Trading companies like Noble, Enron and Lehman all have a common feature, their existence depends on an uninterrupted flow of short term credit financing.

1. Open Memo To Noble Group’s 15,000
Employees
This post is written by Michael Dee, who has been in the investment
banking scene (ex Morgan Stanley CEO SE Asia, ex Senior MD of Temasek
Holdings) for more than 30 years.
As a banker for 35 years I have watched a steady deterioration in the corporate
governance ecosystem since 2000. There is never just one problem in a crisis
because the machinery of governance is so complex. It is the interaction of many
gears and springs like a Swiss watch and the modern financial system suffers
from what I call Complexity Collapse. The ecosystems complexity collapses
when systematically weakened by each gear looking out for itself rather than the
health of the entire organism.

2. Noble is great example of this and I am watching each element look out for itself
and thus the protections for employees and minority investors are been
abandoned.
In the memo below I have written not to shareholders but to employees who
actually have a much greater personal stake in ensuring that Noble straightens
itself out.
There is no question in my mind that Noble is able to answer the accusations
made by Iceberg in a clear and comprehensive manner.
It is equally clear that Noble will not do this. Why? Iceberg has brought out some
serious issues which if not addressed could lead to the collapse of Noble.
The only plausible explanation is because Iceberg has been right all along and
Noble’s management are merely trying to save themselves and in the process
putting the livelihoods of 15,000 people in jeopardy.
As I state below I have no personal or economic interest in this other than
highlighting yet another corporate abuse of power in the hopes that employees
will save themselves, from their leadership.
Memo to the 15,000 Employees of Noble Group:
I have waited until now to write you. It is about 15 weeks since Iceberg
Research launched their first of three reports, and your management and
board have had an ample opportunity to fulfill their promise to fully answer his
charges regarding Noble’s accounting practices.
There are over 15,000 of you who have a tremendous stake in the outcome of
this debate. You have families, many with children, health insurance, pensions,
mortgages, careers and even investments in your companies securities.
All are riding on whether your management is telling you the truth, whether your
board is taking actions to protect your source of financial security, and whether

3. your auditor is doing their job to fully review Noble’s financial statements and that
they present fairly Noble’s financial condition.
By way of background you should know that over the last five years the Dow is
up over 80 percent, the Singapore STI is up over 20 percent and yet Noble
is down more than 55 percent.
Thus over five years a dollar invested in the market would now be worth $1.80
while the same dollar invested in Noble is only worth $0.45. In other words, a five
year investment in the Dow did four times better than Noble.
It takes a lot to so massively underperform the market and with such high
volatility in the share price.
Even over 10 years the share price is down over 17 percent while the Dow
is up almost 75 percent.
The inescapable conclusion is that the stewardship of Noble over the last five
and 10 years has not served shareholders and employees well at all.
The market is telling you that something is very wrong at your company and I’m
telling you time is running short to fix it.
As an investment banker and investor for over 30 years I have seen many such
scenarios that have ended badly. Right up until they lost absolutely everything,
Enron’s employees also thought they were being well served by management
and their board.
Trading companies like Noble, Enron and Lehman all have a common feature,
their existence depends on an uninterrupted flow of short term credit financing.

4. When the vendors of this short term capital stop lending bankruptcy can follow as
we saw so often in the recent financial crisis and with Enron.
Markets are well suited to handle good news and bad news, however when there
is a loss of trust in the news being provided crisis ensues.
This is where Noble is now with the share price down over 40 percent in the last
year.
It’s easy to paint Iceberg Research, Muddy Waters or even me for that matter as
the enemy to be attacked, defamed and even sued.
It is part of the routine playbook, yet it never works.
Enron did all that and even forced Merrill Lynch to fire John Olsen, the
honourable research analyst who dared ask what proved to be the most
prescient questions about Enron’s finances.
Yet facts are persistent things and reality cannot be fired, bullied and sued.
Right now your careers, benefits, pensions and even your reputation hangs in the
balance. However, Noble’s founder, senior management, board, auditor and

