Regulatory Action 3 October 2016 SGX reprimands KLW Holdings Limited, its former Managing Director, Lee Boon Teck, and former Group Financial Controller Jaslin Gaw Kuan Ching Public reprimand: Breach of Catalist Rules 1. Singapore Exchange ( SGX ) reprimands KLW Holdings Limited ( KLW or the Company ) for its breaches of the Catalist Rules, and the Company s former managing director Lee Boon Teck ( Mr Lee ) and its former group financial controller Jaslin Gaw Kuan Ching ( Ms Gaw ) for their role in the Company s breaches. 2. Based on the findings of PricewaterhouseCoopers LLP ( PwC ), and taking into account the representations made by KLW, Mr Lee and Ms Gaw to SGX, the breaches are as follows: (a) KLW breached Catalist Rule 703(1)(a) read with Catalist Rule 703(4), when it failed to announce, in a timely manner, that significant amounts owing to it in respect of property development projects in Bali (Indonesia) and Zhangye Gansu (China) were not recovered. Mr Lee willfully caused that breach, being the only member of KLW s board of directors ( Board ) who was aware, at the material time, of the full facts surrounding the property development projects and payments made, and having failed to inform the Board of those facts. (b) KLW breached Catalist Rule 704(16)(c) when it failed to immediately announce its acquisition, through its subsidiary KLW Resources Sdn Bhd, of all the shares in Key Bay Furniture Co. Ltd. Mr Lee willfully caused that breach, being the only member of the Board who was aware, at the material time, of the acquisition, and having failed to inform the Board of it. (c) (d) KLW breached Catalist Rule 905(1) when it failed to immediately announce a payment of S$1.95 million to Mr Lee in June 2014 as an interested person transaction of a value equal to, or more than, 3% of the group s latest audited net tangible assets. KLW also breached Catalist Rule 906(1)(a) when it failed to obtain shareholder approval for that payment to Mr Lee as an interested person transaction of a value equal to, or more than, 5% of the group s latest audited net tangible assets. KLW breached Catalist Rule 704(30) when it failed to immediately announce some of the use of proceeds from a share placement by KLW in 2014 ( 2014 Placement Issue ), when those funds were materially disbursed. KLW also breached Catalist Rule 703(4) as some of the use disclosures it made were inaccurate. Page 1
(e) (f) KLW breached Catalist Rules 704(30) and 815 when it failed to immediately announce some of the use of proceeds from a rights and warrants issue conducted in 2014 ( 2014 Rights cum Warrants Issue ) and a rights issue conducted in 2013 ( 2013 Rights Issue ), when those funds were materially disbursed. KLW also breached Catalist Rule 703(4) as some of the use disclosures it made were inaccurate. KLW breached Catalist Rule 703(1)(a) read with Catalist Rule 703(4) when it erroneously classified and thus materially misstated S$16.2 million paid in respect of the property development projects in Bali (Indonesia) and Zhangye Gansu (China) and the S$1.95 million advanced to Mr Lee as cash and bank balances in the Company s HY2014 financial statement. Ms Gaw willfully caused that breach, being the group financial controller and the most senior finance personnel in the group. (g) KLW breached Catalist Rule 719(1) to have a robust and effective system of internal controls addressing financial, operational and compliance risks. 3. SGX observes that Mr Lee and Ms Gaw have willfully caused the Company to breach the Catalist Rules. SGX-listed companies are advised to consult SGX before they appoint Mr Lee or Ms Gaw as a director or member of their management. 4. SGX has referred the case and potential breaches of the law to the relevant authorities. Details on appointment of PwC 5. The facts surrounding the property development projects in Bali (Indonesia) and Zhangye Gansu (China) and the commitment fees paid in respect of those projects came to the Board s knowledge only when Ms Gaw informed the audit committee on 6 May 2015. 6. On 25 June 2015, PwC was engaged as the special auditor, to determine the facts and circumstances surrounding the term sheets entered into by KLW in respect of the two projects, and to review the financial affairs of KLW and certain of its key subsidiaries for the period 1 May 2013 to 31 May 2015. 7. On 10 November 2015, the Company released the executive summary of the report. 8. SGX notes that the Company s audit committee was proactive in engaging PwC as the special auditors and ensuring the prompt release of the special audit report. Background of events leading to the public reprimand Term Sheets and Commitment Fees for property development projects in Bali (Indonesia) and Zhangye, Gansu (China) 9. In 2014, Mr Lee entered into non-binding term sheets for property development projects in Bali (Indonesia) and Zhangye, Gansu (China) ( Term Sheets ). Pursuant to those Term Sheets, commitment fees ( Commitment Fees ) of approximately $16.2 million were paid by KLW to counterparties. The Term Sheets provided that those payments would be refunded to KLW if no definitive agreements were signed by July 2014. Page 2
