The choice of lawyers in Tortola: Focus Media counterparties edition

The main streets of Tortola are a little dusty. When I wandered down them they were surprisingly empty but then it was hot. Very hot. There were irregular English tourists who had wandered away from the coastal resorts for a look-see. You could tell them, they were sunburnt to a strange crimson. There was the odd local seeking those tourists out (and me at the time) to offer us marijuana. There were signs for the local poison (Pusser's rum).

Beyond that there were lots of low-slung, excessively air-conditioned office buildings that contained lawyers. Lots and lots of lawyers.

After all Tortola is tax-haven in the sun with British law. The lack of taxes and the lawyers to protect your rights are the industry in the British Virgin Islands - and lots of people structure their businesses there.

Including the people that Focus Media does business with.

Here is a list of 2009 dispositions made by Focus Media (you will find the original in the latest 20F filing):



2009 Disposition

In 2009, we aborted a contemplated initial public offering for its Internet advertising segment due to the economic recession in late 2008. As a result, between August and December 2009, we disposed of six underperforming subsidiaries in that segment through a series of individual transactions with their respective original owners. Each of the subsidiaries was considered a component of our company, and their results have been included in discontinued operations in the consolidated statements of operations. The results of discontinued operations include net revenues and pretax losses of $127.6 million and $45.4 million, respectively, related to these subsidiaries. We recorded a loss on disposal of $44.1 million.

The following table summarizes the acquired subsidiaries in the mobile handset advertising services segment and Internet advertising segment that were sold back to their original owners in 2009:

		Acquisitions		Date of acquisition				Business segment		Proceeds paid				Date of Disposal				Loss on disposal
1.		Catchstone(1)			2007-4-16			Internet advertising		$	14,489,647				2009-12-22			$	11,560,617
2.		WonderAd(2)			2007-9-15			Internet advertising		$	14,926,003				2009-11-30			$	14,926,003
3.		Jiahua(3)			2007-8-15			Internet advertising		$	7,659,158				2009-12-1			$	7,659,158
4.		Wangmai(4)			2007-9-1			Internet advertising		$	2,749,158				2009-12-14			$	2,749,158
5.		Jichuang(5)			2007-12-1			Internet advertising		$	366,032				2009-8-24			$	366,032
6.		1024(6)			2008-3-1			Internet advertising		$	3,397,124				2009-12-18			$	3,397,124
7.		Dongguan Yaya(7)			2007-10-1			Mobile handset advertising services		$	1,540,612				2009-2-28			$	1,588,110

(1)	The original sellers which subsequently repurchased Catchstone were Only Education Holding Limited and Maxnew Holdings Limited, BVI companies owned by a single PRC individual unrelated to our company.

(2)	The original seller which subsequently repurchased WonderAd was Megajoy Pacific Limited, a BVI company ultimately owned by seven PRC individuals unrelated to our company.

(3)	The original sellers which subsequently repurchased Jiahua were two PRC individuals unrelated to our company.

(4)	The original seller which subsequently repurchased Jichuang was Richcom International Limited, a BVI company owned by a single PRC individual unrelated to our company.

(5)	The original sellers which subsequently repurchased Keylink Global Limited were four PRC individuals unrelated to our company.

(6)	The original sellers which subsequently repurchased 1024 were two PRC individuals unrelated to our company.

(7)	The original sellers which subsequently repurchased Dongguan Yaya were Sinoalpha Limited and Max Planet Limited, BVI companies each of which is owned by a separate single PRC individual unrelated to our company.

All these businesses were acquired and sold back to their original owners. Indeed they were mostly given back to their original owners. Those original owners were mostly BVI entities which the company has said were not related.

In my original post on this matter (which you should read first) I posed three different interpretations of the accounts.

The first interpretation was that these really were unrelated entities and huge amounts of money was lost on these transactions and then the assets were given away. That is the accounts were straight and these were just bad deals.

The second interpretation was that these were undisclosed related parties and the transactions were part of looting Focus Media.

The third interpretation was that the earnings of Focus Media were fake (probably by faking up revenue) and the losses on these transactions were fake losses designed to offset fake profits (and hence make the books balance).

The whole write-up is here. I had no way of distinguishing between these interpretations.

