The Equities First Scandal - Its going to get worse, heads will roll - Tom Winnifrith BearCast Special

Comments

1. ---

   Paul Scott

   15 November 2014, 07:15

   Hi Tom,

   I agree with you that the EFH deals are appalling, and should be outlawed by the FCA.
   You are right that the companies concerned should give full disclosure, and hopefully this incident has put off any other Directors from getting involved in EFH “loans”.

   You deserve enormous praise for having highlighted this area, as it was very much your work on the subject that exposed this murky area. It is sad that you still receive so much abuse from misguided punters, who should actually be thanking you, not attacking you.

   In the case of Quindell, I am convinced that RT is using the EFH facility as a backdoor way of disposing of his stake. It’s also clear from the way his purchases of shares have gradually dried up, that he has no intention at all of using the entire loan proceeds to buy QPP shares. It’s the usual window-dressing nonsense from QPP that nobody serious believes any more.

   However, turning to OPAY, I disagree with you on the situation there, and am happy to have a civilised debate with you on the matter.

   OPAY is a highly profitable, successful, growing company. I’ve gone through all the RNSs, and as recently as 10 Sep 2014 OPAY stated that FY 2014 results will be ABOVE expectations. The profits are real, and I can’t see any accounting funnies. It’s generating real cashflow. The only issue that worries me is that 41.7% of turnover came from one key customer. That’s clearly a risk.

   Looking at the CEO of OPAY, Joel Leonoff’s transactions with EFH, he clearly believes that he has entered into a loan arrangement. It’s actually a sale & optional buyback arrangement, but EFH’s modus operandi is to obscure that fact. OPAY gave more details on 14 Nov 2014, but clearly they still think that it was a loan arrangement. They don’t seem to understand that EFH’s contract is cleverly worded to forbid them from “short selling” the collateral stock, but of course since that stock has had its ownership transferred to EFH, then they are free to sell it! Such a sale does not of course constitute a “short sell”, because they already own the stock! Smoke & mirrors I’m afraid, and it’s amazing that their documentation seems to have fooled company Directors & their advisers, when we can see right through it!

   We can argue until we’re blue in the face about whether OPAY has disclosed fully, correctly or not. But as a new shareholder, I’m not really bothered about that. In a few months’ time, the OPAY Dir deal will be water under the bridge in my view.

   The CEO taking a £4m loan, against 1.5m shares he owned in the company, is not really a big deal for a £520 mkt cap, highly profitable & cash generative business. It’s made him look like an idiot, but nothing worse than that, in this case, in my opinion. If he eats humble pie & apologises to the Instis, then I doubt any will sell up over this one issue. Worst case scenario? The CEO has to walk the plank. No other Directors were involved.

   Does the EFH deal that Mr Leonoff entered into affect the valuation of the company (OPAY)? Not at all in my opinion. Hence the 20% drop in price last week was an excellent buying opportunity, which I took advantage of. This stock has been on my watchlist for a while, it’s a good company, and a spike down in price over something that’s frankly a bit of a storm in a teacup in the overall scheme of things for OPAY, makes me a buyer, not a seller.

   Did the CEO do something stupid? Yes. Was he dishonest? Possibly, but we don’t know whether he was given advice or not, etc. Does it affect the value of the business? Not at all in my view.

   So I agree with you that the EFH deals need to be properly disclosed, and that the Directors concerned look very bad over this issue. BUT, it is also providing potentially attractive entry prices for the good companies that get caught up in this scandal. IQE is a good company for example, and their sp has held up OK over this issue. I’m not sure about the others though.

   QPP is very different, in that the EFH deal was clearly used in a far more cynical way, and is very much the last straw in a two-year long run of misleading actions & statements from the company, which I believe to be rotten to the core.

   Regards, Paul. (voluntary disclosure: Long OPAY, short QPP. No positions in other companies affected by the EFH issue)

2. ---

   hammer69

   15 November 2014, 13:05

   Tom,

   Believe your being generous in saying directors have 4 days to advise – the AIM Rules actually state “without delay”. Re such dealings the RNS must cover:

   Pursuant to rule 17, an AIM company must make notification of the following:
   (a) the identity of the director or significant shareholder concerned;
   (b) the date on which the disclosure was made to it;
   © the date on which the deal or relevant change to the holding was effected;
   (d) the price, amount and class of the AIM securities concerned;
   (e) the nature of the transaction;
   (f) the nature and extent of the director’s or significant shareholder’s interest in the
   transaction;
   (g) where a deal takes place when it is in any close period under rule 21, the date upon
   which any previous binding commitment was notified or the date upon which the
   Exchange granted permission to deal in order to mitigate severe personal hardship; and
   (h) where the notification concerns a related financial product, the detailed nature of the
   exposure.

   h) looks interesting in the EFH context, and note use of the word “detailed”. As we all know none of the 6 have so far been generous enough in the “detail” department, so more must follow.

   H69

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   MariSabStar

   16 November 2014, 07:32

   Some of these companies have disclosed transparently all these matters. The assumption that EFH does sell shares is wrong and biased. When the loan expires, EFH will have to hand back the shares (assuming nobody defaults as base case). These companies could be worth much more or go bust, but the point is that EFH will have to hedge both upside and downside risk. By only paying 75% of the principal translates in EFH actually having more upside that downside risks.

   You should think.

   Directors are effectively reducing their downside exposure but they are keeping the upside, at the cost of paying the interest on the loan. The base case is that nobody defaults, and directors simply didn’t want to sell the shares but needed cash. In the majority of these cases directors would have been easily able to sell on the market without raising any concern among its investors for whey less than a 25% discount to market prices. If you think your stock will go up, you will happily pay a small interest but remain invested.

   I don’t personally like these arrangements but you are making a lot of noise for nothing