This article first appeared in The Edge Malaysia Weekly on April 18, 2022 - April 24, 2022
SEVERAL corporate and capital market players and observers are questioning the decision by the Attorney General’s Chambers to drop the prosecution against Serba Dinamik and its officials under the Capital Markets and Services Act 2007 (CMSA) and opting instead for a compound of RM3 million each.
The compound constitutes a settlement for the case in which the troubled oil and gas (O&G) outfit and its four top officials were charged with falsifying its financial statement on a whopping RM6.01 billion in revenue.
In a nutshell, the developments at Serba Dinamik indicate that corporates can now “falsify” numbers and documents and not even serve a day in jail — even though incarceration is provided as a penalty under the Capital Market Services Act, the very law that has been breached.
When contacted by The Edge last Thursday, Gerald Ambrose, CEO of abrdn Islamic Malaysia Sdn Bhd, says: “abrdn never held any Serba Dinamik shares, so I’m not following it that closely. However, I note that a lot of asset owners and asset managers feel hard done.
“After all, they [asset managers] should expect audited numbers to be correct and they based their investment decisions on that. Unitholders of mutual funds and members of pension funds have suffered as a result and the compound fines offer little restitution to them.”
To recap, last Wednesday, the Securities Commission Malaysia (SC) compounded Serba Dinamik and four of its top executives RM3 million each for submitting a false statement involving revenue of RM6.01 billion for its financial period ended Dec 31, 2020 (FY2020), which was previously red-flagged by the company’s external auditor, KPMG. This followed the decision by the public prosecutor to accept the representation made to the Attorney General’s Chambers by Serba Dinamik and the individuals involved regarding the charges pending in court.
The four individuals are Serba Dinamik’s CEO and group managing director Datuk Dr Mohd Abdul Karim Abdullah; executive director Datuk Syed Nazim Syed Faisal, who was chief financial officer (CFO) from June 2016 until mid-2020; current group CFO Azhan Azmi; and vice-president of accounts and finance Muhammad Hafiz Othman.
The compounds settled the criminal charges they faced for submitting a false statement to Bursa Malaysia Securities Bhd on Feb 26, 2021. Muhammad Hafiz was also compounded an additional RM1 million for falsifying the accounting records of one of Serba Dinamik’s subsidiaries, the SC said in a statement.
The compounds were issued under Section 373(1) of the Capital Markets and Services Act (CMSA), with written consent of the public prosecutor.
“This [RM3 million] is the maximum amount of compound permissible under Section 369(a)(B) of the CMSA for submission of false information in the company’s financial statement,” the SC said.
Muhammad Hafiz’s additional RM1 million compound is also the maximum amount permissible under Section 368(1)(b)(i) of the CMSA, for falsifying Serba Dinamik’s accounting records.
The decision by the SC shocked many observers and participants of the capital markets, especially when the law that Serba Dinamik and its officials had breached provided for a jail term of a maximum 10 years.
The quantum of the revenue that was falsified far exceeded other financial crimes that had taken place in Malaysia in recent years.
Many fund managers and individual investors were burnt when Bursa Malaysia suspended the trading of Serba Dinamik’s securities, following the group’s refusal to release a factual finding update (FFU) of the special independent review (SIR) conducted by Ernst & Young Consulting Sdn Bhd (EY Consulting).
“I know some fund managers are saying the company should give up some of its earlier profits as a more appropriate fine,” says Ambrose.
Commenting on condition of anonymity, a fund manager with a local asset management company says many cases investigated by the SC are settled with compounds because the process of trying to prove guilt is too onerous and time-consuming.
He agrees, however, that the RM3 million compound is not commensurate with the extent of the fraudulent action committed by the group and its officials.
Another corporate market player ran a comparison between two cases — that of Transmile Group Bhd and the current case involving Serba Dinamik. She says there is a huge imbalance between the sentences meted out to the management of Transmile and to Serba Dinamik.
“It’s quite ridiculous, really. In Transmile’s case, the misleading statement on revenue amounted to over RM333 million. Its CEO Gan Boon Aun was fined RM2.5 million and his jail sentence increased from one day to 24 months.
“In Serba Dinamik’s case, the company and its four top executives were compounded RM3 million each for the false statement amounting to RM6.01 billion! What message are we sending out?” she asks, adding that the decision is bad for corporate governance and capital market development in Malaysia.
For context, in August 2020, the Kuala Lumpur Sessions Court found Transmile founder and former CEO Gan guilty of furnishing misleading statements to Bursa Malaysia. The misleading statement was on its revenue amounting to more than RM333 million in fictitious sales.
