WSJ: Taiwan Digs Deeper Into Pang Case
Muggle
December 21, 2009
Taiwan Digs Deeper Into Pang Case
By MARK MAREMONT
The investigation into the fraud scandal surrounding the late
California financier Danny Pang has widened in his native Taiwan, as
its government probes whether bankers received bribes to steer their
customers into investing with Mr. Pang's firm.
Losses at Taiwanese banks could continue to mount, with analysts
anticipating $100 million to $300 million in losses on top of $296
million already recorded.
Alex Fai, co-chairman of the Taiwan legislature's finance committee,
said regulators at the Financial Supervisory Commission are examining
whether bank executives received commissions from overseas related to
distributing more than $800 million in notes from Mr. Pang's firm.
Investigators in the civil inquiry appear to be probing whether any
bankers received kickbacks or other unusual incentives, according to
people familiar with the matter.
In a separate criminal probe into possible bribes, the Ministry of
Justice's Investigation Bureau has required banks to provide details
of their employees' personal accounts, according to a senior executive
at one of the banks. An Investigation Bureau spokesman declined to
confirm or deny the existence of any investigation, in keeping with
the agency's standard practice.
Mr. Pang's firm, Private Equity Management Group Inc., or PEMGroup,
was seized by the U.S. government in April. A court-appointed receiver
later discovered a hole in its books of between $400 million and $600
million. At the time of Mr. Pang's death in September, at age 42, he
was facing Securities and Exchange Commission allegations that he ran
a Ponzi-like scheme and looted the Irvine, Calif., company to finance
a lavish lifestyle. He denied the allegations.
Between 2004 and 2008, a half dozen major Taiwanese banks distributed
PEMGroup's "structured notes" to some 16,000 retail customers.
Investors were promised above-market interest payments and told their
money was safe because it was guaranteed by major insurance firms. The
insurance turned out to be almost completely illusory, and PEMGroup's
investments -- most in the U.S. -- lost most of their value.
Nasar Aboubakare, PEMGroup's former No. 2 executive, said Mr. Pang
repeatedly told him he sometimes raised money by offering under-the-
table payments to Taiwanese bankers, and told him this delicate task
was handled by a senior employee in PEMGroup's Taiwan office.
Mr. Aboubakare produced an August 2006 PEMGroup accounting statement
showing expenses related to a $75 million note offering. It showed
that 1.375% of the total, or just over $1 million, was paid to the
senior Taiwan employee, which Mr. Aboubakare believes was partly for
under-the-table payments. The document lists a separate 3.1% sales
commission for the Taiwanese bank that distributed the notes.
While Mr. Pang was in charge, a PEMGroup spokesman said the 1.375%
represented commissions to the PEMGroup employee and to brokers who
referred investors. He said there were no under-the-table commissions.
Amid a public outcry after the scandal broke, Taiwan's banking
regulators demanded that the banks repurchase the PEMGroup notes. The
banks complied, shielding their customers from losses.
Although Taiwanese investors also lost money in other structured-note
products, government officials said the PEMGroup situation was the
only one where they prodded banks to cover 100% of their retail
clients' losses. "It was a real embarrassment for some of the
experienced bankers to agree to distribute or sell PEM products," said
Jonathan Lee, a senior director at Fitch Ratings in Taiwan. "It was a
well-fabricated, well-disguised scheme."
The second-largest distributor of PEMGroup notes, Britain's Standard
Chartered PLC, in August wrote off $170 million of its $221 million
exposure after agreeing to repurchase the paper from its retail
customers at face amount, without accumulated interest. The bank
inherited the PEMGroup situation when it purchased Taiwan's Hsinchu
International Bank in 2006.
Dexter Hsu, an analyst at J.P. Morgan, said two other banks have yet
to report the bulk of their likely losses from the scandal. Hua Nan
Financial Holdings Co. has recorded a loss of about 10% of its roughly
$257 million exposure to PEMGroup, while the Bank SinoPac unit of
SinoPac Financial Holdings Co. has written off about 15% of its $146
million exposure, Mr. Hsu said. Three smaller Taiwan-based banks have
recorded losses of between 40% and 51% of their exposure.
Mr. Hsu projects overall losses from PEMGroup to be between 50% and
75%, suggesting that Taiwanese banks as a whole will report between
$100 million and $300 million in additional losses.
York Lai, a spokesman for Hua Nan, said the loss on PEMGroup's
investments will be "less than everybody thinks."
--Ting-I Tsai in Taipei contributed to this article.
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