The role Goldman Sachs played in the 2013 penny stock crash was put back in the spotlight recently, as one of its former top executives took to the stand as a prosecution witness in the trial of John Soh Chee Wen and co-accused Quah Su-Ling.
The duo are allegedly the masterminds behind the share manipulation ring of Blumont Group, Asiasons Capital and LionGold Corp. Collectively known as BAL, the three counters surged throughout 2013 before crashing spectacularly in October that same year, wiping off some $8 billion in market value from the local bourse. Asiasons has since been delisted while LionGold has been renamed Shen Yao Holdings.
Besides charges of share manipulation, Soh and his lover Quah also face six cheating charges too. Specifically, they are alleged to have deceived Goldman and Interactive Brokers into extending more than $170 million in margin financing to their accounts with BAL shares used as collateral, and for “dishonestly concealing” from the two financial institutions that BAL shares were manipulated by them.
The accounts at Goldman’s private wealth management unit allegedly used to trade BAL shares were held under Quah’s own name, and that of James Hong, a former executive director of Blumont. Ng Su Ling and Wong Chin Yong, two other known associates of Soh, had similar accounts with Goldman. Soh, at no time, was a Goldman client, and neither was he authorised to trade on behalf of the account holders, according to the conditioned statement of Jason Moo, a former Goldman executive who testified on behalf of the US financial institution.
Back in 2013, Moo was head of the market solutions group and alternative capital markets within Goldman’s private wealth management unit in Asia. He left the US firm in 2019 and is now head of Southeast Asia private banking and branch manager for Bank Julius Baer Singapore, a Swiss private bank.
Deputy public prosecutor Nicholas Tan asked Moo if Goldman would have accepted BAL shares as collateral for extending credit to those accounts had the bank known there were persons using their accounts as well as accounts in the name of other parties to trade BAL shares for the purpose of manipulating the market for BAL shares.
Moo told the court Goldman would not have accepted BAL shares as collateral. First, Goldman would not have allowed the illegal activity of market manipulation to be committed using the accounts. Secondly, market manipulation with the intention of creating a false picture of the true value of the underlying security leads to price inflation of the asset, distorting the picture in which the bank would then lend value to that collateral. Typically, said Moo, the bank would look at the value of an asset and then assign a lending value based on a coverage factor, which is calculated by the number of times the market value covers the actual loan value. If that factor was distorted, it would have an impact on the value assigned to the collateral.
In any case, Moo pointed out that clients cannot enter into any illegal activity with the accounts and they are obliged to disclose any financial activity to the bank. “If there was any form of obscuring this, this would be considered a break of that terms and representation,” he added.
According to Moo, back in January and February of 2013, Quah and Hong, through an individual known as William Chan of Stamford Management, approached Goldman’s private wealth management unit to open accounts with share financing services. Quah then pledged more than 19 million Asiasons shares while Hong pledged nearly 10 million Asiasons shares. With financing from Goldman, they went on to buy more LionGold shares. Subsequently, additional Asiasons and Blumont shares were transferred to the Goldman accounts on July 3, 2013, and July 5, 2013.
In total, Goldman extended loans of $69.36 million to Quah and $73.23 million to Hong. “During the material period, Goldman Sachs was not aware of any matters that suggested that the demand for the shares of the BAL companies was false or misleading. Had Goldman Sachs known that the demand for the shares for the BAL companies was false or misleading, Goldman Sachs would not have extended such credit or made payment for such purchases,” said Moo in his conditioned statement.
Stress testing accounts
Around September 2013, a month before the crash, the accounts belonging to Quah and Hong were flagged to Moo, given their large debit balance against a small number of equity counters.
According to Moo, Goldman ran simulations on hypothetical “shock” market events of a 50% drop in the value of the equities in the accounts, and also on the ability of the collaterals to absorb the shock. The impact of such a “shock” on Quah and Hong’s accounts, with collaterals mainly in the form of equities, were deemed “pronounced” by the tests. As such, it was deemed “appropriate” for Goldman to “have discussions” with “the clients to confirm that they were comfortable with the exposure of the accounts to equity concentration risk”, said Moo in his conditioned statement.
On Sept 27, 2013, Goldman’s credit risk management and advisory department, raised concerns that the valuation of the BAL shares seemed extreme when viewed against the operating earnings of the three BAL companies and indicated that “they were not comfortable lending against the subject accounts going forward”.