Gan was sentenced to one day’s jail and fined RM2.5 million, resulting in him filing his appeal, while the SC filed the cross-appeal against the sentence imposed by the Sessions Court. In January this year, the Kuala Lumpur High Court allowed an appeal by the SC and increased Gan’s jail sentence from one day to 24 months.
Meanwhile, Lya Rahman, adviser to the Institutional Investors Council of Malaysia, says the compounds send the wrong message to corporate and capital market players, both domestic and foreign, that there is a loophole or compromise in treating criminal charges of this nature.
“It gives rise to the perception of double-standard practices being accorded to certain individuals and that a criminal charge can now be settled through compounds. Will similar treatment be accorded for other ongoing similar offences?” asks Lya in a response to questions from The Edge last Friday.
She adds that even a maximum compound would not serve as a strong deterrent for future offences. “Since a precedent has been set, perhaps regulators would need to relook into strengthening the rules and regulations to ensure that no one will take advantage and submit false statements for whatever reason(s) since there is already a precedent that this offence can be compounded.”
She says the authorities should explain the decision to compound instead of going for the jail term, as the capital markets fraternity would want to understand the basis of the decision. Even if the case is complicated and might drag on for a long time, that does not justify meting out only a compound, and the capital market players need to understand why such a decision was taken.
Meanwhile, Kumpulan Wang Persaraan (Diperbadankan) (KWAP) says the recent developments with regard to Serba Dinamik clearly demonstrate the urgent need for robust and effective corporate governance practices by public-listed companies.
“A compound of this nature serves as a timely reminder to the market in terms of the fundamental importance of corporate governance, transparency and integrity. As a leading investor in the Malaysian capital market, KWAP will continue to uphold stringent best practices for the companies it invests in, specifically in relation to corporate governance, which is very much a pillar of ESG (environmental, social and governance),” says its spokesperson.
The public services pension fund says decisive action will be taken if governance is compromised at the companies that it invests in. Retaining investments that do not adhere to the highest standards of corporate governance is not aligned with its investment philosophy, it adds.
At least one regulator is still not throwing in the towel. Bursa Malaysia last Wednesday filed contempt proceedings against Serba Dinamik and its directors in relation to its failure to disclose the FFU of the SIR conducted by EY Consulting.
Bursa Malaysia filed an ex-parte application to seek permission from the court to proceed with committal proceedings, owing to Serba Dinamik’s failure to comply with a Feb 7 High Court order made by Judicial Commissioner Wan Muhammad Amin Wan Yahya that required the O&G company to disclose the FFU within two market days from the date of the order.
“In the end, justice must prevail and the integrity of the capital market should be upheld and the interest of the company and shareholders should be protected at all times,” says Lya.
Senior lawyer Philip T N Koh says the consent by the public prosecutor or Attorney-General in giving the maximum monetary penalty that can be levied by the SC suggests that the individuals involved are freed from further enforcement actions by the regulator on the alleged offences that were committed.
The law, Koh says, relies on the enforcement authorities’ discretion as to whether it is in the public interest to pursue the enforcement process on the matter or to be content with the imposition of compound fines.
“From the legal regulatory perspective, there are residual concerns as to whether such a resolution would quell questions regarding the integrity of financial reporting and consequences of infraction of the rules, given the impact it has on the governance of the capital market,” he explains.
“A separate point of the alleged contravention may also involve potential contraventions of other laws — for example, the Companies Act 2016 on true and fair accounting records with the Companies Commission of Malaysia (CCM).”
Koh questions whether CCM is also investigating whether financial records filed by Serba Dinamik complied with the Companies Act 2016, as there is a statutory requirement that accounts should be “true and fair”.
Subdivision 2 of the Companies Act stipulates that general offences include false and misleading statements and false reports.
Shedding light on the AG’s powers provided under the law
By Hafiz Yatim
Last Wednesday, four senior executives of Serba Dinamik Holdings Bhd were compounded a total of RM13 million by the Securities Commission Malaysia (SC) for submitting a false statement involving revenue of RM6.01 billion for its financial period ended Dec 31, 2020 (FY2020), which had previously been red-flagged by the company’s external auditor KPMG.
The decision may come as a surprise as the SC had charged the four in the Kuala Lumpur Sessions Court last December with the purported intention to deceive, make or furnish false or misleading statements or reports to the commission or stock exchange.
The company was charged in the Sessions Court under Section 369(a)(B) of the Capital Markets and Services Act 2007 (CMSA), while its officers were charged under the same Section read together with Section 367(1) of the same Act.
