By dint of sheer obsessive blogging persistence, Naked Capitalism seems, for better or worse, to have acquired the Journalistic Beat That No-One Else Wanted: all things related to GXG Markets, a profoundly dodgy European small-cap stock market that, after nearly a year of death throes, documented in part at NC, here, for instance, but also in New Zealand, of all places, finally imploded on the 18th of August 2015.
The implosion left behind a desperately damning regulatory report, the prospect of litigation by small-cap companies left high and dry, and a strong sense that surely the responsible regulators, Finanstilsynet (the Danish FSA), and the UK’s FCA, can’t just leave it at that. From the Financial Times Alphaville blog, summarising Finanstilsynet’s report and drawing some conclusions :
Denmark’s Finanstilsynet belatedly paid GXG a visit, in November last year, and quickly realised that this exchange was letting just about any company onto its platform and had no ability to carry out any due diligence. At least 70 listings had broken GXG’s own listing rules, but the regulator had not been informed and GXG had not bothered to do anything about it.
It took another six months, however, before the Danish regulator got round to telling GXG that it considered the exchange to have “repeatedly and grossly neglected and disregarded its own rules and internal guidelines,” noting that there had quite likely been a lot of fraud going on here.
At the end of May the Finanstilsynet told GXG of a draft decision to withdraw the exchange’s license, but then the matter was allowed to drag on for another month before GXG said it would be relinquishing its licence to operate voluntarily.
And that seems to be as far as the Finanstilsynet are taking things.
We might note, in passing, that a lot of GXG business was conducted through London, so the FCA is sure to be on that end of the matter. No?
But in any case there’s one obvious lesson here that few policymakers or regulators seem ready to acknowledge: the MIFID passporting rules that allow unscrupulous operators to benefit from the City of London’s (relatively) robust regulatory reputation while taking advantage of slack oversight elsewhere in the EU, simply don’t work.
Let’s park that final giant theme for the moment, and get to the more immediate fallout: litigation.
In a strong indication that Naked Capitalism definitely has the post-GXG franchise, we are now receiving press releases announcing lawsuits by companies formerly quoted on GXG Markets.
First out of the gate was Asia Pacific Gold Mining Investment(s), with a real headscratcher of a release, via noted London PR Agency EdenCancan. NC has been sitting on the damn thing for a week now, while it figures out what on earth’s going on. That’s pretty unlikely to be exactly what EdenCancan was hoping for, but then, here at non-mainstream NC, we do like to do our due diligence, at our own pace. That release will get its own post shortly, once the homework is done.
The second press release, issued late yesterday, is a much more straightforward proposition. Former GXG company Capital Venture Europe is suing GXG Markets in London:
FOR IMMEDIATE RELEASE
Capital Venture Europe Plc Makes Damage Claim against Danish GXG Markets
Market Crash Resulted in €2 billon Loss, Largest in Scandinavian History
October 5, 2015 (London)
On August 18, 2015 the Danish regulated stock market, GXG Markets, ceased operations in London and Copenhagen after a finding of gross negligence by the Danish Financial Services Administration. GXG voluntarily surrendered its license to operate a European Regulated Exchange and two EU Multilateral trading Facilities.
This blogger vaguely remembers Capital Venture Europe. It sat there on GXG Markets for a couple of years, if I remember correctly, without a designated broker, yet with a market capitalisation of £50Mn, based on the offer price of £1, not the bid price of £0, and a balance sheet of a few tens of thousands of quid; all doing absolutely nothing except looking weird. Mind you, the trippy world of GXG Markets was such that Capital Venture Europe was massively overshadowed by other weirdness, such as swarms of phantom geese, or an alleged fraudster leading an international symposium on fraud prevention, before his arrest and prosecution.
Back to Capital Venture Europe’s release:
At the time of the GXG Markets collapse, upwards of €2 billion in market capital listed on the exchanges disappeared stranding most shareholders and leaving them with essentially worthless and illiquid shares. In the UK, GXG had encouraged pension plans to invest in the now worthless shares.
Retail investors may have invested in GXG stocks via tax exempt ISAs, too. Here are the UK’s tax authorities, dealing with the resulting can of worms.
Back to the release again:
Capital Venture Europe shareholders experienced a loss of €50 million in market capitalization and now may be unable to sell their shares. As a result Capital Venture Europe has retained legal counsel, Washington DC based Brimstone & Co, and has filed damage claims against GXG Markets and its Swedish parent company GXG Global Exchange Group.
Brimstone & Co, as this 2010 Bloomberg report states, act for survivors and their families in the matter of the Vatican’s role in laundering money looted by the Nazis in the Holocaust, a case that goes all the way back to a report by the US State Department in 1998 and is still running. So Brimstone do look like operators with stamina and connections. Brimstone & Co have definitely picked out one of the key men in the GXG story already:
Both GXG companies are headed by NASDAQ OMX official Carl Johan Högbom.
He’s quite striking, Mr Carl Johan Högbom. He adorns NASDAQ OMX Stockholm’s Disciplinary Committee, which intones gravely on market abuses perpetrated by companies on the NASDAQ Stockholm exchanges, for instance here, in 2015, or here, back in 2011.
