Monday, July 5, 2010
WallStWTF Non-Bronzed No-Prize Award goes to....
So this is my first post after a month of silence in honor of the rule of law in Dubai.
Marvel Comics is one of the most innovative media companies in the world. I say this not because of the wonderful cast of characters they have come up with over the years though they are indeed wonderful. I don’t say it because of the fact that they have emerged from bankruptcy with a vengeance, finally marrying that great set of characters to the vastly more profitable medium of film though that too was a great innovation. No, I think Marvel deserves an innovation award for it’s invention of the “No-Prize.”
Occasionally there would be “continuity errors” in Marvel Comic books. A continuity error is when there is an inconsistency between several frames such as a character having a blue shirt in one frame and a green one in the next without having changed the shirt. Many comic book readers are a bit pedantic and would write in to Marvel to point out these errors. The staff at Marvel found this kind of annoying so they invented a fictional prize which they would award to people who found these inconsistencies. They called it the “No-Prize” as kind of a joke on the recipients in order to get them to lighten up. It’s just a comic book after all...
Though the “no-prize” was a non-monetary award the fact that you could be recognized for discovering errors created a deluge of mail from nit-picking readers and spurred on the creation of the “Non-Bronzed No-Prize.” The Non-bronzed No-Prize was awarded to readers who discovered a continuity error but also explained why the continuity error was not in fact a continuity error at all but could be explained away by some massively tortuous logic. For example how a freak burst of gamma radiation temporarily changing the color of a green shirt to blue for a single frame of a comic book. Or how a wrinkle in the space time continuum enabled a character who had been killed in episode 17 could be alive in episode 19 and dead again in 20 without having actually been killed a second time, that is to say it used pseudo-logic to explain away nonsense.
Recently I have discovered a fairly massive continuity error in Dubai and so I have decided to award myself a “No-Prize.” In addition to that I have decided to award a “Non-Bronzed No-Prize” as well to a respected Dubai publication! But first, let’s have a look at the continuity error that has to be explained.
Here is a schematic of the plot outline:
Chapter 1.) An enterprising man starts a jewellery company. He builds his business up substantially and passes the prosperous firm on to his sons.
Chapter 2.) His sons are aggressive. They expand the business, and engage in new financing schemes related to gold, a key input in the business. They occasionally depart from the main business though rarely successfully. Their commercial success brings social prominence in Dubai. They are active in the community and gain the confidence and favour of the Ruler.
Chapter 3.) Constrained by financing their activities with retained earnings and bank loans the brothers decide to sell shares to the public. They decide to list on the DIFX because it will enable them to curry favour with the ruler and, importantly to have their share offering priced not by ESCA, which will apply a steep discount, but by an auction process called book building which will produce a higher price. The company will remain a Dubai entity and so must remain 51% owned by Emiratis. The brothers will not lose control. So they raise cash, make the ruler happy, and keep control. Win, win, win.
Chapter 4.) The brothers decide that their company is worth a billion dollars. This is where things start to go wrong. At that price there are not enough investors willing to bite. The demand is so low that the brothers won’t be able to place enough shares to qualify for an offering on the exchange.
Unwilling to contemplate the idea of a lower valuation or the prospect of forgoing access to external cash the Brothers rig the auction. They take company funds and invest them in a Dubai Holding VC fund called Dubai Ventures. Dubai Ventures then submits a bid with the companies own money for shares in the IPO creating the illusion that there is enough demand at the higher price to justify it and to qualify for the offering.
This goes on undetected or at least undisclosed by the regulator and the underwriter. IPO goes ahead, raising $165 million in cash for the company from international investors.
Chapter 5.) In short order the brothers transfer to themselves the money that had been invested in the company. They do this via cash transfers, the purchase of assets in the name of the brothers with company funds and the requisition of two tons of gold from the company by the brothers. The Board of Directors, which had been hand-picked by the brothers took no action to prevent this and in some cases actually approved it.
Chapter 6.) Around the time of the Dubai World crisis, the transfers to the brothers were revealed and described as “unauthorized transactions.” One of the brothers is forced to resign as CEO though another brother takes over as MD. The disappearance of $165 million into illiquid assets not actually owned by the company combined with weakening business conditions force the company into negotiations with creditors. The board of directors appoints some accountants to conduct an investigation into the “unauthorized transactions.” The authorities declare that they are “monitoring the situation.” The markets laugh and destroy the stock.
Chapter 7.) Before the audit is complete or the authorities take action the brothers negotiate a deal among themselves, one brother representing the brothers, another representing the company. They agree to repay the money within 18 months or they will forfeit their shares which are now worth only a fraction of the amounts they have stolen. Neither the shareholders nor the authorities are consulted.
