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Why AIM’s woeful regulatory environment makes it a hotbed of FRAUD.

By Nigel Somerville, the Deputy Sheriff of AIM | Sunday 10 July 2016

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

It seems that we at ShareProphets are not the only people concerned about the amount of fraud we see on the London markets – and, in particular, on AIM. We have seen the horror of the biggest stockmarket fraud for thirty years (Quindell, QPP – now Watchstone, WTC) unfold before our very eyes and yet as Tom Winnifrith doggedly banged on the doors of AIM Regulation and the FCA they did nothing and the frauds continued unchecked for far longer than they otherwise would.

Last year we saw the fraud at Globo (GBO) unravel at alarming speed as the company crashed and burned in a matter of a few days after we alone were brave enough to publish the expose – yet the writing was on the wall for a long time before that. Has anyone been hauled in to, ahem, “help” police with their enquiries?

We have the nonsense at Worthington (WRN) as reported just in the last few days – again, by Tom Winnifrith whereby the UKLA still seems to think that an RTO is on the cards by an insolvent and now delisted entity abroad.

And, of course, there are the China Frauds – a monstrous indictment of the entire regulatory set-up governing AIM. Remember, our Filthy Forty is already down to just 20 companies, of which two more are set to depart the Casino shortly, with another two suspended pending financial clarification and accounts respectively. We could be down to just 16 in September, by which time the next round of corporate reporting deadlines may well see further casualties. Fourteen of the filthy forty delistings last year were the result of a Nomad resignation. Fourteen!

We all know how useless the regulators at the FCA and AIM Regulation are. After all, AIM Regulation won’t even enforce its own rules (see HERE). But AIM Rules do not outlaw fraud, so that obviously doesn’t matter to the LSE. The FCA doesn’t care and is too far up its own secretive posterior to be concerned with actually getting to the truth and dealing with it.

Heck, let’s get Rob Terry for another bite of the cherry! Perhaps he should float a BVI-registered holding company with contracts in place in the form of a VIE over some dodgy technology mom-and-pop business in Fujian Province, China. There are plenty of Reporting Accounts who will happily sign off on a cash balance of, say, £40 million so that a flotation doesn’t actually need to raise any capital, beyond listing costs and a couple of years’ worth of tasty dividends. Anyway, who needs new capital when the business is highly profitable, growing, cash generative and drowning in cash? All this will, of course, draw in mug punters attracted by the too-good-to-be-true investment proposition.

It would still be a fraud, but since AIM Rules don’t forbid that, who cares? Heck – even if the auditor won’t put his name to annual accounts it seems not to matter. They numbers have been audited (and the auditor says there’s no evidence to go on) and that’s good enough.

Last week saw the publication of a report by the Fraud Advisory Panel. There are blistering criticisms of the current anti-fraud set-up. (in)Action Fraud drops far too many cases, Police forces don’t bother – because that is the job of (in)Action Fraud and despite pressure the Police doesn’t even have fraud as one of its Key Performance Indicators.

But here is some of what the report has to say about corporate offenders:

Piecemeal approaches to fraud fighting throw up anomalies and inconsistencies that help the criminals and harm the rest of us. One such area in economic crime is corporate offences of ‘failure to prevent’.

Hey, AIM Regulation and the FCA, are you reading this? Think about you inaction over Quindell for a moment.

….Without corporate failure-to-prevent offences prosecutors must prove the guilt of a person so senior that he or she can be said to embody ‘the company’. It is this requirement – the so-called ‘controlling mind’ problem – that makes it so much harder to prosecute corporate crime here than in the US.

…. It was disappointing to see something that was reported as a prime ministerial commitment to create corporate failure-to-prevent offences for fraud and money laundering turn out, on closer inspection, to be a commitment to consult rather than to act.

There are plenty of examples where a failure to prevent rule would have surely had a few people thinking twice before signing off on certain transactions, as they considered whether they might find themselves on the receiving end of a tap on the shoulder from the rozzers.

So how about it, AIM Regulation: you have regulatory oversight on the junior market. You require companies to retain the services of a Broker, yet you have no oversight over the Broker community. You have oversight of Nomads and companies, but if someone were to indulge in a Panama Pump (for example) or a share issue which contravened the subscription conditions it is surely the broker which would have the ability to prevent it from happening.

One might consider, for example, a case where a share issue exceeded the size of the actual placing by some margin, with shares issued at double the agreed price, fewer than the minimum number of shares stipulated as a condition of the Placing were issued and the investors only received the balance of their shares (half of them) over a year later. In the meantime the company becomes insolvent and the investors lose (near-enough) everything – before they even receive the full number of shares applied for, by which time (following a CVA and restructuring) the company has undergone a change of business, name and management. The company issues an RNS saying the number of shares issued (which is below the minimum stipulated in the placing letters) and which itself even turns out not to be true.

Who could prevent that? The Broker? The Directors? The Nomad? The firm controlling the client account from which the Placing funds were released? All of them?

Of course, AIM Rules could be adjusted to include a failure to prevent clause (surely that is what the Nomad is there for!) AIM Regulation could take on some responsibility for making sure Brokers play fair. There are plenty of ways to skin this particular cat: if government won’t do it, the LSE can – and should. To fail to implement this would, surely, constitute a “failure to prevent”.

Or should I say: “Versagen zu verhindern“?

Food for thought.

You can read the full report HERE

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