When not intoning gravely on market abuses, 2011-2015, Mr Carl Johan Högbom, with his other hat on, as Chairman of GXG Markets A/S, presided over the monumental supervisory trainwreck, 2011-2015, described in Finanstilsynet’s regulatory report:
Finanstilsynet has previously – in cases involving GXG’s admission of companies to trading – conveyed to GXG a number of risk statements, reprimands and orders. One case was reported to the police by Finanstilsynet.
During the on-site inspection, Finanstilsynet ascertained that GXG had admitted several third-country-based issuing companies to trading on its market places in violation of GXG’s own rules. In the opinion of Finanstilsynet, in many cases, GXG had interpreted its own rules such that companies only just qualified for admission, and in many other cases, GXG did not observe its own admission criteria at all.
It is the opinion of Finanstilsynet that GXG has grossly ignored the risk information notified to GXG over a long period of time, and that, by admitting the many additional companies, GXG took risks which, historically, GXG has been unable to manage.
During the on-site inspection, Finanstilsynet found that, internally in the organisation, GXG had allowed far more than 70 cases on possible violation of GXG’s own rules to develop without processing these cases or making the statutory notification to Finanstilsynet.
At the time of the on-site inspection, GXG did not yet have a full overview of these cases but had concluded, however, that several cases concerned “fraud claims” or other behaviour which may give rise to suspicion of fraudulent behaviour.
In the view of Finanstilsynet, the observations made confirm the risks in GXG’s business model; risks which Finanstilsynet has repeatedly pointed out to GXG.
Finanstilsynet considers it to be gross negligence that GXG has allowed the build-up of such an excessive caseload without GXG having either processed these or having notified these to Finanstilsynet.
Finanstilsynet particularly notes that several of the cases may have inflicted losses on investors or other market participants due to fraudulent behaviour.
As an operator of a regulated market, GXG is responsible for the market being conducted in an adequate and appropriate manner.
In the assessment of Finanstilsynet, even though there is a great difference between actual operation of its primary and ancillary activities (GXG First Quote and GXG Main Quote), GXG also bears a general and fundamental responsibility for ensuring that the ancillary activities are also operated in an adequate and appropriate manner, including the enforcement of private-law regulations for operating multilateral trading facilities.
The on-site inspection carried out by Finanstilsynet revealed that GXG repeatedly and grossly neglected and disregarded its own rules and internal guidelines. As a consequence of this neglect, GXG exposed itself and the market to the exact same risk elements that the very same rules are intended to manage and mitigate.
Against this backdrop, Finanstilsynet assesses that GXG has failed to operate its regulated market and multilateral trading facilities in an adequate and appropriate manner. Such operation is irreconcilable with continuation of the company’s licences and therefore, Finanstilsynet assesses that the company’s licences should be withdrawn.
So Mr Carl Johan Högbom leads a kind of Jekyll-and-Hyde existence: prim disciplinarian in Sweden, penny stock orgiast in Copenhagen and London. So far, NASDAQ OMX Stockholm don’t seem all that bothered.
Perhaps that will change; back to the Capital Venture Europe press release one last time:
According to a Company spokesperson, Capital Venture Europe has documented five or six massive frauds that were perpetrated using the GXG stock markets. In at least two cases, companies were allowed to amass market capitalization in excess of $1 billion. Suspicious transactions totaling almost $750 million went unnoticed by GXG. Fraud losses to investors could top $2 billion.
Dr. Jonathan Levy, a solicitor who is representing Capital Venture Europe stresses that the case is in its infancy. According to Levy who has current legal cases against Swiss banking giant UBS AG and the Vatican Bank: “To quote Hamlet, ‘Something is rotten in the state of Denmark,’ I can see regulators missing one or two of these scams but five or six?” Levy has filed public records requests with several national regulators as the case grows. He also reports that several of the New Zealand brokerage firms, shell companies and corporate advisors registered with GXG had questionable backgrounds including bans by other security regulators. “I am baffled why a stock exchange would permit so many known bad actors to participate in a regulated activity.” Capital Venture Europe however has asserted that the GXG exchanges were the hub of the questionable activity, the one common factor.
Although Denmark ranks high for transparency in business dealings and integrity, in the case of the Danish GXG, the Danish Financial Services Authority has only released a single statement which lacks much information and has not addressed the billions of dollars in alleged fraud.
I agree with Dr Levy: this one’s got enough jurisdictions, Nordic political entanglements, mighty-but-caught-out firms and institutions, and reputation issues, to be real a slow burner. But Dr Levy seems to be a specialist in that kind of thing. A month ago, he lit another little fire under the UK’s FCA, by the way. I expect there will be more as he refines his questions.
If, dear readers, you want to see who gets burned down, if anyone, and how, you appear to have the ringside seats, but I suspect you’ll have to be quite patient. Let us see.
The PDF of the original press release, with contact details for any interested journos, who are most welcome to horn in on our rather daunting GXG patch, is here.