Allied's missing S$33m and questions about the escrow account

ALLIED Technologies' revelation that about S$33 million of cash held in escrow with law firm JLC Advisors had gone missing raises questions about why that account existed for so long, and how the account held as much as it did.

The genesis of the account dates back to Oct 23, 2017, when Allied Tech reached an escrow agreement with the boutique law firm. The escrow account was set up while Allied Tech was carrying out a stock placement to raise funds for unspecified acquisitions.

When the placement was completed on Oct 31, 2017, the company deposited the S$33.4 million of net proceeds into the escrow account.

That S$33.4 million figure shows up in a few places. Earlier this month, Allied Tech's auditor, Ernst & Young, raised concerns about S$33.4 million held in escrow. This week, JLC said the S$33.4 million is believed to have been disbursed under the instruction of its managing partner Jeffrey Ong, who is now uncontactable. Allied Tech says it has not received the funds, and that it had not authorised the release of the monies. It has also put the balance at a slightly smaller S$33.15 million.

Doubts raised

But Allied Tech's past announcements raise doubts about whether the missing S$33.4 million came primarily from the placement, because the company may already have spent the bulk of the proceeds.

On April 4, 2018, Allied Tech said that it used S$30.1 million of the placement proceeds to pay for its acquisition of a 51 per cent stake in Asia Box Office (ABO), an event ticketing solutions provider, leaving only S$3.3 million unutilised but earmarked for general working purposes.

So where does the missing S$33.4 million amount - or S$33.2 million as it may be - come from, and why does it so closely match the placement proceeds before they were depleted?

Allied Tech could not be reached for a response.

According to Allied Tech's 2017 annual report, the company held S$45.68 million of cash with "an escrow agent" as at Dec 31, 2017 from the placement proceeds and from money received for the disposal of a China subsidiary. Collection of the disposal proceeds of about S$12.3 million was announced on Dec 1, 2017.

That extra is not enough to account for the S$33 million or so that is now believed to be missing. Taking out the S$30.1 million paid for ABO would have left Allied Tech with about S$15.5 million held in escrow, assuming no other funds were added or used.

A check through Allied's announcements via SGX did not yield any statement that the ABO deal had fallen through.

Allied Tech could have topped up the escrow account, although if it did so the transactions were not disclosed, and would raise more questions.

Corporate lawyer Robson Lee of Gibson, Dunn & Crutcher said escrow accounts have very specific conditions on disbursements, and contracting parties do not typically add money into escrow accounts after they have been set up.

Mr Lee also explained that escrow agreements are usually tripartite deals between two contracting parties and the escrow agent in the middle, whose responsibility it is to release the funds to the correct parties at the right time. Allied Tech has not disclosed who the other contracting party might be, if any, in its escrow arrangement with JLC.

Indeed, one of the key questions is why Allied Tech was maintaining the escrow account for so long, and with such a large sum of money.

It would not have been for the mid-2018 acquisition of a majority stake in Activpass Holdings, which was almost entirely paid via a stock placement. Activpass is a provider of cloud-based customer and business management systems for lifestyle businesses and professionals.

It may also have been too early for the April 29 letter of intent (LOI) that the company received for a proposed reverse takeover of Allied Tech. That proposal, if it crystallised, would have required Allied Tech to pay stock and about S$30 million to S$50 million in cash.

The company may already have deposited the money in the escrow account before receiving that proposal. Allied Tech said this week that it had already begun to seek the return of the escrow funds since March 23, 2019, more than a month before it received the LOI for the reverse takeover.

JLC senior partner Vincent Lim, however, has disagreed with that version of events, telling BT that his firm had no knowledge of demands for repayment since March 23.

"Why" and "how"

It is important for investors to seek answers about the circumstances surrounding the escrow funds, Mr Lee said. "Investors should be aware of these issues."

While questions about the why and the how of the escrow funds abound, "where" is still the key mystery when it comes to the money and Mr Ong.

JLC's Mr Lim told BT: "Our managing partner Jeffrey Ong has not turned up at our office since a week ago. We have tried to contact him to seek his views on the concerns in relation to our firm's clients' account and for him to assist with police investigations. We have not been able to contact him."

Mr Lim also said the monies in the escrow account were paid out to different persons and entities over the period in question on Mr Ong's instructions, although the firm has no information about whether the instructions were of his own initiative or at the behest of others. There is no evidence at this time that the funds were paid to Mr Ong or entities known to be related to him, Mr Lim added.

On Friday, the Law Society of Singapore seized control of all client monies held by JLC, and said it will launch an investigative audit. At the same time, Singapore Exchange Regulation (SGX RegCo) directed Allied Tech to expand the scope of its upcoming special audit to include developments surrounding the missing funds, and the progress of Allied Tech's attempt to recover the money.

The Society said its investigative audit will focus on JLC's client accounts, looking into the facts and circumstances surrounding the operation of the firm's client accounts and the role played by Mr Ong.

"Interventions of this nature due to reasonable suspicions of dishonesty are rare," the Society said in a statement. "Nevertheless, the Law Society does so where merited and appropriate to safeguard public interest and the integrity of the legal profession, including the vast majority of Singapore lawyers who carry out their duties with honesty, fidelity and responsibility."

Kenneth Lim

25 May 2019