SINGAPORE (Aug 20): In June 2013, Arnaud Vagner was fired from his position as senior credit analyst at commodity trader Noble Group. He says it was not till after he left, however, that he began to take a closer look at Noble’s financials. That was when he began to find misrepresentations in the company’s accounts.

On the phone with The Edge Singapore, from an undisclosed location in Europe, Vagner says it took him “months” to understand what was going on. He says he also checked his assumptions and calculations multiple times, and against available industry information. His investigations led him to start a website under the name Iceberg Research, where he began a crusade to expose Noble’s financial irregularities.

Since Feb 15, 2015, when Iceberg went public, Noble has lost nearly 99% of its market value. Now, the company is undertaking a restructuring with the hope of recovering some value for those who hold its shares, perpetuals and bonds. But Iceberg is suggesting that those same securities holders band together to sue the parties responsible for the loss of value instead.

In a post on Aug 14, Iceberg says it has “talked to experienced law firms” that are “ready to represent the interests of these investors”, as well as litigation funders that are interested in financing these lawsuits. “The new Noble is absolutely not financially viable. It has almost the same financing costs,” the post says. Iceberg adds that it has “recently received internal documents” that confirm its assumptions about the misleading aspects of Noble’s accounting.

Iceberg’s call comes at a crucial time for Noble. On Aug 27, a special general meeting will be convened to review the proposed restructuring of Noble. Broadly, the restructuring involves the creation of New Noble, which will be 70%-owned by Noble’s creditors, 20% by existing shareholders and 10% by Noble’s management. The new company will acquire certain assets from Noble and take over Noble’s listing on the Singapore Exchange (SGX).

Noble’s management says New Noble will be sustainable because it has managed to secure new financing and will have reduced debt as well as “an experienced and committed management team”. Iceberg counters that New Noble is just “another trick”, as “it will be the same company, with the same failed management”, and that the only way for securities holders to recover their money is to sue those behind it. “It is the right thing to do in terms of justice, but it is also the only viable strategy to get their money back,” the website says.

The man behind Iceberg

The Singapore market has seen its fair share of mudslinging over corporate governance lapses, aggressive accounting and purported fraud. But few cases have attracted as much international attention as that of Noble, formerly a Straits Times Index constituent with a market capitalisation that at one time exceeded U$13 billion.

Noble responded to Iceberg’s criticism by trying to discredit it. In March 2015, alongside a point-by-point rebuttal to Iceberg’s assertions, Noble painted an unflattering picture of Vagner as a poor performer at work and called him “disruptive”. Vagner deems this characterisation as defamatory.

In an attempt to uncover more about Vagner, The Wall Street Journal had in 2015 turned up a Noble company branding video posted on YouTube in February 2013 — months before Vagner’s termination. It features several employees, all named, talking about Noble’s culture, values and future. Vagner appears in this video, dressed in a suit and tie, saying that Noble offers “a new challenge every day”.

The video was supposed to have been an internal one, Vagner says, made for a corporate event. Now, he has some sharp words about the company. His job was to analyse counterparty risk at Noble’s shipping department. He says he had some concerns about the way resources were being allocated to manage risks. Vagner also believes his performance review was coloured by his disagreements with the head of credit risk, and he says he was in fact told he was doing a good job. He is reserving his right to take action on statements by Noble’s management that may have affected his reputation.

Vagner attended HEC Paris, a business school in France, and has more than 15 years’ experience as a credit and financial analyst at various banks. He does not consider himself a whistleblower because he worked, in the beginning at least, with documents that were available to the public. Figuring out the fair values of Noble’s commodity contracts was the most difficult part of the job, he says. It was only after he began publishing his findings online that he was approached by former Noble employees with additional information.

Later, Michael Dee, former CEO of Morgan Stanley in Southeast Asia and a former senior managing director at Temasek Holdings, who has also been critical of Noble, connected Vagner with the authorities at SGX and the Monetary Authority of Singapore (MAS). Vagner says he provided the authorities with information — he provided The Edge Singapore with a copy of a 2015 email from Iceberg to SGX — but is disappointed with the response.

“Although I was in touch with SGX, its head regulator claimed he did not know who Iceberg is,” Vagner says, referring to a 2017 article in The Straits Times in which SGX RegCo CEO Tan Boon Gin was quoted as saying: “Iceberg makes all these allegations against Noble, but we don’t really know who Iceberg is.” Vagner says he was asked several questions “on Yancoal, fair values, et cetera”, but has not heard from SGX or MAS in a long time.

Value destruction

Vagner has endured much since starting Iceberg. In addition to an ongoing lawsuit with Noble, which is costing him money, he says he has “received physical threats, was followed in the street and was constantly under hacking and phishing attacks”.

It may be some consolation that his concerns about Noble now appear to have been validated. For instance, Iceberg had highlighted in its first report that Noble’s 13% stake in ASX-listed Yancoal Australia was valued at US$678 million in its annual report for FY2013 ended December. But the market value of the stake, based on Yancoal’s stock price, was just US$88.7 million. Yancoal was at the time loss-making. By FY2016, the carrying value of Yancoal had been reduced to just US$180 million.

In its second report, Iceberg highlighted that Noble was booking significant gains from the fair values of unrealised contracts. In FY2013, for example, Noble had booked US$3.1 billion in net fair value gains on commodity contracts and derivative financial instruments. Iceberg questioned the size of these gains. Noble’s response was that the fair values were based on robust internal processes.

