Corporate fraud in the vietnam upcom stock market, a case study of the central mining, mineral exporting and importing company

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY FULBRIGHT ECONOMICS TEACHING PROGRAM ANH NGUYEN NHAT CORPORATE FRAUD IN THE VIETNAM UPCOM STOCK MARKET: A CASE STUDY OF THE CENTRAL MINING, MINERAL EXPORTING AND IMPORTING COMPANY MASTER IN PUBLIC POLICY THESIS HO CHI MINH CITY - 2017 MINISTRY OF EDUCATION UNIVERSITY OF ECONOMICS HO CHI MINH CITY FULBRIGHT ECONOMICS TEACHING PROGRAM ANH NGUYEN NHAT CORPORATE FRAUD IN THE VIETNAM UPCOM STOCK MARKET: A CASE STUDY OF THE CENTRAL MINING, MINERAL EXPORTING AND IMPORTING COMPANY MASTER THESIS Major: Public Policy Code: 06340402 THESIS ADVISORS Prof David O Dapice Thanh Nguyen Xuan Ho Chi Minh City, 2017 i CERTIFICATE OF ORIGINALITY I hereby declare that the thesis entitled: "Corporate fraud in the Vietnam Upcom stock market: A case study of the Central Mining, Mineral Exporting and Importing Company" is my own original work carried out as a Master's student at Fulbright Economics Teaching Program (FETP) except to the extend that assistance from others in the thesis design and conception or in style, presentation and linguistic expression are duly acknowledged All sources used for the thesis have been fully and properly cited It contains no material which to a substantial extent has been accepted for the award of any other degree at FETP or any other educational institution in any language fully or partly except where due acknowledgement is made in the thesis The thesis does not reflect the views of the University of Economics Ho Chi Minh City or FETP Hanoi, 08/09/2017 Author Nguyen Nhat Anh ii ACKNOWLEDGEMENT Studying in FETP seems to be the hardest way to get Master degree, however it is the fastest way that you can learn every things about how our society is going on I am not able to complete the coursework as well as the thesis without elegant supports by FETP staff, my classmates and family I would first like to thank my thesis advisor Mr Thanh Nguyen Xuan of the Fulbright School of Public Policy and Management at Fulbright University Vietnam He consistently allowed this thesis is my own work and steered me in the right direction when I lost my way Without his adjustments, I not think that I can have my own perfect theoretical framework to solve a case study I would also like to thank experts in the Committee of my thesis defense: Dr Khai Dinh Cong as Chairman, Dr Giang Tran Thi Que and Dr Du Huynh The as the second readers of my thesis, and I am deeply indebted to your valuable comments and corrections on my thesis I very much want to thanks again Dr Du who is my second tutor in the finalize stage of my thesis His suggestion about the second framework is a brilliant idea to wake me up to see what happened in the real life I not know how to thank MPP7 members enough for your physical and mental backup Many challenges and accomplishments would not have been possible without our teamwork I also have a big thank to Mr An Bui Quoc in particular, who sat next to me in st the year and provide tremendous assistance to me in the finalize stage Finally, I owe my wife a great debt of gratitude for unfailing support and continuous encouragement throughout my years of studying and researching Hanoi, 08/09/2017 Author Anh Nguyen Nhat iii ABSTRACT The Central Mining, Mineral Exporting and Importing Company (MTM) is the typical case that illustrates clearly the situation of agency cost and fraudulent behaviors in the Vietnam Upcom stock market The first part reveals the weaknesses of regulation and current policies in Vietnam by using the principal-principal agency perspective of Young (2008) particularly with regard to the mechanisms of stock scanning, no controlling the changes of regulated capital, the undemanding capital contribution and no legal responsibilities of former majority shareholders The second part of thesis uses the modified fraud of triangle of Soltani (2014) as a theoretical framework with several adjustments to adapt the current circumstance of MTM The case of MTM shows a number of fraudulent behaviors by controlling shareholders including: (1) The reconstruction of human resource before listing; (2) Having no major shareholder - holding more than 5% of the chartered capital - but the power is concentrated; (3) Using the brand and pictures makes confusion with another company; (4) Increasing the regulated capital in the short term; (5) No core business or production, mainly the joint venture or capital contribution; (6) The external audit accepted despite of the fact that financial statements have the problems; (7) The business situation is not good but the price and volume of stock trading is still high; (8) Tax obligation and social insurance are not completed In conclusion, the thesis strongly recommends the policies to reduce the likelihood of expropriation of minority shareholders due to the principal-principal agency conflicts and these fraudulent behaviors Keywords: corporate fraud, fraud triangle, MTM, principal-principal agency conflicts Abbreviations BoD HNX IPO JSC Ltd MoF MTM OTC SFP SSC PO Upcom US VSD VND v TABLE OF CONTENT CERTIFICATE OF