While further internal discussions took place on Sept 30, 2013, no decision was taken to demand repayment or cease lending at that point in time. “It was agreed that we would discuss with the private wealth management clients to understand better the business fundamentals of the BAL companies,” said Moo.
On Oct 1, 2013, the Singapore Exchange issued Blumont a query regarding unusual trading pattern although Moo made no mention of this in his conditioned statement.
A day later on Oct 2, 2013, before discussions could be held with Quah and Hong, Moo received a call from Goldman’s New York headquarters saying that the firm had “ultimately decided” it was not “comfortable” with the risks in the accounts and that Goldman should not be lending against the BAL shares.
“We needed to move the risk off the firm’s books, and that we needed to be in a position to start selling the BAL shares if the account holders were not able to find alternative financing to repay the loans,” said Moo.
At between 8.30am and 8.45am on the very morning of Oct 2, 2013, Moo and Tan Bong Loo, the former Goldman relationship manager handling Quah and Hong’s accounts, called Chan of Stamford Management to demand repayment of the loans by 1pm. As no payment was received by that time, Goldman proceeded to issue notices of an event of default, close-out and termination date, asserting its contractual right to appropriate all or part of the assets in the accounts for the repayment.
On Oct 2, 2013, and the days that followed, Goldman started selling the shares held as collaterals in Quah and Hong’s accounts. Meanwhile, discussions continued. As of Oct 3, 2013, prior to the suspension of BAL shares by SGX in the morning of Oct 4, 2013, although the value of BAL shares had plunged, the value of the collateral in the accounts was still enough to cover the amounts outstanding at that time.
On Monday, Oct 7, 2013, trading in BAL shares were allowed to resume by SGX but the prices dropped even more. By then, the value of the collateral in the accounts was no longer enough to cover the credit Goldman extended to Quah and Hong of $29,881,735 and $32,302,515 respectively. From Oct 9, 2013, onwards, Goldman exercised its contractual rights to force sell the collateral and the selling would continue to do so until Oct 23, 2013, when the accounts were closed out.
The following month, Quah and Hong sued Goldman in the UK, where the Goldman unit providing the lending, Goldman Sachs International, is based. Goldman promptly counterclaimed against them for the outstanding amounts, plus interest and costs. On July 25, 2014, and March 26, 2015, the UK court ruled in favour of Goldman against Hong and Quah respectively. Hong and Quah were declared bankrupt by the Singapore court in July 2014 and April 2015 respectively.
Colour of money or quality of clients?
In his cross-examination of Moo, Soh’s lawyer, N Sreenivasan, tried to cast doubt on the due diligence conducted by Goldman on clients. Moo had insisted “quality checks” were conducted before Goldman onboard clients. Not only must they have a certain amount of financial assets, clients must also be “people of good standing”.
“You see, I’m trying to find out whether is it just the colour of money that counts or the quality of clients that count,” said Sreenivasan.
Sreenivasan tried to get Moo to agree that when accepting collaterals, Goldman would have a certain set of criteria.
“Now, if I come to you with a blue-chip stock, say OCBC, you may lend me 70% or 80% of the market price, am I right?”
“Yes,” replied Moo.
“If I come to you with an absolute Mickey Mouse Catalist stock, you may tell me no financing at all. Right?” pressed Sreenivasan.
“Yes, but can I clarify? In Goldman, they would look at the market cap of a company plus liquidity of the company, in other words, the daily trading volume of the share, to determine the lending value,” said Moo.
Sreenivasan also got Moo to agree that periodic reviews were conducted on clients’ trading activities and that checks would have been made on the collaterals that clients put into their accounts. Moo added that while every bank does its best to try and ascertain the total assets their clients have, they cannot have “perfect information” unless the clients show them statements from every bank they deal with.
“But can’t you ask?” said Sreenivasan.
“We can ask. But the chance of getting an answer is fairly low,” said Moo.
Sreenivasan also suggested that given the amount demanded, the time frame for Quah and Hong to repay Goldman made it “hardly possible”.
“No, I think if they had means outside of the bank to effect that payment, then that wasn’t an unreasonable time,” Moo replied.
“Well, you see, people may have means in terms of assets, but in terms of cash, it’s a different ball game, isn’t it? Do you know many people with $60 million in cash lying around, even among your very high net worth private wealth management clients?” pressed Sreenivasan.
“It is not uncommon to have that amount for ultra-high net worth clients,” said Moo.
Chinese Wall of bricks or paper?
