Thursday, September 13, 2012

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:

Date of
Business segment
Proceeds paidDate of
Loss on
Internet advertising
$14,489,647  2009-12-22  $11,560,617  
Internet advertising
$14,926,003  2009-11-30  $14,926,003  
Internet advertising
$7,659,158  2009-12-1  $7,659,158  
Internet advertising
$2,749,158  2009-12-14  $2,749,158  
Internet advertising
$366,032  2009-8-24  $366,032  
Internet advertising
$3,397,124  2009-12-18  $3,397,124  
Dongguan Yaya(7)
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.


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.


Appendix: Company details

Only Education Holdings Limited:

Maxnew Holdings

Megajoy Pacific Limited

Richcom International Limited

Sinoalpha Limited

Maxplanet Limited


Anonymous said...

is it possible the pe firm is doing this deal fully aware this is a fraud company, in exchange of better deal in the future?

Anonymous said...

This gets better and better.


Anonymous said...

1.correct me if i wrong but i think there's no state bank involved given the large deal size. there was a chinese state bank in the hrbn deal.
2.also, didnt the same pump happened when sina claims they want to buy focus media? that eventually fell through after months.

Anonymous said...

whoa...hell of a sleuthing job John. I think this SHOULD seal FMCN's fate

gv said...

John, you're doing a great job here, must be an awful lot of work you put in this.

Anonymous said...

Just as consistent with the looting theory, no? The directors and related parties use the same lawyer to set up dummy corporations to assist in the looting. And, in the case of Richcom, are so sloppy they set up the dummy corporation after the alleged sale by which they looted the cash. So you're still left trying to work out if it's interpreation two or three?

John Hempton said...

Two things so far are not consistent with the looting theory.

(a). They had a 2.5 million dollar squeeze in Renminbi. Not exactly possible if the business is massively cash generating, and

(b). They paid a couple of million dollars in cash - according to the accounts - to a company that did not exist. If the company did not exist it could not open a bank account. If it could not open a bank account it is pretty hard to receive large gobs of cash. But it is perfectly possible to pay fake cash to a company that does not exist.... this suggests fake cash was used - in which case it suggests the company generates fake cash.


Will K, London said...

Good job on all the sleuthing - I agree the evidence suggests that either there has been grand-scale looting or (as increasingly seems likely) the cash is also fake.

One question though; FMCN's press releases do suggest that the Chairman / CEO, "Jason Nanchun Jiang" is a member of the consortium looking to take Focus private. He would know that Carlyle etc is going to do thorough due-diligence. Why would he agree to the takeout proceeding if he knows that this is going to expose his 'bezzle'. Wouldn't he be more likely to keep going as an independent company so that he can continue to milk shareholders.

Luke said...

I've loved this series John and I'm going to be disappointed when the ship sails.

Anonymous said...

How long does it typically take PE firms to complete due dilligence? In other words, if the deal is to fall apart, what is the timing?

sdm said...

1) All of the sellers (except Richcom) were registered only a couple of months before they sold businesses to Focus Media. Seems strange - is there a reason for this?

2) If these weren't simply dummies set up to facilitate the (fake) purchases by Focus Media, why did they de-register themselves for nonpayment of registration fees? Is it possible to find out the de-registration dates?

3) The Focus Media disclosure doesn't mention who sold Wangmai. Seems like both Wangmai and Jichuang were sold by Richcom? Also, the disclosure's acquisition date for Wangmai is different from the one you discovered.

Fantastic work, John. Many thanks.

Anonymous said...

Great job, and a great example of actual due dilligence. In stark contrast to what most people do, which is just listen to management or hack analysts at the banks.

Watching guys like Neil Shen and Kai-Fu Lee (whose father was a respected member of the KMT in Taiwan) become apologists, if not participants, in the corruption and greed so pervasive in China is truly sad.

Watching firms like Carlyle get taken again and again (China Forestry, China Agritech, etc) is sad as well. Bob Grady needs to wake up and realize that whomever at Carlyle is doing these deals is clearly corrupt as well.

JM said...

Amazing work on this one and nice call on FMG AU.

Anonymous said...

Do you need someone to set up and staff a Caribbean office for your fund? If so do say so :)

Anonymous said...

This seems to be their lawyer in BVI. The address matches.

The good news is, they are real. In fact, you can rent some space next to them if you want a closer look.

Anonymous said...

Hi John - love the Blog and I largely agree with your take on FMCN.

That said, I don't necessarily think that all these companies using the same registered office really adds much to your case. While I am not familiar with the BVI, there is a similar phenomenon in Cayman with Ugland House / Maples & Calder where a plethora of hedge funds and offshore subs of US companies all have the same "address". See here:

and here:

Also, here in Hong Kong, if you walk into any local lawyers office you will see the names of hundreds of companies which are registered there.