The respective charges were in relation to a revenue figure of RM6.014 billion contained in Serba Dinamik’s financial report for the quarter and year ended Dec 31, 2020.
The senior executives charged in the Sessions Court were Serba Dinamik CEO Datuk Dr Mohd Abdul Karim Abdullah, executive director Datuk Syed Nazim Syed Faisal, group chief financial officer Azhan Azmi and vice-president of accounts and finance Muhammad Hafiz Othman.
Rumours senior executives to be compounded
While the compound was issued on Wednesday (April 13), rumours had been swirling since Monday (April 11) over a decision to compound the senior executives.
This followed Serba Dinamik’s counsel Mak Lin Kum informing the appellate bench on April 11 (in a separate civil case at the Court of Appeal) that a representation letter was apparently accepted and the company and individuals were offered to be compounded.
Meanwhile, in the Sessions Court also on April 11, the SC’s deputy public prosecutor Hashley Tajudin announced that the company and the four senior executives had sent representation letters to the Attorney-General’s (AG) Chambers and they were conditionally accepted.
A representation letter in a criminal case is sent to the public prosecutor by the person or company charged, with the intention of having the charge withdrawn, reduced or due to some other development.
On April 13, the SC issued a statement that Serba Dinamik along with Karim, Syed Nazim, Muhammad Hafiz and Azhan were each given the maximum compound of RM3 million by the SC, while an additional RM1 million compound was issued on Muhammad Hafiz for falsifying the accounting records of the company’s subsidiary.
Compounds issued under Section 373(1)
The compounds were issued under Section 373(1) of the CMSA with written consent of the public prosecutor.
Section 373(1) stipulates the chairman of the SC may, with the consent in writing of the public prosecutor, compound any offence committed by any person under Part II, III, VI, VII, X or XII or any regulations made thereunder, by accepting from the person reasonably suspected of having committed such offence a sum of money not exceeding the maximum fine (including the daily fine in the case of a continuing offence, if any) for that offence.
The offences Serba Dinamik and its senior executives were charged with under Section 367 and 369 come under Part VII of the CMSA.
The decision may have raised eyebrows, with some expressing concern about the possible negative implications on the capital market, and also reports that the SC and Bursa Malaysia Securities Bhd (which took separate action against Serba Dinamik) are unhappy with the decision.
However, an understanding of Article 145 (3) of the Federal Constitution regarding the powers of the AG may shed some light.
Under Article 145 (3), the AG shall have the power, exercisable at his discretion, to institute, conduct or discontinue any proceedings for an offence, other than proceedings before a syariah court, a native court or a court martial.
From the reading of Article 145, the AG has the sole or unfettered discretion to charge or discontinue to institute trial against an accused person or company.
This may explain the decision to offer the compound on Serba Dinamik and its senior executives, much to the chagrin of others, instead of going for a full trial.
The Edge has reached out to AG Tan Sri Idrus Harun, whose tenure was extended last month for another year, for comments on the compound on Serba Dinamik and its senior executives. The publication is awaiting his response.
Meanwhile, a quote by former Malaysian Bar president A G Kalidas concerning the AG Chambers’ decision not to appeal in the acquittal of former federal territories minister, Datuk Seri Tengku Adnan Tengku Mansor is also possibly apt in this Serba Dinamik case.
“Thus, in cases attracting high public interest where the charge is one that strikes in the heart of faith in the administration and its governance, no matter the personality in question, those who they are associated with, or to which divide of party they belong to, it bodes well for the AG or the AG Chambers to provide reasons to the public when it decides to discontinue to prosecute at any stage,” Kalidas said at the Opening of the Legal Year 2022 event recently.
He also said that the central tenets of the rule of law, such as transparency, are building blocks which contribute to public trust and confidence.
In the Serba Dinamik saga, an explanation would also be warranted on the decision to compound and not go ahead with the trial in the interest of the investing public and capital markets.
Meanwhile, the Minority Shareholders Watch Group (MSWG), CEO Devanesan Evanson, commenting on the compound, told theedgemarkets that the regulator’s decision should be respected.
“MSWG looks forward to the resolution of all issues and the eventual lifting of the suspension,” Devanesan added.
However, as reported, Serba Dinamik is not off the hook yet, as Bursa Malaysia had initiated contempt proceedings on five of its directors — including Karim, Syed Nazim, along with Datuk Awang Daud Awang Putera, Datuk Abdul Kadier Sahib and Noor Azri Noor Azerai as contemnors for not abiding with the High Court decision in disclosing the factual finding update done by the company’s special independent review auditor Ernst and Young Consulting Sdn Bhd.
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