Scorpio ex-executive director calls 'roundtripping' allegations baseless

SINGAPORE - Trial proceedings began on Tuesday on defamation claims brought by Scorpio East Holdings former executive director Hady Hartanto against three independent directors (IDs) over the contents of a Singapore Exchange (SGX) announcement that alleged, among various things, his involvement in "roundtripping" transactions.

The Sept 7, 2011 announcement, which included a summary of a report by special auditors Stone Forest Corporate Advisory, alleged irregularities in the way Mr Hartanto dealt with accounting transactions related to contracts for several Chinese movies as well as concerts by Taiwanese performer Jay Chou and K-pop group Honey, now known as SKarf.

Suresh Nair of Straits Law Practice LLC, representing Mr Hartanto, in opening statements filed on Tuesday, said the defendants made "baseless allegations and failed to disclose facts known to them that would correct falsehoods or false impressions" created by the summary. To make matters worse, they "gratuitously made a six-page announcement in which they adopted the summary and added allegations of their own", he said.

But independent directors Yee Kit Hong, Chia Hoo Khun Valery Kelvin and Ko Chuan Aun defended their actions, saying they were "under an obligation to inform the company's shareholders".

Represented by Senior Counsel Ang Cheng Hock of Allen & Gledhill LLP, the defendants, in opening statements, confirmed that they had approved the publication of the SGX announcement and the summary "for the purpose of discharging their obligations as directors of the company, and not for any other reasons".

The Stone Forest report said the company had terminated several contracts valued at about $12 million, but failed to disclose this as required under Catalist rules. The company had also deposited $5.1 million with producers as part of a deal to distribute seven movies and two concerts by Jay Chou. The deposits formed about 30 per cent of Scorpio East's net asset value.

According to Mr Hartanto, the Scorpio contracts were terminated between December 2010 and January 2011 by John Ho Ah Huat, Scorpio East's former CEO, after a due diligence report found that these contracts were likely to be loss-making. Some 85 per cent of the deposits under the movie contracts were to be refunded by the producers to the company, while the deposits under the Jay Chou concerts were to be refunded in full.

The company subsequently entered into five contracts worth about $6.2 million with Alpha Entertainment Group, for concerts by four K-pop groups including Wonder Girls and Honey aka SKarf, and the production of two movies.

Mr Hartanto said this was a "very good outcome" because Alpha paid Scorpio East $2.86 million as refunds from the Scorpio contracts, and agreed to recover those monies from the producers. Scorpio East paid $3.2 million to Alpha as deposits for the Alpha contracts.

But Stone Forest found that the Alpha contracts were not disclosed - another breach of Catalist listing rules.

The defendants also called the arrangement (by which monies paid by Scorpio East to Alpha were paid back by Alpha to Scorpio East in the same period) "misleading" because it reflected the collection of refunds from producers - who, in fact, had not made such cash refunds.

Mr Hartanto said Mr Ho and Lim Kian Nam, Scorpio East's financial controller, told him that formal board approval was "unnecessary as the Alpha contracts were in the ordinary course of business".

In addition, the company's lawyers, Loo & Partners, had advised that "such agreements would entail trade secrets which are not announceable on the Singapore Exchange in accordance with the listing rules".

But the defendants disagreed, citing the Stone Forest report that found the board's approval was needed as the total consideration of the Alpha contracts formed about 36 per cent of the net asset value of the Scorpio group.

In disputing the defendants' "roundtripping" allegations, Mr Hartanto said: "Not only were the cancellation of the Scorpio contracts and the entering into of the Alpha contracts clearly in the interests of the group, the transaction did not affect the group's financial position, as the payment of deposits under the Alpha contracts were not to be made until the Scorpio refunds had been received."

But the defendants disagreed.

They said: "Between 17 and 21, March 2011, a total amount of $3.2 million from the Scorpio Group was transferred to Alpha and recorded as payments of deposits due under the Alpha Contracts. During the same period of time, a sum of $2.86 million in cash was deposited into the bank accounts of companies in the Scorpio group. The monies paid by Alpha to Scorpio Group were the same monies paid by the Scorpio Group to Alpha during the same period. The payments were therefore a roundtripping exercise."

The "roundtripping" exercise was allegedly hatched by Low Shiong Jin, an undischarged bankrupt who had also been blacklisted by SGX for his involvement in a scandal involving listed company Oculus Ltd, according to the defendants.

The defendants also said Mr Hartanto allegedly approved Low's proposal to transfer $3.3 million from the Scorpio Group on March 21, 2011 without the board's approval. Of that amount, $300,000 was to be paid to his wife, Jung Jin, and Liu Woon San, wife of Alan Chan, CEO of Alpha. Both women are shareholders of Alpha.

According to Scorpio, the $300,000 was a refundable deposit for a due diligence exercise for its planned acquisition of a 51 per cent stake in Alpha. But in approving this transaction, the defendants said Mr Hartanto had breached his fiduciary duties as a director because he failed to consider the Scorpio Group's ongoing cashflow requirements. At the time, the consolidated cash balance of the Scorpio Group was only $2.2 million.

Mr Hartanto did not seek re-election as executive director after a public reprimand by SGX on Oct 20, 2011 for not disclosing the termination of the Scorpio contracts.