Small Talk: Langbar case highlights loophole in AIM rules

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The Independent Online

The sharp rise in the number of foreign company floats has been one of the major driving forces behind the growth enjoyed by the Alternative Investment Market (AIM) over the past few years.

In 2005 alone, more than 90 admissions came from international issuers but, as the scandal at Langbar International perfectly highlights, investors need to handle such stocks with extra care. The fact that foreign companies listed on AIM can get away with more lax disclosure is a major problem for investors. This is particularly true when it comes to the activities of their major shareholders.

For example, it seems that well over £70m-worth of shares in Langbar were offloaded before it finally emerged that the company was worthless, without anyone being told about the sales because of a loophole in the AIM rules.

UK-registered companies listed on AIM have to make public all shareholders with a stake of more than 3 per cent. Foreign companies on the junior market have to publicly disclose major changes to their shareholder register only if the law of the country where they are incorporated compels it.

Langbar is incorporated in Bermuda, where the law merely says that stake sales or purchases have to be recorded on a company's shareholder register by its secretary. Public disclosure is not required.

The only way an investor can see such changes is to go in person to a company's office and ask the company secretary to show him or her the register.

Langbar investors wanting to uncover who was dumping tens of millions of pounds-worth of shares day after day in the autumn would have had to visit the group's offices at Canon's Court, 22 Victoria Street, Hamilton, Bermuda to ask Mrs Judith Mills, the company secretary, for an updated shareholder register.

The Bermuda authorities tell Small Talk that "on certain grounds" such a request can be turned down by a company, but assured us that a locally registered firm cannot withhold this information indefinitely.

Should it try, investors have to ask the Bermuda courts to compel the company to make this disclosure.

This legal process, Small Talk was warned, would take quite some time and resources.

At this point, it becomes plainly obvious that any investor wanting to find out who are the major shareholders of a Bermuda company listed on the junior market will not be able to do so independently.

In the case of Langbar, any investor who set out last October to find out exactly who was behind the tsunami of stock sales will today be no closer to finding an answer.

This question is now one for the Serious Fraud Office and it seems almost certain that whoever was behind the bulk of the selling was also a major player in the wider fraud.

Of course, it is all too late for the hundreds of private investors and a few institutions who piled into Langbar at the end of last summer believing they were buying into a cash-rich company.

They are unlikely to get much of their money back. But one can't help concluding that the fraud at Langbar, which seems to have been nothing more than a sophisticated share-ramping operation, would have been rumbled a lot earlier had AIM imposed more stringent rules governing the disclosure of stock sales by major shareholders. In fact, it may never have happened.

And what of the hundreds of other foreign companies listed on AIM, many of which are also incorporated in Bermuda or other offshore destinations such as Cyprus, the British Virgin Islands and Caymen? Who is really behind them and what is their agenda?

Booming Ireland

The smaller companies broker WH Ireland posts annual results today. Given the buoyancy of the stock market, the figures are bound to impress. Over the past 12 months, the group executed 26 floats on AIM, raising nearly £70m for its clients. This time last year, the Manchester-based broker posted a pre-tax profit of £2.6m. This should have risen to about £3m for the year just gone.

Griffin mines rich seam

Likewise, readers should also look out for a solid trading statement from Griffin Mining today. Since getting its Caijiaying mine in China up and running in June, the group is believed to have produced more than 6,600 tonnes of zinc during the rest of 2005. Although operating costs are believed to have been higher than originally envisaged by Griffin, due to a series of teething problems, kinks have now been ironed out by management. In fact, the company expects improved efficiencies in production and output rates to result in falling costs.

Chaco can rise further if it gets Colombia go-ahead

Chaco Resources, the South America-focused oil and gas explorer, saw its shares finish at an all-time high last week. The company awaits news on whether it has been granted an exploration and production licence for Colombia's Primavera block and word has it a decision is imminent. On Friday, Chaco raised £1.5m through an equity fundraising - money it needed to assure the Colombian authorities that it has the resources to develop the site. Should it secure the block, the group's shares may go a lot higher.