10. No definitive agreements were signed by July 2014. The Commitment Fees due to be refunded were not refunded. According to Mr Lee, all reasonable attempts to recover the Commitment Fees were not successful. However, SGX notes that Mr Lee was able to recover S$9 million in Commitment Fees almost immediately, after the audit committee was informed by Ms Gaw of the Term Sheets and Commitment Fees in May 2015. (a) In respect of the Bali Project, the Commitment Fees were S$2.2 million. S$2 million has been recovered leaving S$0.2 million outstanding to-date. (b) In respect of the Zhangye project, the Commitment Fees were S$14 million. S$7 million has been recovered leaving S$7 million outstanding to-date. 11. The Commitment Fees of S$16.2 million constitute a significant investment and should have been recovered when the Commitment Fees became due to be refunded to KLW. Mr Lee was the only member of the Board who knew about the Term Sheets, the payment of the Commitment Fees, and the non-recovery of the Commitment Fees due to be refunded. As a director, he ought to have known that this was material information that should have been announced by the Company. However, he did not inform the Board and no announcement was made. It was only on 27 May 2015, after Ms Gaw informed the audit committee of the Term Sheets and Commitment Fees, that the Company released the announcement on the Term Sheets, the payment of the Commitment Fees and the amounts outstanding. 12. In light of the circumstances above, SGX is of the view that KLW has breached Catalist Rule 703(1)(a) read with 703(4) to announce, in a timely manner, material information which is necessary to avoid the establishment of a false market in the Company s securities, and that Mr Lee willfully caused that breach. Key Bay Acquisition 13. In April 2014, the Company s wholly owned subsidiary, KLW Resources Sdn Bhd, entered into a share transfer agreement to acquire 100% of Key Bay Furniture Co. Ltd, a company in Vietnam, for a purchase consideration of US$1,582,532 ( Key Bay Acquisition ). Mr Lee explained that the reason for entering into the Key Bay Acquisition was to take advantage of a piece of land held by Key Bay for the construction of a manufacturing facility. 14. For more than 14 months after the Key Bay Acquisition was entered into, Mr Lee was the only member of the Board who knew about it. As a director, he ought to have known that the Key Bay Acquisition was a matter that the Company had to announce under the Catalist Rules. However, he did not inform the Board of the facts for the making of such an announcement. PwC found that while there were discussions in various meetings with the Board and independent directors regarding the leasing of a factory in Vietnam, the Key Bay Acquisition was not brought to the attention of the Board and the independent directors until much later, in May 2015. Accordingly, the Key Bay Acquisition was not announced when it was entered into nor was it mentioned in the Company s Financial Statements for HY2014. The Key Bay Acquisition was subsequently announced by the Company on 7 July 2015. 15. In light of the circumstances above, SGX is of the view that KLW has breached Catalist Rule 704(16)(c) to immediately announce any acquisition of shares resulting in a company becoming a subsidiary of KLW, and that Mr Lee willfully caused that breach. Page 3
Advance to Lee 16. PwC found that in June 2014, KLW paid Mr Lee S$1.95 million on his request ( Advance to Lee ). The payment was recorded in KLW s contra account before being subsequently reclassified as cash and bank balances in various management accounts as well as KLW s half year unaudited accounts ended 30 September 2014 ( HY2014 Financial Statements ). 17. Mr Lee explained that the money was transferred to him to enable him to pay for expenses relating to the Zhangye project and that the money was returned as the project did not proceed. PwC however is of the view that the S$1.95 million can be construed as a loan to a director as it was advanced to Mr Lee at his request without informing the finance team or the Board of the purpose of such payment and remained in Mr Lee s possession for an extended period of time. PwC noted that Mr Lee held on to the S$1.95 million for 8 months before returning it to the Company in February and March 2015, despite the expiry of the Zhangye Term Sheet in July 2014. Further, during those 8 months, despite the significance of the loan, Mr Lee made no mention to the Board of it or the purported purpose for which it was provided to him. 18. A loan to a director constitutes an interested person transaction. Further, S$1.95 million amounts to more than 5% of KLW s latest group audited net tangible assets. As such, KLW should have immediately announced and obtained shareholder approval for the Advance to Lee. This was not done. 19. In light of the above, SGX is of the view that KLW has breached Catalist Rule 905(1) to make an immediate announcement of any interested person transaction of a value equal to, or more than, 3% of the group s latest audited net tangible assets, and Catalist Rule 906(1)(a) to obtain shareholder approval for any interested person transaction of a value equal to, or more than, 5% of the group s latest audited net tangible assets. Disclosures on use of proceeds from fund raising exercises 2013 Rights Issue 20. KLW made four announcements, dated 6 August 2013, 26 June 2014, 27 October 2014 and 4 November 2014 disclosing the use of proceeds from the 2013 Rights Issue. 21. PwC noted however that KLW did not disclose that the proceeds from the 2013 Rights Issue had also been used for (a) payment of Commitment Fees; (b) repayment of loans to Mr Lee and his wife; and (c) payment as compensation to directors to Mr Lee and his father (Mr Lee subsequently refunded this payment to KLW as the Remuneration Committee did not approve the payment). 22. PwC further noted that some of the disclosures in the four announcements were inaccurate. 2014 Placement Issue 23. KLW made three announcements, dated 27 October 2014, 4 November 2014 and 4 June 2015 disclosing the uses to which proceeds from the 2014 Placement Issue had been put. 24. PwC noted however that KLW did not disclose that the proceeds from the 2014 Placement Issue had also been used for (a) payment of Commitment Fees; (b) repayment of loans to Mr Lee; and (c) the Advance to Lee. 25. PwC further noted that some of the disclosures in the three announcements were inaccurate. Page 4
