Landmark case against Mayban Trustee and Kaf Discounts

This is a very interesting landmark case against an independent adviser and trustee in a bond deal gone wrong, Mayban Trustee and Kaf Discounts are severely punished. Kaf's prospecutus was deemed to be "false and misleading" and "had toyed with the truth", Mayban Trustee had not shown "the required degree of care and diligence".

For some reason, the case has not been highlighted in the local media.

This bags the question, why are independent advisers of deals on the Bursa Malaysia not punished? I have seen so many strange cases with independent advice that was not unbiased at all, leaving out lots of important information and considerations. Some of the independent reports I have written about (the first being by far the worst prospectus I have ever seen):

In the below case regarding the bond deal, the plaintiffs were financial institutions, having a level of knowledge that is much higher than what can be expected (in all reason) from the average minority shareholders. And still they were proven right by the judges that indeed they should be able to rely on the independent advice.

Do minority shareholders really have to go all the way and sue the independent advisers, following the path of the financial institutions? Surely the authorities (most notably the Securities Commission and Bursa Malaysia) should take fast and stern action and minority shareholders should not need to have to go to court.

Unfortunately, I haven't noticed a single case against an independent adviser in cases related to companies listed on the Bursa Malaysia.

From The Business Times (Singapore), November 21, 2011

by S. Jayasankaran

Warning for independent advisers in bond deals

Malaysia's appellate court has unanimously affirmed a landmark decision by the High Court that will radically raise the bar on standards governing private debt issues in Malaysia.

Last year, Justice Mary Lim had ruled that the lead arranger and the trustee of a bond deal gone awry were just as liable as the issuer for any losses suffered by bondholders.

To recapitulate, 10 Malaysian financial institutions had filed a RM 149 million lawsuit against prominent defence contractor Rafie Sain in 2005 over bonds issued by his company that had defaulted. The decision took so long because of various actions and counter-claims brought by the warring parties.

But the suit was unprecedented in that it also named the deal's independent advisers as defendants. They included Mayban Trustee, a unit of the country's largest bank, and Kaf Discounts, which acted as the transaction's lead arranger and financial adviser.

The 10 institutions - which included CIMB, Malaysia's largest investment bank - were holders of RM 140 million worth of bonds issued in 2004 by Pesaka Astana, a private company owned by Mr. Rafie. Pesaka defaulted on its debt in September 2005. In 2008, however, Mr. Rafie and his company entered into a consent judgment in favour of the plaintiffs. For their part, Mayban and Kaf opted to go to trial.

Pesaka, a builder of heavy-duty vehicles for the Ministry of Defence, had raised RM 140 million through Islamic debt securities in April 2004. The bonds were wholly taken up by the 10 institutions in varying amounts.

At the core of the plaintiffs' arguments was the notion that they had gone into the deal on the basis of an information memorandum - a prospectus by any other name - prepared by Kaf that was essentially "false and misleading". Among others things, the suit also contended that Mayban failed to exercise the necessary care and due diligence expected of a trustee.

Both Justice Lim and the three appellate judges agreed with this argument, saying that the 10 had depended on the informed information memorandum to "make informed investment decisions".

Indeed, the appellate judgment - released over two weeks ago but unnoticed by the local media - was even more scathing than the High Court's.

Writing for the Court of Appeal, Justice Jeffrey Tan said that the information memorandum "had toyed with the truth" and concluded that Mayban Trustee had not shown "the required degree of care and diligence and so should also answer to the bondholders for those false and misleading statements".

In summary, the appellate court dismissed both Kaf's and Mayban's appeals and ordered them to pay the bondholders RM 149.3 million. To add insult to injury, the court also tacked on compensation of 3 per cent a year dating back to the time the bonds defaulted. Justice Lim had been kinder. The bondholders had sought interest at 8 per cent from the day the bonds defaulted. Justice Lim disagreed saying that "such interest is riba and not allowed by sharia".

The case raises at least two important issues.

One, it underscores a newly found ruthlessness in Malaysian financial litigation as at least two of the litigants on both sides of the suit are government-linked companies. Maybank and CIMB are both majority state-owned and might have resorted to quiet and state-brokered, mediation in less competitive times.

More importantly, however, the two judgments will have warning overtones for all intermediaries and advisers in future debt transactions.

As Justice Lim had said in her original judgment, it "will send a chilling message to the bond industry". In short, independent advisers will have to be just that - independent and professional.