in addition to undertaking some deep soul searching in the wake of this and other recent scandals. Singapore has a very well deserved reputation but no one is perfect and in this case they failed miserably the implication of which is loses of tens of billions of dollars.

Some say Richard Elman lost also and it was due to market conditions not accounting fraud. If so then he should welcome a fully independent forensic account review externally led and staffed. The PWC review was a complete sham with massive disclaimers and a very narrow mandate conducted by a firm which had a conflict with a director who had a nine year relationship with PWC. Noble used that report to claim their accounting was vindicated, yet PWC’s own words in the report prove that claim was not even remotely true.

It is time to pull open the curtain, blow away all the smoke and once and for determine whether Noble has been noble in all its actions or whether it has been fraudulent in its activities to the benefit of a corrupt management and board. If the former I will gladly acknowledge this, but if not, the harshest criminal and financial penalties should be applied to everyone involved.

Michael Dee

I have never had any financial exposure to Noble in any way. All views are mine alone.


  1. Simon Soh · · Reply

    Bad blood of avarice and greed MUST always be transfused….fast and decidedly.
    I agree with Dee.Too bad Temasek gained nothing to scoot from the loot but at least
    they should ask MofF to bring E&Y to task.


  2. elmanthemf · · Reply

    pls publish this in ST forum page


  3. Justice · · Reply

    Singapore’s reputation is at stake, as they are also home to the HQ of Trafigura who is also subject to serious allegations of fraud and misconduct, like the way they fraudulently enter and acquire weakened companies in the sector. This allows them to get access to an increasing stack of fresh blood which they can use to place bets-all to the expense of investors and minority shareholders in these companies. And Singapore does not want to investigate either.


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