ORIGINALITY ACKNOWLEDGEMENT ABSTRACT LIST OF ABBREVIATIONS LIST OF FIGURES LIST OF APPENDICES LIST OF TABLES 1.1.Background 1.2.Thesis motivation and contr 1.3.Research questions 1.4.Research Methodology 1.5.The structure of thesis 2.1.The Principal-Principal Age 2.2.Fraud triangle 2.2.4 Transformation of Fraud triangles Chapter The weaknesses of regulations in Upcom market 3.1.Overview of regulatory fram 3.2.No scanning fraudulent com 3.2.1 The easy and quick process to be listed vi 3.2.2.Audit co 3.2.3.Ranking 3.3.The increase of the registered capital with 3.4.The undemanding capital contribution 3.4.1.The capi 3.4.2.The capi 3.5.The legal responsibilities of former majori Chapter The frau 4.1.Overview of MTM 4.1.1.Stealing 4.1.2.No tax p 4.1.3.A ghost 4.1.4.Be a pub 4.2.Fraudulent opportunities 4.2.1.The capi 4.2.2.Fake inv 4.3.Incentives 4.3.1.The high 4.3.2.Selling t 4.3.3.The coll 4.4.Ethical problems 4.5.The fraudulent behaviors in the case of M Chapter Conclus 5.1.Conclusion 5.2.Policy recommendations 5.3.Limitations vii References Appendix Appendix Appendix market Appendix Appendix Appendix rd Figure Market capitalization of the Upcom market since 2013 to quarter 2017 Figure 2.Trading value and volume of the Upcom market annually Figure Principal-agent conflicts versus Principal-principal conflicts (Young, Peng, Ahlstrom, Bruton, & Jiang, 2008) Figure Classification of incentives for fraud-committing Figure Fraud Triangle Figure Modified Fraud Triangle Figure The components of ethical problems Figure The modified fraud triangle with several adjustments Figure Legal Matrix System Figure 10 The timeline of the MTM collapse Figure 11 The continuous process of selling and issuing stocks of FID and MTM Figure 12 Trading price and volume of MTM stock since 15/4 to 20/6/2016 Appendix Appendix The trading detail of MTM stock Appendix market Appendix The reform of Vietnam in Business report over time Appendix The highlighted fraudulent cases in the Vietnam stock market Appendix The business license of MTM 42 4.5 The fraudulent behaviors in the case of MTM: According to the analysis of the fraud triangle, the controlling shareholders showed some fraudulent behaviors that the controlling shareholders exploited the rights and interests of minority shareholders: (1) The reconstruction of human resource before listed; (2) Having no major shareholder - holding more than 5% of the chartered capital - but the power is concentrated; (3) Using the brand and pictures makes confusion with another company; (4) Increasing the regulated capital in the short term; (5) No core business or production, mainly the joint venture or capital contribution; (6) The external audit accepted despite of the fact that financial statements have the problems; (7) The business situation is not good but the price and volume of stock trading is still high; (8) Tax obligation and social insurance are not completed Table 18 The fraudulent behaviors in the case of MTM # The fraudulent behaviors The reconstruction of human resource before listed Having no major shareholder - holding more than 5% of the chartered capital but the power is concentrated Using the brand and pictures makes confusion with another company Increasing the chartered capital in the short term No core business or production, mainly the joint venture or capital contribution The external audit accepted despite of the fact that financial statements have the problems The business situation is not good but the price and volume of stock trading is still high Tax obligation and social insurance are not completed 43 Chapter Conclusion, policy recommendation, limitation 5.1 Conclusion MTM is the typical case that has the larger number of fraudulent behaviors in the Upcom market in Vietnam By the buying the small-capital company, manipulating the financial statements, issuing valueless stocks and selling in the Upcom, majority shareholders expropriated dispersed investors If the price of stock fell to the extreme low price, the group of scammers would buy back up to 75% of the regulated capital to the bankruptcy procedure However, minority investors sue their violations and coordinate with regulatory agencies to take their investment back This is the first time that the investors take the active role for their property rights instead of waiting the response of the regulatory bodies The weaknesses of regulation in Upcom market leaves the doors open for fraudulent behaviors In addition, the principal - principal agency problems are main reasons that led to the collapse of MTM The collusion of controlling shareholders, audit company and authority agencies damaged the wealth of minority shareholders With all fraudulent behaviors mentioned above, some contents could be intervened by public policies Not only the roles of the SSC and other stock agencies, the coordination with other regulatory bodies would help prevent the fraudulent companies and strengthen minority investor protections The thesis highly recommends HNX to adjust the Circular 180/2015/MoF with the mandatory equity report Additionally, HNX and other agencies need to establish the mechanism to control the activities that related to capital contributions