Case Study
Daka Designs Limited – Designers of a Fraud
Daka Designs Limited (Daka) launched its initial public offering (IPO) on the
Mainboard of Singapore Exchange (SGX) but its issued profit warnings. SGX to
seek a special audit by KPMG. The special audit found the non-disclosure of
possibly material information, including how capital raised was used and cash
drawings and loans made to senior executives.
The objective of this case:
• to allow a discussion of issues such as investor protection in IPOs,
• effectiveness of the board of directors in protecting minority
shareholders,
• the impact of cross-border listings on investor protection
Case Study
Daka Designs Limited – Designers of a Fraud
• founded in 1993 by Executive Chairman, Pat Y. Mah
• become one of the more prominent design and development
companies in Hong Kong (main operations)
• primarily focused on the design, development and marketing of
innovative products for the global consumer market.
• drive to innovate culminated in the receipt of numerous awards and
accolades since its incorporation
• had plans moving forward to develop its distribution network in order
to provide a more integrated and efficient supply chain as well as
open up new markets to reach out to customers
It planned to use the IPO proceeds to expand its marketing network,
product development, and for its expansion in China2. In addition, its
prospectus stated that the divestment of Daka Industrial Limited (DIL)
was a result of Daka’s change of focus, from manufacturing to the
design and development of products. Finally, the prospectus showed
high turnover and profitability.
Case Study
Daka Designs Limited – Designers of a Fraud
They were charged for their respective roles in a conspiracy to defraud the SGX and misleading
existing and potential investors through the misrepresentation of Daka Designs’ true financial
position
KPMG faced difficulty in performing the special audit as Daka restricted KPMG’s access to its
financial information and personnel despite KPMG’s and SGX’s repeated requests for Daka’s
cooperation. Raymond Chow, the CEO, was purported to have meticulously taken actions to impede
KPMG’s review.
On 25 May 2006, Mah, Chow, CFO Kevin Leung and executive director Rose Chow decided to
relinquish their managerial positions and took leave of absence from the Board of Directors. This
was to prevent further erosion of confidence in the company management and corporate
governance of Daka8
Instead, it used HK$64.8 million raised from the IPO - 84% of the capital - to repay existing bank
loans. This intention was not disclosed in its prospectus.
In the special audit report released in June 2006, KPMG raised concerns regarding possible breaches
of the Securities and Futures Act (Chapter 289) and other laws in Singapore. The information
provided in the prospectus was completely inconsistent with the firm’s actual activities and
objectives. KPMG also believed that Daka’s true intention of the divestment had been to improve
the performance of Daka in anticipation of the IPO
Milestones
Jul 2004 31 Mar 2005 11 Oct 2005 20 Nov 2005 16 Jan 2006 22 May 2006 June 2006 Q1 2007 Sep 2009
The Hong Kong ICAC
prosecuted the top three
Daka filed for an IPO on SGX to Daka issued yet another profit Despite obtaining limited In the special audit former senior executives, Pat
raised S$14 million in net warning, stating that reported information, KPMG was still report released in June Mah, Raymond Chow and
proceeds, 25.5% of the company’s financial performance may able to derive certain 2006, KPMG raised Kevin Leung in September
enlarged share capital. IPO not meet market preliminary findings. On 16 concerns regarding 2009. They were charged for
proceeds used to expand its expectations. This round of January 2006, SGX announced possible breaches of the their respective roles in a
marketing network, product profit warning was reportedly that Daka’s trading would be Securities and Futures conspiracy to defraud the SGX
development, and for its due to provisions made halted because it had Act (Chapter 289) and and misleading existing and
expansion in China. After its IPO, a against the amount due from breached listing rules6 by other laws in Singapore potential investors through
profit warning for the six months its subsidiary, DML. failing to cooperate in the the misrepresentation of Daka
ending 30 Sep 2004. conduct of the special audit. Designs’ true financial position
Daka appointed the consultancy firm A&M Asia To release Daka from its past
Daka announced the Daka had issued two profit to act as interim managers during the course of liabilities, a proposal was
financial results for its first warnings in a short span of just the special audit. Kelvin Flynn and Eric drawn up to sell Daka Group
financial year ended 31 over a year since attaining Thompson were appointed executive director to Daka Direct for HK$42.5
March 2005. Daka disclosed listing on the Mainboard. This and CEO respectively. On 25 May 2006, Mah, million12. The sale converted
that there might be triggered SGX to appoint Chow, CFO Kevin Leung and executive director Daka into a shell company
repayment issues with Daka KPMG to conduct a special Rose Chow took leave of absence from the BOD with only a cash asset of
Manufacturing Limited audit to investigate Daka’s to prevent further erosion of confidence in the HK$12 million13. Following
(DML). financial affairs. company management and corporate the sale, Daka was renamed
