It’s not mystery meat. It’s Dufu

The SC’s enforcement action against technology company raises a menu of questions

HAVE you ever been served something unidentifiable? It has a familiar look, taste and texture, and yet you find out it isn’t what you think it is.

That’s when your mind plays tricks on you. You wonder what it is exactly that you’re shovelling into your mouth. What if the dish has weird ingredients that’ll make you queasy if you knew what you’re eating? What if the dish is somehow bad for you?

Then again, do you really want to go there?

If you’re already enjoying the mystery meat, why let information and awareness get in the way?

Since you’re halfway through the meal, why not continue chewing and swallowing, and move on after that?

It’s quite a dilemma. You’re caught in a tussle between curiosity and fear of the unknown. Some of us can’t stand not knowing. But for the rest, ignorance is bliss.

This can happen in the capital market too. On Wednesday, the Securities Commission announced an enforcement action that amounts to a three-course meal with Dufu Technology Corp Bhd as the key ingredient.

On the surface, the regulator’s decision to reprimand and fine two executive directors of Dufu for “causing wrongful loss to the company” strikes a blow for corporate governance.

But if you’re the inquisitive type, the press release may prompt more questions rather than leave you feeling satisfied that the matter has been fully resolved. Here’s a review of the meal:

Starter: The Wrongful Loss

The SC reprimanded Yong Poh Yow and imposed a RM200,000 fine because he sent about US1mil to “foreign parties” in the United States between January 2013 and October 2014 without the Dufu board’s authorisation. The money was used to buy assets that were registered under Yong’s name.

The regulator says this was a breach of Section 317A(1) of the Capital Markets and Services Act 2007 (CMSA). At the time, Yong was the company’s CEO and executive director.

This is what Section 317A(1) says: “A director or an officer of a listed corporation or any of its related corporations shall not do or cause anyone to do anything with the intention of causing wrongful loss to the listed corporation or any of its related corporations irrespective of whether the conduct causes actual wrongful loss.”

The press release doesn’t name the foreign parties, but according to the SC website, they are Ehrenstein Charbonneau Calderin, US Orthopedics Inc and Mediscope Manufacturing Inc, which are all Florida-based businesses.

Lee Hui Ta, who’s also known as Li Hui Ta, was was reprimanded and fined RM150,000 because he approved the payment vouchers for those remittances to the US. In other words, he helped Yong commit the offence. Li was then Dufu’s executive director and chief financial officer (CFO).

Main Course: Where’s the Beef?

The meal began well. But towards the end of the press release, the SC points out that upon conviction, a breach of Section 317A(1) carries a jail term of at least two years but no more than 10 years, and a fine not exceeding RM10mil. The Dufu case was not prosecuted.

The regulator chose to use administrative sanctions “after taking into consideration that Yong had fully repaid the amount of US$1,010,041 to Dufu”. This is the uh-oh moment when the diner stops munching for a while and questions the wisdom of continuing with the meal. Yong is spared the full brunt of the law because he gave back the RM1mil?

What happened to the clause in Section 317A(1) that says it doesn’t matter whether the prohibited conduct causes actual wrongful loss or not?

The SC doesn’t say when the money was refunded, but we can form a picture by looking at a series of announcements last year by Dufu and the company’s annual report 2015.

It started in February 2015, when the board received a letter alleging that certain senior executives of the company had misappropriated approximately RM3.9mil of company funds.

The auditors appointed to investigate the allegations uncovered the US$M1mil remittances to the US. Yong was asked to step down and the board demanded that he pay back the money that had been taken out of the company.

According to Dufu, all the assets purchased from one of the three US companies (paid with the remittances) had been fully written down or impaired as at December 2015. By then, US$350,000 had already been refunded to Dufu. Yong settled the balance in January this year, and apparently, this enabled him to avoid prosecution.

The day after publicising the Dufu administrative sanctions, the SC dragged to court four ex-directors of Patimas Computers Bhd with 10 charges of causing wrongful loss to the company.

The quartet are said to have made payments totalling RM5.1mil between July and December 2010, for the purported development of software for Patimas when in fact the money wasn’t used for that purpose.

“This is the first time the SC is taking a criminal action for an offence under Section 317A(1) of the CMSA,” says the regulator.

The juxtaposition of these two cases gives us plenty of food for thought, but it looks like only the SC can tell us the recipe for a Section 317A(1) criminal action.

Dessert: Pretzel-Like Board Structure

Where there should be a sweet ending to the meal, we instead get a strange aftertaste. Despite Li’s part in facilitating the remittances to the US, the Dufu board didn’t ask him to leave.

Not only does he carry on as an executive director and CFO, but on June 18 last year, he was appointed the executive chairman to replace Hsu Chin-Shui, who had failed to secure re-election during the company’s AGM the same day.

That means Li is in a highly unusual position of being responsible for the financial management of Dufu as well as heading its board of directors. Yeoh Beng Hooi was appointed acting CEO in August last year and was confirmed in that role a year later.

This allows the company to assert that it separates the responsibilities of the executive chairman and the CEO, who’s not a board member.

But the fact that Li is an executive chairman remains an issue because the Malaysian Code on Corporate Governance prescribes that the chairman must be a non-executive director.

The Code also recommends that a listed company have a majority of independent directors if the chairman isn’t an independent director. That’s not observed in Dufu, which currently has a 50:50 split of executive and independent board members.

In the latest annual report, Dufu says it’s evaluating two options – ask one of its independent directors to take over as chairman or appoint an additional independent director. It hopes to work this out by the year-end.

There’s another awkward element in Dufu’s governance that should be addressed. A CFO typically reports to the CEO, but how does this work if the CFO is also the board chairman?

Oddities like the kind we see in Dufu ought to be minimised, if not eliminated. Otherwise, they are likely to cause corporate indigestion.

Executive editor Errol Oh is feeling hungry.