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By Tom Winnifrith, The Sheriff of AIM | Monday 11 August 2014
The way that the AIM Casino is set up is based on one great enormous conflict of interest and that is why companies can and do tell lies to investors – that is the Nomad (Nominated Advisor) system.
A company must, under AIM rules, have a Nomad. If its Nomad quits the shares are suspended. If no replacement Nomad is found within a month the stock is booted off the Cesspit for good. The Nomad must verify every statement that is put out by a company and ensure that it complies with the rules. As such it is the Nomad who is at the front line of regulation and it works FOR the LSE.
That is the theory but in practice it is not the LSE who pays the fees it is PLCs who must pay £20,000 to £50,000 a year. And the reality is that there are too many Nomads in London and that running a Nomad has high fixed costs. One of the main costs is that you must employ a certain number of Qualified Execs (i.e. grotesquely overpaid corporate financiers). You need a minimum of 4 QEs and then for every x new clients you take on you must hire another QE.
Since there is a limited supply of those who qualify as QE’s they can charge a fortune. And do. The net result is that even in good times (i.e. lots of lucrative IPOs) very few Nomads are making much money. In bad times the staff still need to get paid but the windfall fees disappear and no-one makes any money.
It is the Nomads serving the bottom end of the Cesspit who are the most marginal operations. And it is the same Nomads who have the dodgiest clients – ones that really are not investment grade material and are prone to lying, cheating and fraud.
And so such Nomads face a real dilemma. If they report a client to AIM regulation for lying they will either see that company booted of AIM or it may just be censured. Or as it happens as this is the casino the odds are that nothing will happen. But if the company remains on AIM it will know that the Nomad has dobbed it in and will seek to move to a new Nomad. The net result is that the Nomad has just lost a retainer.
If you are an employer asked for a reference for a crap employee you are certifiable if you risk legal action by saying that the person was useless. And so you just say “so and so worked for us between x& y as a whatever.” Ad so the bad penny moves on. If an AIM company switches Nomad the new Nomad will get an equally bland reference. That is just how the system works. Bad AIM stocks just work through the Nomads and there are always Nomads desperate enough for fees who will take a bad stock on.
And of course it is made worse in that company’s also need a retained broker under AIM rules. And most Nomads are also brokers. Brokers earn 5% commission on all sums raised. That is where the real cash is made. So if a Nomad kicks up a fuss about some lie or other the next £1 million placing is pulled. That would have earned the broker £50,000 for a couple of days work. Easy money.
This is the flaw at the heart of AIM: those who are meant to regulate are conflicted against regulating. The economics of the world in which they operate almost prevent them from asking too many questions. Meanwhile the FCA/AIM team do not have the resource to investigate in a forensic manner.
That is not to excuse the chocolate teapots of the regulation world. They are approached often enough by folks such as myself with cast iron evidence of PLC lying and fraud. I know they also get about thirty requests a day from Quindell shareholders to investigate me but I also know where those are filed. The point is that there are cases that could be prosecuted. And were they to be done so in a very public manner that would serve to make CEOs who are tempted to lie think twice.
The fact is that right now, with the pretence that Nomads regulate known to be a pretence and with CEOs almost never publicly sanctioned and fired others see that lying/fraud is an activity with almost now downside risk.
The Nomad system has failed. Is there an answer? Yes.
Firstly a company should not have to have a retained Nomad just a broker.
However it should need an FCA authorised corporate advisor to sign off on every release which they should charge for on a release by release basis. That would discourage companies from issuing non-news just to ramp the shares as it would have a real cost. If an advisor refuses to sign off on a release as it is unverifiable it should be forced to report that to the AIM team and failure to do so should see that advisor and the employees concerned losing their license.
Finally the FCA and AIM team should publically censure any CEO found to have lied/committed fraud on however small a scale and that person should be barred from sitting on the board of an AIM Casino company for life.
I suggest to you that after the first few prosecutions even perennial liars would stop lying for they would realise the enormity of the downside risk they face.
Will any of this happen? No. As such AIM investors should be aware that they are playing a game in a casino where there is now no regulation at all that protects them.
Tom Winnifrith has just published his new e-book, The 49 Golden Rules of Making Money from oil, gas and mining shares. You can buy it on Amazon for £6.25 or you can order a FREE copy HERE
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