According to Noble’s FY2013 annual report, commodity contracts include forward purchase and sale contracts, options, and offtake and marketing agreements. The majority of Noble’s contracts form part of its trading activities. Changes in fair value are recognised in the income statement, in the cost of sales and services in the period of change. When sales contracts have been settled, the associated revenue is recorded in the books as revenue.

In FY2013, Noble recorded US$97.9 billion in revenue and US$96.5 billion in cost of sales and services. That gave it an operating income of US$1.4 billion. Earnings for the year came to US$243.5 million. In FY2017, Noble reported revenue of US$6.4 billion ($8.8 billion) and cost of sales and services of US$8.9 billion. Its operating loss was US$2.4 billion and net losses came to US$4.9 billion. In its annual report, Noble attributes the poor performance partially to fair value changes. That year, it booked US$352.9 million in net fair value gains on commodity contracts and derivative financial instruments.

Responding to queries from The Edge Singapore, an SGX spokesperson says: “We have been putting the onus on Noble’s auditors to justify its audit, and their accounting practices were reviewed by a Singapore-registered auditor. Most recently, we have required Noble to appoint a Singapore-registered auditor to jointly audit the accounts for FY2018 and to appoint a new Singapore-registered auditor for FY2019.  If there is any failing by any auditor, we will refer the auditor to the appropriate accounting regulatory bodies.”

At the time, Noble’s financials were being audited by EY. EY was unable to assist The Edge Singapore with its query.

A spokesperson from the Accounting and Corporate Regulatory Authority says: “ACRA inspects audits carried out by public accountants in Singapore that are registered with ACRA. The audits of Noble’s financial statements (the latest being for FY2017) were done by Ernst and Young (Hong Kong) and therefore do not come under the purview of ACRA.”

Responding to a request for comments, a MAS spokesperson says: “SGX has frontline regulator responsibilities to maintain fair, orderly and transparent markets and will follow up with listed companies to investigate any allegations of irregularities. MAS will also investigate potential breaches of the law that have been referred to us by SGX if SGX’s investigations uncover breaches of law administered by us. Should MAS’ own investigations uncover any violations of our regulations, we will not hesitate to take the necessary enforcement action.”

Noble said it had no comment for this story.

Full disclosure

The Singapore Exchange has responded to the Noble saga by pushing the company to release more information. Has that been enough?

May to August 2015

Noble announces on July 7, 2015 the appointment of PwC to conduct an independent mark-to-market (MTM) review, following discussions with SGX. On Aug 10, the company announces the conclusion and results of the full PwC review report. In summary, PwC finds that Noble’s accounting practices adhered to international financial reporting standards and standard industry practices.

August 2015 

On Aug 11, Noble announces that an “Investor Information Day” would be held on Aug 17, following engagements with SGX. At the event, Noble’s management presents what it says is “a comprehensive explanation of how Noble’s business works, its interim results and the findings of the full PwC review report, with a full and open Q&A session”.

2015 to 2018

Throughout 2015 to 2018, SGX is in close engagement with Noble. Additional financial disclosures are made in Noble’s quarterly financial statements, relating to Noble’s business segments, net fair value gains, the financial performance of its associated companies and cash-flow breakdowns, and follow-up engagements with SGX. Additional disclosures are made in Noble’s annual report relating to fair value/MTM (valuation techniques and inputs used), inventory sales, performance of its associated companies and sensitivity analysis of the level-3 MTM. SGX also issues queries on the financial results announcements. Noble’s responses are published.

March 8, 2018

SGX issues a Notice of Compliance requiring Noble to appoint an independent financial adviser to provide an opinion on whether the proposed restructuring and its resultant allocation of shares in New Noble to the shareholders, management and senior creditors are fair and reasonable and not prejudicial to the interest of the shareholders. The IFA’s opinion is included in the shareholders’ circular in relation to the proposed restructuring, despatched on Aug 10, 2018, to assure that the shareholders are fully informed in making their decisions with respect to the proposed restructuring.

March 26, 2018

Noble’s responses to SGX’s queries on the proposed financial restructuring are disclosed.

April 5, 2018

SGX issues a Regulatory Announcement registering its concerns with regard to existing shareholders’ entitlements to shares in New Noble in the alternative restructuring scenario. SGX:

(a) states that shareholders should have the freedom of choice in voting on the primary restructuring. How a shareholder votes on the primary restructuring should not have a bearing on whether he/she would be entitled to receive shares in the new company under the alternative restructuring; and

(b) urges the senior creditors to reconsider their proposal to ensure parity in the treatment of all shareholders. After further discussions with SGX, Noble announces on April 18 that it will “amend the restructuring support agreement so as not to pursue the alternative restructuring provision in the RSA as to enable shareholder freedom of choice in voting on the restructuring”.

Aug 10, 2018

SGX imposes the following requirements for the transfer of Noble’s listing status to New Noble:

(a) New Noble to appoint a Singapore-registered audit firm as joint auditors for the financial statements for FY2018 (expected to also comprise, in part, Noble’s financial statements for the relevant period prior to the incorporation of New Noble); and

(b) New Noble to appoint a Singapore-registered audit firm for the financial year ending Dec 31, 2019 (“FY2019”).

Noble discloses this in the shareholders’ circular in relation to the proposed restructuring, despatched on Aug 10.