Singapore's penny stock mystery increases pressure on exchange

Reuters

By Rachel Armstrong and Anshuman Daga

SINGAPORE Oct 28 (Reuters) - Singapore Exchange Ltd 's role as the city-state's equity market regulator iscoming under increasing scrutiny in the fall-out from a pennystock crash earlier this month.

The sudden implosion of Blumont Group Ltd,LionGold Corp, and Asiasons Capital Ltd -after huge run-ups in their share price earlier in the year hadturned them briefly into billion dollar companies - left many inthe market mystified and raised question marks over whether theexchange missed red flags and was too slow to act.

The Monetary Authority of Singapore (MAS) has now steppedinto the fray and confirmed on Thursday that a review into whatwent on was taking place.

Experts say one thing it should look at is whether thebourse is able to manage conflicts of interest between its roleas both market operator and watchdog.

"The exchange has to focus on profit for shareholders,meaning they have less time for regulation," said Jimmy Ho,president of the Society of Remisiers who works for brokerageUOB Kay Hian.

Singapore is sensitive to anything that could tarnish itsreputation for strong corporate governance, effective regulationand low levels of crime and corruption, which have helped itdevelop into one of Asia's major financial centres.

The saga also poses a threat to the exchange's long-runningpush to increase revenue by boosting its trading volumes amongretail investors.

"It will basically deter people from investing in this assetclass (the penny stocks) for now at least," said Kevin Scully,executive chairman and founder of equity research firm NRACapital.

"You can compare it to the S-chips where we had a spate offrauds," said Scully referring to the string of blow-ups atlocally-listed Chinese stocks in 2008 and 2011, that deterredmany retail investors from the market.

Blumont, Asiasons and LionGold have all denied anywrongdoing and there are no allegations of fraud in their cases.

PENNY STOCKS

The most actively traded stocks are often the penny stockswhich attract little institutional interest. At the same time,SGX has not seen many major big-ticket listings for a number ofyears and the growth of Singapore's equity market has lagged thegrowth of the city-state as a major wealth management, foreignexchange and commodities trading hub.

That has led to concerns that the exchange could facepressure to lower standards in order to boost its bottom line.

MAS said last week that it and SGX would look into widerissues that have surfaced regarding "market structure andpractices". The central bank did not elaborate on what thatwould involve, but said it would issue a public consultation ifit decided to make any changes.

Many countries including Hong Kong, Australia and the UnitedStates have an independent securities regulator overseeing thestock market, a separation aimed at ensuring potential lostrevenue is not a consideration when enforcing rules.

In Singapore, SGX performs the front-line regulatory roleand the bourse in turn is regulated by MAS. The exchange has aspecial committee to deal with conflicts of interest its dualrole can pose.

SGX said earlier this year that it believed the currentsystem was best for the local market and its proximity to themarket helped it understand its users' compliance issues.

It has responded to some of the criticism facing it, sayingthat it deployed a series of tools to restore stability to themarket when the stocks began to fall and that it uses separatemeasures to investigate possible wrongdoing.

"SGX devotes significant resources into detecting andinvestigating market misconduct and works closely with statutoryauthorities against offenders of the law," the exchange said ina statement.

RED FLAGS

Shares in natural resources investment company Blumont,alternative investment firm Asiasons and gold miner LionGoldraced higher earlier this year, before crashing in a frenzied 40minutes of trading on Friday Oct. 4. The shares were suspended,but tumbled further when trade resumed the next Monday.

The three stocks lost more than S$8 billion ($6.47billion)in combined market value in less than two days of trade.Before that, Blumont's share price had risen more than 1,000percent since the start of the year.

Some brokers in Singapore had put trading restrictions onthe stocks during September due to concerns that their value wasno longer matched by the fundamentals.

SGX did not put in place trading curbs until after thestocks started to fall, causing complaints that it acted toolate.

The exchange was not oblivious to the companies' pricerises - it queried Asiasons and Blumont twice and LionGold oncein the weeks leading up to the crash, moves that SGX says shouldact as red flags to investors.

Some corporate governance experts say they are concerned,though, that the need for such queries is on the rise, and thereneeds to be closer examination of what companies are doing.

"I have noticed that unexplained price run-ups seem to havebecome more common place, and queries sometimes result in adisclosure that a deal is being discussed but not certain," saidMak Yuen Teen, associate professor at the National University ofSingapore (NUS) Business School, without commenting on thestocks involved.

"This raises the issue of possible insider trading bysomeone with knowledge about the transaction - for example abanker or lawyers, and their tippees".

Blumont and Asiasons both responded to at least one of thequeries put to them that they were in discussions on potentialdeal opportunities, though nothing was confirmed. Both thecompanies have denied any wrong-doing.

LionGold said it trusted MAS and SGX to investigate thematter.

"As far as we understand from press articles on the matter,MAS is investigating the trading activities surroundingLionGold's shares and not on the company's operations," it saidin a statement on Friday.

The exchange and MAS said they were unable to publiclyaddress whether market manipulation could have been behind thestocks' wild price swings, as it could hinder anyinvestigations.

That is not removing pressure for them to be more open aboutthe way such cases are investigated in general.

"I personally would like to see more transparency inrelation to enforcement, including capacity, resources, numberof queries, number of cases investigated, number of casesdropped, number in progress and so on," said Mak at NUS BusinessSchool. "At the moment, everything is too much of a black box." ($1 = 1.2369 Singapore dollars) (Additional reporting by Eveline Danubrata in Singapore andClare Baldwin in Hong Kong; Editing by Alex Richardson)

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