Sreenivasan also raised questions about Chinese Walls between various units in Goldman Sachs. He suggested that the sale of Asiasons shares by a client of another Goldman unit had caused “downward pressure” on the shares.
Sreenivasan, citing questions put to Moo by the Commercial Affairs Department (CAD), told the court that on Sept 30, 2013, Powershares Capital Management, a Goldman client, sold around 8.2 million Asiasons shares — days before the BAL shares crashed.
Earlier during the long-running trial, the court had heard from several brokers who took the stand that Soh had urged them to “defend” the price of BAL shares. Besides the brokers, Adeline Cheng, who was in a relationship with Soh, was also asked to buy BAL shares although she had reservations, given how high the share prices were already at then.
When Moo’s statement was taken by CAD on May 21, 2018, he said he was not aware if Goldman had any part to play in the sale by Powershares, nor if there was any relation between the two entities. Invesco Powershares, a fund management firm based in the US, is the new name of Powershares Capital Management.
According to Moo, after questioning by CAD, he had gone to check with Goldman’s legal counsel whether the bank had anything to do with the sale by Powershares. However, Powershares was not a Goldman private wealth management client, and as such, Moo was not given an answer.
Sreenivasan also got Moo to confirm that besides the private wealth management business, Goldman had other units in investment banking, proprietary trading, and also those that work with other funds and investors.
“Now, if we take a very famous example, the 2008 financial crisis, there were issues where certain banks or investment houses had prior knowledge about what was going on in the CDO market. Right? We have seen the movie The Big Short and things like that. Agreed?” asked Sreenivasan.
“I haven’t seen The Big Short,” replied Moo.
“Okay, but you would have lived through that period?”
“I have lived through that period,” said Moo.
“Yes. So, the way this problem is solved about one division affecting another is the term called the China Wall. Right?” asked Sreenivasan.
“Chinese Wall,” Moo clarified.
“Chinese Wall, okay. Now, some people think the China Wall is thick, made of bricks, others think it may be made of paper. Now, would I be correct to say that one side of a bank may have sensitive information that will affect activities in another side of the bank, agreed?” asked Sreenivasan. “And that’s why the Chinese walls are important, agreed?”
“Yes,” replied Moo.
“But we do know that after 2008, a lot of people lost confidence and faith in Chinese walls, and the US had Dodd-Frank making things harder for banks to trade on information. Right?” said Sreenivasan.
“Yes,” said Moo.
“Therefore, in this case, if someone advising a client holding on to Asiasons shares know about the red flags raised by Goldman’s credit risks management, that would prompt whoever was holding Asiasons shares and who knew about this to get rid of not just Asiasons, but all BAL shares,” said Sreenivasan.
Moo agreed that this would have put “downward pressure” on the shares, which under “normal circumstances”, was an indication to sell.
“Would I be correct to say it is quite obvious that the CAD had concerns about this? Otherwise, they won’t ask you,” asked Sreenivasan.
“I assume so. I cannot speak for the CAD,” said Moo.
“But I’ll tell you what puzzles me because you told them, ‘I don’t know’, which I can accept. So, did anybody from Goldman Sachs actually answer that question?” added Sreenivasan.
“I’m not sure,” said Moo.
Short sellers or Goldman conspiracy?
Sreenivasan also wanted to know what happened between the time Goldman’s credit risk management unit had raised concerns over the valuation of the BAL shares on Sept 27, 2013, and on Oct 2, 2013, when Goldman’s headquarters at New York made the call to get Quah and Hong to make good the financing with a four-hour deadline even before Moo and Tan could talk to their clients.
“I’m very puzzled. I’m trying to figure what happened in between,” asked Sreenivasan.
Citing earlier witnesses, Sreenivasan noted that there were short sellers in the market, who could have triggered the crash.
“The other view is, of course, Goldman Sachs’ decision to recall the loan triggered the crash, and then if one is conspiracy-minded, you can combine the two together. Were you aware of any short sellers in the market?”
Moo replied that he was only aware of short sellers in the market on Oct 4, 2013, that he only knew about it after reading media reports, and that he had no actual information of the short sellers. Furthermore, Moo said he was told that there was no short selling by Goldman for one month leading up to Oct 4, 2013.
“And in terms of PowerShares selling 8.2 million Asiasons shares on Sept 30, 2013, you have no visibility about who they were and what they were doing, am I right?” asked Sreenivasan.
“I was not aware of this. I believe they may be an institution, but I can’t be sure,” said Moo.