Furthermore, given that these are all relatively small and inexperienced PRC companies they would not have needed to have offshore vehicles until they decided to sell themselves to an offshore company (FMCN). Presumably, the M&A bankers on the deal or FMCN advised the sellers on how to setup the offshore structure given that they would have much more experience with it. It would not surprise me that they recommend using the same BVI lawyer and thus the same registered office for each transaction (a la Ugland House / Maples & Calder). Also, the offshore holding company transfer is common in China (and HK) as a way to avoid tax. A common example of this can be seen in how Renhe Commercial (another dodgy company...) sells units in its mall developments at the BVI or Cayman to avoid PRC tax. From a PRC perspective, they have no way of knowing it changed hands. People do the same things with apartments in Hong Kong.

With regard to the company that was registered after the sale, that sounds a bit more dodgy, but could be potentially explained by the timing of acquisition deal being signed and the cash settling. Given that the only reason for having these BVI's is to sell the company, it wouldn't need to be setup until it was to be sold. That doesn't impact how long the PRC company has been around. With regard to each of them being struck out for not paying fees that could also be explained because the BVI level would no longer be necessary after the sale. Probably from FMCN's perspective, even if it sells it back to the same people it bought it from, it would make sense to use a new BVI entity to sell it back to. Less paper trail.

As I said above, I think you are right, but not sure this is much of a smoking gun. Good luck.

Anonymous said...

The disclosure that puzzles me today is they say in their 20-F that they issued shares to the CEO as a "private equity transaction" in 2009, where they issued 75 million shares at $1.89 per share (for $142 million). The stock price then was ~$12. They say the discount amounted to a $4 million compensation difference. This math doesn't make sense? Also, why did they need to issue stock at that time?

Also, I find it odd that their purchase of VisionMedia China was done in an unlisted version of the stock in China?

Incredible job on the counterparty documentation.

Anonymous said...

John, good job. I have a question though. the company hasnt done any M&A since 2009. Does that mena that if there's any funny business, it's already been cleaned up? AS long as the company still generates cash flow, is it enough for the PEs to look over the history? thanks!

uair01 said...

Not really relevant, but it looks like the place is available for hire:

You might call them to inquire abbout the previous tenants. That would be classic detective work :-)

Anonymous said...

Nice work here! I am no expert, but it does seem that the investment banking group that put the deals together could have organized these transactions to occur through BVI, thus explaining why all of the deals look so similar. Any thoughts from those with experience?

I too wonder about the timing of due diligence. It seems they would be moving quickly, but concerns around corruption could slow things down considerably. Can we have confidence in the due-diligence efforts?

Anonymous said...

General question , you've probably addressed this and if so please let me know where , what is your interpretation of the dividend they pay? It's something that cannot be faked and they have paid it as well as have one coming up in a few weeks....

John Hempton said...

The company has paid two small dividends in its history - and declared a third.

CCME even paid a dividend at the end.

Consistent large dividends without capital raises - they are real.

But small dividends - they are just an IR expense in some cases (CCME being prime example).


Anonymous said...

just noticed that target media , which was bought by focus media for 300 million a few years back, was backed by carlyle.

Simon C. said...

The address and PO Box come up for a lawyer with the following specialties:
Anti Money Laundering
Company Formations

It doesn't actually say "nudge nudge."

ET said...

To anon re the placement to JJ of 75m ordinary shares for $142m.

You were looking at the price of the ADS, each of which represents 5 ordinary shares following the split in April 2007. The pricing and compensation expense then make sense. See the two passages from the 20F below.

On that note, it would appear at least that JJ had not given up on FMCN in Sept 2009 and was willing to risk $142m of his (perhaps looted or minority investor funded) capital at $9.45 per ADS to both increase his stake and keep the show/business/scam/looting going.


Our ADSs have been listed on the Nasdaq Global Market since July 13, 2005. Our ADSs trade under the symbol “FMCN”. From July 13, 2005 until April 10, 2007, each of our ADSs represented ten of our ordinary shares. Starting April 11, 2007, we reduced this ratio to one-to-five.

On September 23, 2009, the Company entered into a definitive agreement for a private equity placement of 75 million of its ordinary shares with JJ Media Investment Holding (“JJ Media”), a British Virgin Island company controlled by Jiang Nan Chun, the Group’s Chief Executive Officer and Chairman, for a purchase price of $1.899 per share, representing the average closing price of the shares during the twenty consecutive trading days preceding the signing of the definitive agreement. On November 18, 2009, the private equity placement was consummated and the Company received gross proceeds of $142,425,500. The shares issued to JJ Media are subject to a six month lock-up and have customary registration rights pursuant to a registration rights agreement entered into between the Company and JJ Media. This transaction resulted in share based compensation expense of $4.0 million, which represents the excess of the fair value of the Company’s shares over the purchase price. The fair value of the Company’s shares reflects the Company’s closing share price on the trading day immediately preceding the signing date of the definitive agreement.