5. legal counsel are denying reality and relying on an army of PR firms to try and
augment the reality.
Well it won’t work. Only straight answers to simple questions can begin to repair
the damage to Noble’s share price. Even CIC, Noble’s second largest
shareholder has recently sold down their position and your founder
originally sold them some of those shares.
Perhaps you may say that your founder is also a major shareholder and thus
your interests are aligned with his.
To that I would respond that other shareholders are not paid as handsomely by
the company and are not the Chairman of the very board which decides his
compensation.
How handsomely and with what perks is undisclosed. Wouldn’t it be nice if your
friends decided your compensation?
I want you to know I have no economic position in this situation, am not short the
stock and do not desire to see the demise of your livelyhood.
On the other hand, your management is currently practicing what I call
the Octopus Theory of crisis management, squirt ink and swim away
quickly.
It’s not working as a quick look at your share price makes clear. On the theory
that as employees you have the most at stake and that management must listen
to you as the key stakeholders, allow me to offer some advice to move your
company from a deficit of trust to one of confident respectability.
Please indulge me as I offer you and Noble’s minority shareholders, my personal
thoughts as to saving your company.
First, fire your PR firms and those lawyers suing Iceberg Research as Iceberg is
not your problem.

6. Your problems and those of Noble are of management’s own making by not
answering question completely and convincingly to the market, accepting blame
where due, and instead engaging in diversionary tactics which have not and will
not work.
Your CEO is a very smart Goldman Sachs trained banker and your current
auditor,Ernst & Young (E&Y), has been your auditor for over 20 years.
CEO for Noble Group
They know the answers and how to explain them far better than the lead PR spin
doctors, Bell Pottinger, whose Wikipedia page precedes them.
Noble must show the market they do not need any spin merchants to explain
with clarity your financial statements and how they are prepared.
Second, specifically answer the questions which have been raised.
As a start just focus on two issues; 1) the exact details of how Noble can justify
the YanCoal valuation at at level over 30 times it’s market value, and 2) fully
explain why what Noble calls “inventory sales” are not in fact just repos which
should be shown as debt.

7. Now before you try to say “Noble answered this already” just stop, because your
management has not. Until proven otherwise I consider the YanCoal valuation a
mythological fiction pure and simple.
I’m willing to listen and be proven wrong but only if Noble shows all the math
behind the valuation model.
Anything less is just voodoo or magic, and I believe the employees and investors
deserve better.
And don’t worry about ‘competitive secrets’ because Noble’s credibility is in taters
and your competition is unlikely to attempt to recreate your extreme valuations
anyway.
If I was an employee and saw an asset valued at 30+ times what the market
valued it at I would tell my management to show their confidence and bid for the
company and reap a massive return.
Management should at least show the market why they are so wrong on this
asset and they are so right. After all in 2012 Yancoal traded above A$1.20 and
now it’s down over 90 percent as of the recent financial release.
Who to believe? The publicly traded market price or a secret model which says it
is worth 30 times more. You decide. Oh and don’t forget it used to be valued at
over 50 times the market price before Iceberg correctly pointed out this disparity
and Noble took a write down of US$200 million a month ago. Too little too late.
As for Noble’s “inventory sales” which Noble claims are just sales of commodity
inventory to banks with no obligation to repurchase? I just don’t believe it.
I contend Noble are committed to repurchase the inventory as a source of short
term debt until proven otherwise. It may sound arcane but it’s the equivalent of a
pawn shop or secured lending.

8. Now I know you say your management says it’s contracts make it clear that
repurchase is at Noble’s option. But not all legal agreements are written. Oral
and tacit agreements are still agreements.
So to clear this up here’s a simple question you can ask your colleagues in the
finance department. “Over the past three years how many inventory sales to
banks has Noble completed and how many times has Noble not repurchased
them?”
If they are actually sales and not repos then the vast majority of them would not
have been repurchased. So go find out and report back because your
management really doesn’t want to discuss this.
You see, the banks with whom Noble does these sales are regulated and thus
their accounting must match Noble’s. I contend the risk committee and boards of
the banks Noble does these with do not consider them open purchases.
I mean think about it, why would a bank be buying commodity inventory anyway?
At this point you may want to google ‘Repo 105′ as it relates to Lehman Brothers
as you recall the images of 20 year employees walking out of Lehman with their
finances shredded and their career in a cardboard box.
Third, speaking of the now extinct Lehman Brothers, change your auditor,
E&Y, who have been auditing Noble’s finances for 20 years now.
This is far, far too long. Auditors are guardians for investors and 20 years breeds
too cozy a relationship. E&Y were Lehman’s auditor along with other infamous
companies now defunct.
Noble says they rotate E&Y partners every five years but this is just substituting
players on the same team. Your management have said E&Y doesn’t have to
defend your financials, however they should defend their role in singing off on
them.