and the rise of the regulated capital 5.2 Policy recommendations To reduce the likelihood of expropriation of minority shareholders due to the principal-principal agency conflicts, the thesis highly recommend establishing a new mechanism to control the capital contribution and changes of regulated capital Publishing the contracts or essential material is a good way to reduce asymmetric information between majority shareholders and minority shareholders The adjustment in the Circular 180/2015/MoF with the mandatory equity report is one suggestion from the thesis's perspective The rapid rise of regulated capital seems to be 44 a common characteristic of fraudulent company If the authority agencies have clear vision of this process, this kind of company would not be listed in Upcom market According to the list of fraudulent behaviors, HNX should put more criteria to scan stocks in Upcom market Although these efforts require more resources, it would help eliminate the ghost companies as a way to protect minority shareholders In addition, it would raise the concern and awareness among investors 5.3 Limitations The thesis based on one case scenario so that the scale is small The case is the firm trading on the Upcom so could not extrapolate the results to the HNX and HOSE The framework modified the fraud triangle by author Soltani (2014) so that the behaviors of investors are limited in the analysis The trend of modern microeconomics is moving to irrational assumptions The case of MTM is the long observation from 2014 up to now However, the investigation of MTM have not finalized yet The allegations and indemnities for the related parties have not been disclosed and have affected policies not yet implemented Therefore, the direction of research company MTM is opened for further research The Chinese and Vietnamese stock markets have some companies that showed similar fraudulent behaviors Investor fraud cases are also common in China and there is a lot of documentation and analysis However, these materials are mainly in Chinese and not widely available, it is difficult to access these materials directly but through another study Increasing the corporate governance is the vital solutions to again the financial scandals There is abundant evidences supporting for the relationship between the quality of governance mechanism with the credibility of the financial reporting (Farber, 2005) However, MTM is the small and "ghost" company so the corporate governance is not in the extent of this case 45 References AICPA (2002) SAS No.99, Consideration of Fraud in a Financial 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10/6/2016 13/06/2016 14/06/2016 15/06/2016 16/06/2016 17/06/2016 20/06/2016 Appendix The detail of Market Capitalization and trading value on the Upcom market Month Jan-17 Dec-16 Nov-16 Oct-16 Sep-16 Aug-16 Jul-16 Jun-16 May-16 Apr-16 Market Cap Mar-16 Feb-16 49 Appendix The reform of Vietnam in Business report over time Year of Doing Bussiness report DB 2017 The content of reform in minority investor protections 25 Vietnam strengthened minority shareholder protections by making it easier to sue directors in cases of prejudicial transactions amongst interested parties, by increasing shareholder rights and role in major corporate decisions, by strengthening the ownership and control structures of companies and by increasing corporate transparency requirement DB 2014 Vietnam strengthened an investor protection by introducing greatere disclosure requirements for publicly held companies in cases of related-party transactions DB 2012 Vietnam strengthened investor protections by requiring higher standard of accountability for company directors DB 2008 Vietnam strengthened investor protections by increasing disclosure requirements for bot regular and related-party transactions Appendix The highlighted fraudulent cases in the Vietnam stock market Time Value million of PPC stocks caused a loss of around 89 billion VND of the national budget 25 http://www.doingbusiness.org/Reforms/Overview/Topic/protecting-minority-investors#vietnam accessed on 25/03/2017 50 20072009 4/2008 9/2010 069/2011 3/2011 Stock Securities 7/8/2009, HSX delisted 6.84 million shares of BBT and all of investors had cannot sell off suffered losses AAA shares in margin accounts Most of investors 17.7 billions VND suffered intense losses 51 There was a 12/2011 trick of issuers without the control of law or HNX 2011 04/2016 that, KTB was suspended trading by HNX According to the information above, KTB had many fake transactions with MTM 52 Appendix The business license of MTM ... CERTIFICATE OF ORIGINALITY I hereby declare that the thesis entitled: "Corporate fraud in the Vietnam Upcom stock market: A case study of the Central Mining, Mineral Exporting and Importing Company" ... iii ABSTRACT The Central Mining, Mineral Exporting and Importing Company (MTM) is the typical case that illustrates clearly the situation of agency cost and fraudulent behaviors in the Vietnam Upcom. .. trading Tan Hoa Plastic JSC Bac A Mining and Metallurgy JSC BacCan Mining and Metallurgy JSC Central Mining, Mineral Exporting and Importing JSC West North Mining Investment JSC Phu Thinh Metallurgy