Key Investments’ mysterious transaction explained

The new Prague 6 mayor can now accurately calculate the value of the district’s investment portfolio managed by Key Investments

Novopečená starostka Prahy 6 Marie Kousalíková zdědila po svém předchůdci Tomáši Chalupovi i nadělení s Key Investments. | na serveru Lidovky.cz | aktuální zprávy Novopečená starostka Prahy 6 Marie Kousalíková zdědila po svém předchůdci Tomáši Chalupovi i nadělení s Key Investments. | foto: © ČTKČeská pozice
Novopečená starostka Prahy 6 Marie Kousalíková zdědila po svém předchůdci Tomáši Chalupovi i nadělení s Key Investments.

Czech Position yesterday published information about a mysterious announcement on the website of Key Investments: In a legally-required declaration, the controversial brokerage revealed that it had acquired shares in the non-existent company Sigma Brno. We have since managed to unravel the mystery, but any sense of satisfaction at having revealed the scheme behind the suspect transaction was soon dispelled by more serious questions which arose there from and should interest the administrations of Prague 6, 10 and 13.

Key Investments is managing portfolios for Prague 6, 10 and 13 in which the district administrations have a total of around Kč 650 million invested.    

ISIN CZ0005092858 or CZ0005092859?

When filling out the legal formula, someone from Key Investments simply “overwrote” the final number of the international identification number (ISIN) of the shares in question. As a result of the different ISIN number, the shares transferred were not Considering the price at which Key Investments sold the same shares to its clients, somebody lost about 90 percent of their investment.those of the non-existent firm Sigma Brno (ISIN CZ0005092858), but shares in Key Investments’ “hit asset” Spolek pro chemickou a hutní výrobu (ISIN CZ0005092859), which it has consistently acquired for the portfolios of its clients.

This transaction was by no means small – 5 percent of all Spolek pro chemickou a hutní výrobu (Spolchemie) shares were involved.   

Any satisfaction at having solved a mystery lasted only until the significance of the transaction emerged. The shares in Spolchemie were sold for approximately Kč 28 per title. Considering the price at which Key Investments sold the same shares to its clients, somebody lost about 90 percent of their investment. It’s not possible to say which clients because we have been unable to ascertain a complete picture of the portfolios of the brokerage’s individual clients.    

Key Investments clients who already have Spolchemie shares in their portfolios (Prague 6 is blessed with possessing 92,417 shares bought at approximately Kč 288 per share), can now reliably calculate the value of their portfolio assets. The results won’t be encouraging. Czech Position recently reported that in mid February the Czech mining company Sokolovská uhelná lodged complaints with the anti-corruption police and the financial regulator over Key Investments’ practices. The brokerage returned less than 10 percent of the money invested by the mining company when it decided to close terminate the portfolio.

Hard times may lie ahead not only for the new mayor of Prague 6, Marie Kousalíková (Civic Democrats, ODS), but also for the Via Chem Group — for whom the shares represent a significant portion of the company’s assets. The revaluation of the shares transferred could put the company in an awkward situation.

We still don’t know who the second party to the transaction was (i.e., the lucky owner of the shares and their securities broker). The securities depositary refused to answer Czech Position’s questions, namely whether it was Key Investments o.c.p, a.s. Slovensko — the brokerage’s Slovak branch — which had bought the shares and put them into the portfolios of Slovak district administrations.

At the same time, it’s necessary to differentiate between the value of the shares for minority shareholders and the actual economic situation of the issuer. It seems that for Spolchemie the worst is in the past. In February, the company signed a stands still agreement with its creditor banks and reportedly returned to profit in 2010. The company is probably not responsible for machinations with its shares.    

The silence of the national bank

On the Czech National Bank (ČNB) website is an official notice dating from 2009 informing of the decision to fine Key Investments Kč 2 million for unscrupulous business practices with its clients’ portfolios, which are concisely described. The decision to fine the The decision to fine the company amounted to a yellow card for Key Investments.company amounted to a yellow card for Key Investments, yet since 2009 the brokerage has continued to operate using exactly the same practices, and there is absolutely no record of the central bank noting this or reacting.       

Here, it’s necessary to mention that former ČNB board of directors member Robert Holman worked for Efficient Investments — the parent company of Key Investments — until three months prior to his appointment to the ČNB board by President Václav Klaus. At the end of 2002, Efficient Investments set up a country office in Prague with Holman as its sole employee. His monthly salary there was Kč 80,000. Holman left the company in November 2004, and on Feb. 13, 2005 he was appointed to the ČNB board. We shall not speculate as to whether he used his new position to influence the ČNB’s role as a regulator of the activities of Key Investments.    

Those interested in Key Investments’ deals should take a close look at the issue of so-called buy/sell transactions that the firm has used quite widely. In 2005, the securities commission labeled the practice as dangerous but permissible under certain conditions, which were certainly not met by Key Investments. In very simple terms, buy/sell agreements are when somebody borrows money and puts up shares or bonds as collateral. The shares are returned once the loan is paid off. It’s difficult to provide even a brief summary of the risks involved in such operations, nevertheless, Spolchemie shares at a price of Kč 260 per share as collateral is laughable.    

The operation was probably conducted as follows: when any significant sum of money came into the account of a Key Investments Spolchemie shares at a price of Kč 260 per share as collateral is laughable.client — from interest on bonds for example — the money was immediately drawn from the account and sent somewhere while the brokerage gave the client some form of security as collateral in a buy/sell arrangement. For the most part, Spolchemie shares were provided to the clients as collateral.

Perhaps we will eventually find out who was the recipient of the money from the sell/buy agreements brokered by Key Investments, and also whether the shares provided as collateral will be repurchased at the price that Key Investments “sold” them to its clients.   

All previous articles on the Key Investments case are available here.