9. Here it is instructive to review two aspects of E&Y which are relevant to
establishing how much trust one should have in their work. First, as Lehman’s
auditor they signed off on the earlier mentioned Repo 105.
Since then, it must be noted, E&Y has paid US$109 million in fines and penalties
relating to their Lehman auditing work, including $10 million just recently paid to
NY State over their role in the Lehman collapse.
“Auditors will be held accountable when they violate the law, just as they are
supposed to hold the companies they audit accountable,” said New York
Attorney General Eric Schneiderman.
The Public Companies Accounting Oversight Board (PCAOB), an accounting
watchdog established by the US Congress has recently issued scathing
comments about E&Y.
As reported by the WSJ in 2012 and 2013 the PCAOB found in their review of
over 100 audits that they were deficient about 50 percent of the time.
In half of the audits reviewed, “E&Y hadn’t obtained enough evidence to
support its audit opinions giving its clients a clean bill of health“ as reported
in the WSJ last year.
But this isn’t a recent problem, the WSJ also reported in 2011 that in over half of
the E&Y deficient audits it was because “E&Y was deficient in its testing of how
clients applied fair value to their hard-to-value securities”.
This is directly relevant to Iceberg’s charges. Also directly relevant is that in 2012
it was reported E&Y had paid a record US$2 million fine with the PCAOB
Chairman saying; “These audit partners and E&Y — the company’s outside
auditor for more than 20 years — failed to fulfill their bedrock responsibility”. Not
a ringing endorsement I would say.
Fourth, Noble should be accountable and release completely detailed
compensation and benefit figures for senior management including the founder,

10. who is the Chairman and a major shareholder. There is no excuse for not
disclosing what your senior management team are paid.
Fifth, Noble must focus on generating positive free cash flow from operations.
Noble’s basic problem is you do not generate free cash flow from operations.
Increased dividends and share buy backs paid for with more debt may keep
shareholders happy for a while but is not a strategy. It just worsens the problem
and is not sustainable.
Your share price is about the same as it was 10 years ago yet your debt levels
keep increasing. Just recently Noble announced negative operating cash flow of
US$850 million and an increase of debt of US$900 million, in just one quarter.
It’s time to solve the problem in your business model and generate free cash
flow.
Finally, as employees you must protect your own jobs and reputation. For tens
of thousands of good people their name was forever stained with Enron and their
finances were ruined.
Noble claims that Iceberg Research is led by a former Noble credit analyst. This
actually caused me to really take notice, for if true, Iceberg should be taken even
more seriously as a whistleblower.
And the more Noble sues and tries to discredit him, the more the market listens
and wonders why Noble just doesn’t answer the questions.
This admission by a Noble former employee shows courage for the only way to
improve things often is to go public. Sherron Watkins at Enron and Cynthia
Cooper at WorldCom tried to save the 100,000 jobs at their companies and were
named 2002 People of the Year by Time Magazine.
Had they been listened to in time perhaps many lives could have been saved
financially.

11. If Noble management is unwilling to be fully transparent and answer all questions
about their financials then they should not be a public company. Employees run
the company, shareholders fund it and both should be treated with respect.
Iceberg has noted that many people in key financial and risk management
positions have left Noble recently. Do they know something?
Are they taking proactive actions to protect their families, careers and
reputations? Is there a cancer growing in Noble? If Iceberg is in fact a former
employee and is warning you of the impending storm you had best take his
warnings seriously.
The market has already spoken in the form of Noble’s grossly underperforming
share price. The ship is taking on water, the officers are in the life boats and you
have been warned.
Credit: An Open Memo To Noble Group’s 15,000 Employees
http://www.sharesinv.com/articles/2015/05/29/open-leter-noble/