A few weeks ago on New Years Eve, financial analyst and activist, David Webb, published a disturbing analysis of several shady transactions relating to Convoy, the largest financial advisory company in Hong Kong. The link is HERE.
Stock Market Manipulation
Convoy is publicly listed on the Hong Kong Stock Exchange (stock code: 1019). Webb claims that most of Convoy’s recently reported profit can be attributed to an investment in a single “massively inflated” stock (Finsoft Corp), whose price appears to have been manipulated by some unknown person(s):
Dissemination of Misleading Information
Webb also claims that Convoy published false and misleading information in its 2014 interim report, seemingly in an attempt to hide from investors the concentrated and questionable source of much of its profit.
In Hong Kong, it is a criminal offense to disseminate false or misleading information in order to “maintain, increase, reduce or stabilize the price” of a stock. The maximum punishment is a fine of $10 million HKD and 10 years imprisonment.
Webb has called on the SFC to conduct an investigation:
On January 9th, Webb updated his article and further claimed that Convoy failed to disclose Inside Information and a Disclosable Transaction:
Conspicuously Underpriced Warrants
In another section of the article, Webb pointed out that Convoy placed conspicuously underpriced warrants on two separate occasions (Feb 2011 and Feb 2013). The fact that the warrants were so underpriced suggests that the placement was not in the interest of public shareholders, but rather, in the interest of some unnamed third parties.
I myself had noticed the suspicious warrant placements more than a year and a half ago and subsequently filed a complaint with the SFC. It seemed to me that someone had attempted to manipulate Convoy’s stock price upwards immediately after both warrant placements. Upon the second warrant placement, Convoy’s stock price nearly doubled in price for no apparent reason.
I wrote a blog post about this, titled, “Was Convoy Involved in Illegal Market Manipulation after Issuing 80 Million Underpriced Warrants?” Below is a chart from that post:
In response to my complaint, SFC replied to me, thanking me for bringing the issue to their attention, but they said they could not tell me anything else, due to a secrecy provision in the SFO. However, they did say this:
It has been a year and a half since they said that, but I have seen no press release.
Convoy’s CEO Resigns
In his article, Webb noted that Rosetta Fong resigned as CEO, effective 1 Jan 2015. Here is the official announcement released by the company:
The announcement claimed, “Ms. Fong has confirmed that she has no disagreement with the Board and there are no any matters in respect of her resignation as the CEO that need to be brought to the attention of the holders of securities of the Company.”
The Parent Company Sells All Shares of the Publicly Listed Company
Webb also noted that on 21 Nov 2014, Convoy Financial Group Limited (the parent company) sold all of its shares of Convoy Financial Holdings Limited (the publicly listed company). My understanding of this transaction is that former CEO Rosetta Fong disposed of most if not all of her remaining ownership in the publicly listed company. Here is the shareholding structure in Sept 2014, before the parent company sold its shares:
OCI Bans ILAS Indemnity Commissions
Historically, nearly all of Convoy’s revenue has been derived from indemnified commissions which they received for flogging investment-linked assurance scams (ILAS):
Last July, OCI banned insurance companies from paying indemnity commissions to brokers that sell their ILAS products. As a result, all commissions must now be paid on an earned basis—not upfront. The new regulations went into effect on January 1st, the same day that Rosetta Fong resigned.
Now, Convoy can no longer deceptively extract 25 or 30 years worth of commissions upfront from clients, which means the company’s primary source of revenue has completely disappeared.
In a recent interview with the South China Morning Post, Glenn Turner, former chairman of the Independent Financial Advisers Association, estimated that ILAS sales will “probably drop by 80 to 90 per cent…as agents lose interest in pushing them.”
Falling Knife or Coiled Spring?
Before OCI banned indemnity commissions, I wrote a blog post raising the question of whether Convoy’s stock was a “Falling Knife or Coiled Spring?”
According to David Webb, the answer is neither. He says it’s a bubble, and he’s calling on the SFC to prick it. I am too.
Hong Kong Consumers Angry After Being Sold Complex Insurance Product ILAS (SCMP – May 17, 2013)
American Schoolteacher Takes on HK’s ILAS Establishment (International Adviser – July 12, 2013)
Reforms on insurance-linked investment products bring shake-up (SCMP – Aug. 11, 2014)