Chapter 8.) The Avenging Angel of the DFSA, Steve Glynn, issues an “enforceable undertaking.” In it he outlines the means by which the Abdullah Brothers looted the company with the acquiescence of the board. He dissolves the board and bars the Abdullah Brothers from the DIFC. He ratifies the repayment agreement the Abdullah brothers have with the company and gives it the force of law, indeed he demands that the Abdullah Brothers detail their assets and grant the DFSA a lien in event of default. Finally he fines the Abdullah Brothers $3 million though suspends $2.7 million of it lest they be put into default immediately before they can do anything to rescue the long suffering shareholders.
Chapter 9.) The Abdullah Brothers fail to make their first payment of $55 million. Shareholders and the DFSA are shocked to discover that failure to pay $55 million does not constitute an event of default. It’s not possible to know precisely why because Steve Glynn relied on the agreement the brothers negotiated among themselves and is “confidential.” That is it is a secret both to the shareholders who are nominally a party to it and also to the regulators who are responsible for enforcing it. If missing a payment for $55 million does not constitute an event of default it must be a very interesting document indeed one wonders what does constitute and event of default.
Chapter 10.) The Abdullah Brothers are appointed as Senior Advisors to the company.
So this is where I award myself a “No-Prize.”
This is a country that identified a team of Mossad assassins and within 24 hours had their passport photos all over the world. Surely these sleuths should be donning ski masks and jack boots and be battering in the doors of the Abdullah Brothers, shaking them out of bed and searching their villas for the missing tons of gold. Surely there should be a massive auction in which all their assets are blown out including their four yachts and their substantial real estate portfolio. If there are a lot of encumberances so be it. Put the Brothers into insolvency and pay the creditors off as best you can, give the shareholders whatever is left and the strip the brothers of the remainder of their equity.
This is what should be happening. Ski masks and jackboots aside this is precisely what the laws of the DIFC and the enforceable undertaking of the DFSA would indicate are required by law. Instead the brothers are not only free men but back involved in the management of their own company. In logical terms this makes absolutely no sense and so therefore I’m calling it a “continuity error.”
This leads me to the “Non-Bronzed No-Prize.” The explanation for why this continuity error is in fact not a continuity error at all goes to Damas itself for its press release and to Arabian Business for printing it.
“At a time when Damas is going through a period of transition and pursuing a renewed strategy for its sustainable growth, the involvement of the Abdullah brothers in an advisory capacity provides us significant depth of knowledge and insight. In their roles, even though the involvement is strictly non executive, the company will benefit from their valuable advice on the unique aspects of the jewellery trade."
This is great stuff. Damas is going through a “period of transition.” Periods like this have a name: insolvency. They are “pursuing a renewed strategy” for “sustainable growth” for which the Abdullah Brothers “provide significant depth of knowledge and insight.” Presumably this new strategy is to destroy the bondholders and trade creditors. Who better to advise them on this strategy than the very men who destroyed the shareholders? I have no doubt anyone able to steal two metric tons of gold will be able to provide “valuable advice on unique aspects of the jewellery trade” chiefly the portability of the collateral involved in that trade. Perhaps this should be renamed the “Non-Gold No-Prize.”
But I don’t know that I can stop there. The emerging market mutual funds who bought these shares and are not suing Damas and the underwriters into oblivion also deserve a “non-gold no-prize” though it is obvious why they are acquiescing in the continuity error. They make their money by convincing investors that they are knowledgeable about emerging markets. For them to sue to recover losses they took from having been defrauded would undermine their chief marketing tool namely the belief of their investors in their emerging market savvy. So they stand by and get robbed by the Abdullah brothers and say nothing in order not to look like the fools they are.
The deeper question is whether the DFSA is going to also garner a “Non-Gold No-Prize.” Will they be taken in by the idea that the new appointments of the Abdullah Brothers do not violate the terms of the enforceable undertaking. Do they think that the valuable advice on the unique aspects of the jewellery trade that the Abdullah brothers can provide are worth the DFSA being made completely ridiculous by the greatest thieves in the short history of the DFSA?
Deeper still is the question where the readers of this blog stand. Are comfortable that though the Abdullah brothers may have shafted thier shareholders such a thing could never happen at Emaar or Arabtec or Dana Gas or Agility or whatever company you happen to be buying shares in today....
Not to worry, I've got a whole warehouse full of Non-Bronze No-Prizes ready for the next set of unwary MENA investors....