governance of Daka Carats Ltd
Discussion Questions
1. Did the directors breach any laws pertaining to directors’ duties?
Answer:
The directors breach many laws pertaining to their duties. The first breach was to impede KPMG
(auditor assigned by SGX) from carrying out a special audit. The director was also found to have
breached the Securities and Futures Act, among other business laws in Singapore. In addition, instead
of using the borrowed IPO proceeds for intended investments in expanding business, the directors
used the money to repay the bank loans. This is despite the fact that the intentions were not revealed
in the prospectus. When the special audit was conducted by KPMG, the directors decided to relinquish
their managerial positions and took leave of absence from the Board of Directors. This was to prevent
further erosion of confidence in the company management and corporate governance of Daka. The
breach by company directors also involved recording of exaggerated profit margin to please the
investors. They did for their respective roles in a conspiracy to defraud the SGX and misleading
existing and potential investors through the misrepresentation of Daka Designs’ true financial position.
Discussion Questions
2. Are the prospectus disclosures adequate for investors? If not, how can they be improved?
Answer:
The prospectus disclosures were not adequate for investors, because Daka did not stated and
report the completed information that needed for the investors, the information was inconsistent
between plan and realization. For improvement, they should refer to 6 principles of OECD
Corporate Governance as follows: The rights and equitable treatment of shareholders and key
ownership functions (Principle 2) and Disclosure and Transparency (Principle 5) .
The corporate governance framework should protect and facilitate the exercise of shareholders’
rights and ensure the equitable treatment of all shareholders, including minority and foreign
shareholders. All shareholders should have the opportunity to obtain effective redress for violation
of their rights. The prospectus should extend the information about the financial and operating
results of the company dan related party transactions.
Discussion Questions
3. In this case, divergence of control and cash flow rights occurs because the majority
shareholders were able to exercise excess control than their shareholdings. Does this
divergence between control and cash flow rights of the majority shareholders result in lower
protection for minority shareholders? If that is the case, how can we resolve it?
Answer:
Yes. The divergence between control and cash flow rights of the majority shareholders result in
lower protection for minority shareholders. This could make the majority shareholders have the
unlimited control and could intimidate the minority shareholders.
To resolve and protect the minority shareholders, the company should implement the Good
Corporate Governance based on the framework and regulation regionally and globally. In the
OECD Principle 2, it is governed that “Minority shareholders should be protected from abusive
actions by, or in the interest of, controlling shareholders acting either directly or indirectly,
and should have effective means of redress. Abusive self- dealing should be prohibited”.
Discussion Questions
4. Do you think there exists a conflict of interest between the CEO’s position as management
of the company and his position on the Board?
Answer:
There seems to be a strong conflict of conflict of interest between the position of the CEO as
management and his position in the board. If he did not have an influential position in the board,
he would not have the opportunity to influence the activities that lead to some information being
concealed from major shareholders. As a CEO, he is expected to ensure that the company is
being well in the market and has a strong shareholder confidence.
Discussion Questions
5. How might a cross-border listing contribute to the reduction of investor protection?
Are Singapore’s corporate governance rules geared for fraud perpetrated across borders?
What can be done to mitigate this problem?
Answer:
Cross-border listing contribute to the reduction of investor protection because of the difference
law and regulation in many country to control the breaches in fraud of financial statement.
Singapore’s corporate governance rules are geared for fraud perpetrated across borders.
To mitigate the problem, implementation of 6 principles of OECD would be very important to
protect the investor especially principle 2 The rights and equitable treatment of shareholders and
key ownership functions. The Principles support equal treatment for foreign and domestic
shareholders in corporate governance. They do not address government policies to regulate
foreign direct investment. (OECD Principle 2)
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