2014 Rights cum Warrants Issue: 26. KLW made three announcements, dated 27 October 2014, 4 November 2014 and 4 June 2015 disclosing the uses to which proceeds from the 2014 Rights cum Warrants Issue had been put. 27. PwC noted however that KLW did not disclose that the proceeds from the 2014 Rights cum Warrants Issue had also been used for (a) additional payments for properties purchased in Australia by KLW, (b) payments for the acquisition of a Kaki Bukit property; (c) repayment of loans to Mr Lee; and (d) partial payments for the Key Bay Acquisition. 28. PwC further noted that some of the disclosures in the three announcements were inaccurate. 29. In light of the above, SGX is of the view that KLW has breached Catalist Rule 704(30) to immediately announce the use of proceeds as and when such funds are materially disbursed and Catalist Rule 815 to announce any significant disbursement of proceeds raised from a rights issue. Further, KLW has breached Catalist Rule 703(4) which requires announcements to be factual. Erroneous recording of cash and bank balances 30. PwC noted that the payment of S$16.2 million in Commitment Fees and the S$1.95 million Advance to Lee were erroneously classified as cash and bank balances by KLW s finance team and misstated as such in the Company s HY2014 Financial Statements. The amounts had already been paid out and were no longer in the Company s cash and bank balances. 31. Ms Gaw explained that the erroneous accounting entries were recorded based on Mr Lee s explanation that the paid amounts were held in trust on behalf of the Company. However, as the group financial controller and the most senior finance personnel in the Group, Ms Gaw was responsible for ensuring proper accounting entries and ought to have known that the monies, no longer being in the Company s bank account, should not be classified as cash and bank balances. 32. KLW announced its HY2014 Financial Statements on 4 November 2014, with Mr Lee confirming that nothing had come to the Board s attention which may render the HY2014 Financial Statements to be false or misleading in any material aspect as required under Catalist Rule 705(5). 33. In light of the above, SGX is of the view that KLW has breached Catalist Rule 703(1)(a) read with Catalist Rule 703(4) which requires announcements to be factual, and that Ms Gaw willfully caused that breach. Major breakdown of internal controls 34. PwC found that Ms Gaw, the group financial controller and most senior finance person in the group, jointly with Mr Lee, signed cheques for the significant Commitment Fees (S$16.2 million) and Advance to Lee (S$1.95 million), at Mr Lee s request, without knowing the reasons for such payments and/or without supporting documents, and in certain cases even issued cash cheques and/or signed blank cheques. 35. PwC also noted that there was no proper tracking and monitoring of amounts owing to and from directors, and no proper procedures to ensure that all loans to directors, including the terms, are properly approved, disclosed and documented. Page 5
36. In light of the above, SGX is of the view that KLW has breached Catalist Rule 719(1) to have a robust and effective system of internal controls, addressing financial, operational and compliance risks. -End- About Singapore Exchange (SGX) Singapore Exchange is Asia s leading and trusted market infrastructure, facilitating the exchange of capital and ideas to create value for people, businesses and economies. As a multi-asset exchange operating equity, fixed income and derivatives markets to the highest regulatory standards, SGX is a vertically integrated business that provides listing, trading, clearing, settlement, depository and data services. With about 40% of listed companies and 90% of listed bonds originating outside of Singapore as well as established linkages across the region and in Europe, SGX is Asia s most international and connected exchange. Offering a full suite of derivatives products across Asian equity indices, commodities and currencies, SGX is the world s most liquid offshore market for the benchmark equity indices of China, India, Japan and ASEAN. The exchange was one of the first globally to adopt the Principles for Financial Market Infrastructure, the first and only central counterparty in the region to be fully approved by U.S. regulators as a Derivatives Clearing Organisation and a Foreign Board of Trade, and is recognised by European Union regulators for both securities and derivatives. As Asia s pioneering central counterparty, SGX is globally recognised for its risk management and clearing capabilities. In 2015, SGX was awarded Derivatives Exchange of the Year by Asia Risk, Futures and Options World and Global Capital as well as Central Counterparty (CCP) of the Year by Asia Risk. Headquartered in AAA-rated Singapore, SGX has over 700 employees including offices in Beijing, Hong Kong, London, Mumbai, Shanghai and Tokyo. For more information, please visit www.sgx.com. Media Contact Carolyn Lim Marketing & Communications +65 6236 8139 Carolyn.lim@sgx.com Page 6