Since then I have done more work.

In particular I have obtained the company registration details from the British Virgin Islands for six of the counterparties. Remember these are unrelated counterparties - they are BVI companies that sold assets to Focus Media and were mostly later given those assets back. As these were unrelated purchases all of these counter-parties should be unrelated. All of them except for Only Education Holdings Limited and Maxnew Holdings Limited because above it discloses that those two companies are owned by a single PRC individual unrelated to Focus Media.

Lets go case by case:

Catchstone was purchased from Only Education Holdings and Maxnew Holdings limited on the 16th April 2007. Only Education was registered on 6 October 2006, Maxnew on 8 January 2007. Both had the same address and phone numbers:

R.G. Hodge Plaza 2nd Floor
P. O. Box 3152
Road Town
Tortola VG1110
British Virgin Islands
Tel#: 1-284-494-4693 Fax#: 1-284-494-4627

That is OK because Only Education and Maxnew were related parties - they were both owned by the  same PRC individual.

Both companies were later struck-off for non-payment of a fee.

WonderAd was purchased from and later given back to Megajoy Pacific Limited, a BVI company owned by seven PRC individuals unrelated to Focus Media. The date of purchase was 15 September 2007.

Megajoy was registered on the 2 February 2007. The registered address and phone number were:

R.G. Hodge Plaza 2nd Floor
P. O. Box 3152
Road Town
Tortola VG1110
British Virgin Islands
Tel#: 1-284-494-4693 Fax#: 1-284-494-4627

The company was later struck off for non-payment of a fee.

By now I am puzzled. In a town full of lawyers these seemingly unrelated parties have managed to choose the same lawyer.

Wangmai was purchased from and later given back to Richcom International Limited, a BVI company owned by a single PRC individuals unrelated to Focus Media. The date of acquisition was 15 August 2007.

Richcom was registered on 25 October 2007. Strangely this company was only came into existence a few months after it had sold a multi-million dollar business to Focus Media.

The registered address and phone number are:

R.G. Hodge Plaza 2nd Floor
P. O. Box 3152
Road Town
Tortola VG1110
British Virgin Islands
Tel#: 1-284-494-4693 Fax#: 1-284-494-4627

Yes - it is the same address. And the same outcome. The company was struck off for non-payment of a fee.

Dongguan Yaya was purchased from and later given back to Sinoalpha Limited and Max Planet Limited. The acquisition date was 1 October 2007. Each of these companies was owned by a separate single PRC individual unrelated to Focus Media.

Sinoalpha was registered on the 12 July 2007. Max Planet was registered on 10 August 2007. They both had the same address and phone number:

R.G. Hodge Plaza 2nd Floor
P. O. Box 3152
Road Town
Tortola VG1110
British Virgin Islands
Tel#: 1-284-494-4693 Fax#: 1-284-494-4627

Yes - that same address.

Sinoalpha has since been struck-off for non-payment of a fee but (believe it or not) Max Planet is a company in good standing.

Pictures of the official search records for all of these companies are appended to the end of this post.

Interpretations

I originally had three interpretations of the disclosure about the 2009 transactions. The idea that all these transactions are straight though becomes harder to sustain.

In a town full of lawyers all these seemingly unrelated parties chose the same lawyer. And they are sloppy about it - they don't pay their registration fees and get struck off. More notably (in the case of Richcom) companies that do not yet exist sell assets to Focus Media and are later given those assets back.

The last example leans hard towards my third interpretation - that fake cash was paid for fake assets (hence indicating that Focus Media has fake earnings). Why?

Because millions of dollars were - on this data - paid to a company that does not yet exist. I am not sure how a company that does not exist opens a bank account and receives real cash. [Not having a bank account to receive the cash received precludes the first two interpretations above...]

But a company without a bank account can receive fake cash [as per the third interpretation].

That final line is of course just a guess [maybe the company that did not exist did actually have a bank account]. But on the data here it looks to be a guess with pretty good supporting evidence.




John


Appendix: Company details

Only Education Holdings Limited:

Maxnew Holdings

Megajoy Pacific Limited

Richcom International Limited

Sinoalpha Limited

Maxplanet Limited