Investors brace for financial fraud
2008 COLLAPSE: MAY EXPOSE CORPORATE SHENANIGANS
InvestSure sees a nine-fold increase in their product sales in March and April.
One way to gauge investor suspicions that financial managers are going to start cooking the books is to look at how many are insuring their portfolios against this possibility.
InvestSure, which offers insurance against allegations of management deception and misbehaviour, reported a ninefold increase in product sales in March and April, at the onset of the Covid-19 pandemic.
“This tells us that investors are nervous and they may be expecting a sharp uptick in corporate fraud,” says Shane Curran, CEO at InvestSure.
The company offers insurance against share price losses arising from allegations of corporate financial deception – whether these turn out to be true or not.
The product payout is triggered by allegations of fraud and a 10% drop in the share price.
Curran says economic downturns are typically accompanied by an increase in corporate fraud, and points to the 2008 collapse when Lehman Brothers went bankrupt, and Merrill Lynch, AIG, Freddie Mac, Fannie Mae, Wells Fargo and Citi Bank were bailed out by the US government after their share prices collapsed after the subprime mortgage scandal.
US banking group Bear Stearns was acquired by JPMorgan Chase for $10 a share (far below its pre-crisis high of $133.20 a share) and Merrill Lynch was bought by Bank of America, which was the recipient of a $15 billion bailout from the US government. Rating agencies S&P, Moody’s and Fitch were all fined for their part in the crisis.
The cracks are already starting to appear, mostly in China.
Smelling the coffee
In April this year, Nasdaq-listed Luckin Coffee, headquartered in China, admitted to fabricating $310 million in sales for the 2019 financial year.
This was after an investigation by US-based short seller Muddy Waters alleging irregularities in reported sales figures at the company which was touted as China’s answer to Starbucks.
Initially, Luckin denied the accusations, but later came clean, pinning the blame on its chief operating officer.
In a matter of days, Luckin’s market cap had shed $9 billion (or about 90% of its value), nearly equivalent to the entirety of Standard’s Bank’s current value.
Local isn’t always lekker
South African companies accused of cooking the books in recent times include Tongaat-Hulett, Steinhoff and EOH.
The last events to trigger a payout by InvestSure were in May 2019, when Tongaat warned it would have to restate its 2018 financial results, and in July 2019, when EOH announced it had found suspicious transactions worth R1.2 billion.
InvestSure also paid out on Aspen Pharmacare in August last year when it was accused of being party to anti-competitive agreements in the UK – though this was not related to financial misstatement of results.
It’s important to note that the mere allegation of corporate deception does not mean it’s true.
It often takes months or years to get to the bottom of these allegations, though InvestSure will pay out provided two conditions are met: the allegations of deception are made, and the share price drops 10% within two daysof the news being made public.
Curran says investors are loading up on insurance against possible fraud at virtually all the Top 100 shares, including the major banks.