fin review article

Ugly!!

"The affairs of Advantage Telecommunications (Advantel) warrant an investigation by the Australian Securities and Investments Commission.

For the past 18 months Advantel has been operating on embezzled money without the shareholders being aware of the fact. There must also be some danger that the company could be forced to repay the money, which amounted to some $9 million. And as Advantel has blown the cash, that would leave it in danger of going bust.

Shareholders have not been informed of any of this. Instead the company is now trying to raise $1.9 million in a one-for-one rights issue at 1¢.

The behaviour of the Advantel directors during this period raises several questions. The $9 million Advantel received in unauthorised loans should have been a godsend for this struggling telco but instead the money was sprayed around as though it came out of a fire hose.

The board of Advantel has denied emphatically that it was aware of or involved in any wrongdoing, but there are other reasons for shareholders to be critical of the directors.



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The matter has become public since the charging of Upul Anthony, a former employee of Cogent, who has pleaded guilty in the NSW District Court to embezzling $16 million during 2001. At the time Cogent was a subsidiary of AMP, but has since been sold to BNP Paribas.

Anthony says he became close friends with Andrew Boyd and Hastings Singh, sharing a house in Balmain with them from 1998. At about the same time, Boyd and Singh had started a company called Advantage Telecommunications Australia .

Anthony became highly enthused about the prospects for Advantage, whose Hong Kong subsidiary was a wholesale telecommuncations carrier which took telephone calls from all areas of the world to its Hong Kong switching facility and then onwards to China. Anthony believed they had the only licence in the world to take international calls in and out of China.

The NSW Police fact sheet and accompanying statement by Anthony, tendered in evidence, says Anthony believed the Hong Kong company had the potential to generate huge profits after the injection of additional capital.

At the time, the venture was having trouble raising $1.6 million it needed to buy technical staff and switching equipment.

A West Australian mining company named Nugold Hill Mines took 40 per cent of the Hong Kong company (Advantage HK), but by the end of 2000 Nugold had little more than a million dollars in the kitty and had been unable to raise fresh cash to finance the fledgling telco.

Anthony claims that it was in this situation that he offered to get the money from Cogent.

The fact sheet says that on January 16, 2001 Anthony made an unauthorised loan of $1.6 million from Cogent to Advantage Telecommunications Australia. Anthony was hoping Advantage HK would then become profitable so that he could return the fraudulently obtained money to Cogent.

But the money wasn't repaid. Advantage Hong Kong seemed a bottomless pit and always needed more money.

If it went belly-up, Anthony's embezzlement would be exposed, so he kept pouring more money in, hoping the company would come good and he could repay Cogent. Over the next 10 months Anthony made another $5.4 million in unauthorised loans.

During this period Nugold proceeded with the takeover of Advantage HK. Nugold's plan was to become a telco after spinning off its mineral interests into a new company called Pelican Resources.

Anthony took a final $3 million from Cogent in November 2001, paying the money to a company called Futurestel, which subscribed the money for shares in Nugold in January 2002. The Pelican listing proceeded and Nugold, having taken over Advantage HK, changed its own name to Advantage Telecommunications (Advantel).

Anthony embezzled a total of $16 million from Cogent in 74 transactions. Of that, $6 million was invested by Anthony in Advantel shares, some of it under other people's names. Some of the money was also spent on high living. Of the other $10 million, the main beneficiary was Advantel, which received $4,515,000 of the cash and took over Advantage Hong Kong, which received $4,978,000. The other recipients were Boyd, who received $380,000 and Singh who got $44,000.

The first $1.6 million was paid by Cogent into the bank account of Advantage Telecommunications Australia on January 16, 2001. On the following day $1,582,140 was transferred out of the bank account to Advantage Hong Kong. The same pattern was followed with all subsequent unauthorised loans. They stayed only one day or a few days in the accounts of Advantage Telecommunications Australia, which merely served as a conduit for Advantel or Advantage Hong Kong.

Anthony has now admitted the embezzlement to the NSW Police and is awaiting sentencing in the District Court.

However, the affair also raises questions about the administration of Nugold/Advantel during this period.

Cogent's normal lending was to top 200 companies on security. It would have been outside all bounds of commercial prudence for it to lend $7 million without security to Advantage Telecommunications Australia, a private company with $100 issued capital and only $200 in the bank when its first $1.6 million loan was received.

According to Anthony, Cogent never received any security in return for the loans. However, a loan facility document (described as "false" in the fact sheet) was drawn up between the private company Advantage Telecommunications Australia and the public company Nugold (Advantel) for the first $1.6 million which Advantel received.

According to Anthony, the amount of the loan recorded on this document was changed as further unauthorised loans were made, ending up at $7 million.

Under the document Nugold/Advantel was obliged to repay the loan or could convert it into Advantel shares.

The stipulated repayment date was April 2002. Interest was stipulated at 5.7 per cent. It was never paid but was taken into account when the loan was converted into shares in June 2002.

The conversion was a disaster. The loans were converted at a time when Advantel shares were 40¢. They now trade below 1¢. The result is that Advantage Telecommunications Australia got only 11 per cent of Advantel and the shares are now nearly worthless.

To put it another way Advantage Telecommunications Australia loaned $7 million to Advantel and wound up with only 11 per cent of the company, whose market capitalisation is now less than $2 million. And Advantel shares can't even be traded, because they've been suspended since May.

Advantel directors have blamed the collapse in the share price on negative market sentiment toward the telco sector. However, Advantel also appears to have spent heavily on its Hong Kong and London businesses without getting any commensurate earnings from either centre.

Shareholders appear to have a right to ask whether Advantel directors were sufficiently prudent in handling the $9 million manna from heaven that had been delivered to them. An acute director might have paused to wonder where the money was coming from. Advantage Telecommunications Australia was a tiny company run by two young men, Singh and Boyd, who had few funds of their own.

The money came in the form of loan funds and any demand for repayment would have severely embarrassed Advantel and quite probably sunk it.

Advantel's auditors have remarked in its last two sets of accounts that there was a doubt about it continuing as a going concern.

Admittedly, the terms of the loan facility provided that it could be converted into shares, but as the money Advantage Telecommunications Australia was lending Advantel had been embezzled there must be at least some doubt as to whether the loan facility agreement was a valid document.

Last Thursday Cogent began recovery action for its missing $16 million. Cogent is seeking recovery from Anthony, Singh, Boyd, Futurestel, Advantage Telecommunications Australia and Anthony's private company La Bourse.

Fortunately for shareholders of Advantel, no action has been taken against their company. But if that ever happens, directors will owe them an explanation."