ET said...

3) The Focus Media disclosure doesn't mention who sold Wangmai. Seems like both Wangmai and Jichuang were sold by Richcom? Also, the disclosure's acquisition date for Wangmai is different from the one you discovered.

There may just be a typo or mix-up in the 20F filing but something is clearly not right or confusing at least. Wangmai is obviously the fourth listed entity sold in the table John has provided above from the 20F. However, the corresponding footnote (4) references Jichuang as being purchased by Richcom (the original seller, we are told). Wangmai and Jichuang do not seem to be related let alone identical. There is another reference in the 20F to Wangmai and Jichuang as separate businesses with the admirably aspirational company synonym:

Multibillion International Limited (also known as Jichuang)

Jichuang was supposedly acquired on the 1st of December 2007. So IF the footnote is correctly referring to Jichuang and not Wangmai (acquired on the 15th of August 2007) then the registration of Richcom, the acquirer, on the 25th of October 2007 appears less incongruous. The transfer of cash is then somewhat more likely to have happened. Far from certain though and this would scarcely take the sting out of the serious questions John has raised in these posts so far on Focus Media.

The apparent sloppiness and omission of a footnote for Wangmai hardly inspire confidence in the company or the auditors.

Moreover, is footnote 5 on Keylink Global referring to Wangmai? A very brief search yielded little on any further references to Keylink Global. Could it be this company:

Anonymous said...

1) I think the question raised by the first commenter about Carlyle being in on the fraud is a good one. They may be willing dupes. Perhaps we can see the fee, but we cannot see the consideration.

2) The CEO being part of the take out consortium. Well perhaps this is the end game. One last pump before the dump. Or perhaps one last hail Mary before the whole thing comes apart. But I do struggle to see how this is a rational play on the part of the CEO.

Anonymous said...

sec should investigate these PE firms: are they violating anti-corruption law or helping foreigners to cheat American people's money.

Anonymous said...

Per some Chinese website, a group of entities will be involved in this "take private" deal:

分众传媒表示,发起本次私有化邀约的包括方源资本关联方FV Investment Holdings、凯雷集团关联方Giovanna Investment Holdings Limited、中信资本旗下基金关联方Power Star Holdings Limited、鼎辉投资关联方CDH V – Moby Limited、中国光大控股关联方China Everbright Structured Investment Holdings Limited、分众传媒董事长兼首席执行官江南春、江南春控股的JJ Media Investment Holdings Limited及江南春控股的另一家公司Target Sales International Limited(统称“联合体成员”)。

Anonymous said...

John - brilliant analysis.

Do you think it is possible the CEO and certain managers within Carlyle and other PE funds are in on the fraud?

If the leverage ratio is high enough, it is possible the so called buyers are actually cashing out and leaving the banks with the losses. Wouldn't be the first time the banks got stuffed on a bad PE deal since I doubt they've done any real due diligence - they're just looking to earn some M&A /underwriting fees.

The CEO can be cashing out of a large position by putting up little real equity but just lending his name to the deal to throw everyone off (which is working). Less certain about the PE investors. They could also be cashing out and stuffing the banks. Otherwise maybe the PE management are losing real investor money and just getting kickbacks?

Regardless, if this happens, you could have the correct analysis but still lose money. Or is this what you're thinking all along? By writing this up, it makes it nearly impossible for Carlyle and other PE funds not to do additional due diligence - maybe parachute some people from the US to keep an eye on the local management to make sure they're not getting stuffed themselves. After Sino Forest and everything else, I'd be a little gun shy if I were Carlyle.

And the same would apply to the lending banks - Citi, CS and DBS according to the below. If any one of them do more due diligence after reading your posts and decide to pull out - the deal is dead.

"According to the proposal letter, the Consortium Members will form an acquisition company for the purpose of implementing the Transaction, and the Transaction is intended to be financed with a combination of debt and equity capital. The proposal letter states that the Consortium Members have been in discussions with Citigroup Global Markets Asia Limited, Credit Suisse AG, Singapore Branch and DBS Bank Ltd. about financing the Transaction and that these banks have provided certain of the Consortium Members with a letter dated August 11, 2012 indicating that they are highly confident of their ability to fully underwrite the debt financing of the Transaction subject to the terms and conditions set out therein."

Anonymous said...

maybe that's why the chinese state banks have nothing to do with this ( unkike the hrbn deal).

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