Has the Langbar scandal damaged AIM’s healthy reputation?

LG finds itself embroiled in the first major scandal to hit the junior market. By Margaret Taylor

Have you heard the one about the Jewish pensioners, the Brazilian bank and the Monaco-based Canadian entrepreneur? An unlikely grouping, admittedly, but in this case there is no witty punchline. For this is the story of ill-fated company Langbar International, whose demise in 2005 still has the power to bring the reputation of London’s junior stock market into disrepute.

Cast your mind back almost two years. On 12 October 2005 trading in Langbar’s shares, which had listed on AIM in 2003 under the name Crown Corporation, was suspended while an investigation of the company’s assets was carried out. A little more than a month later insolvency experts Kroll said the company had been subject to a serious fraud, with the City of London police, the Financial Services Authority and the Serious Fraud Office all being called in.

The result? Langbar’s former directors Mariusz Rybak (the Monaco-based Canadian entrepreneur) and Jean Pierre Regli will face the company in court at the beginning of November charged with defrauding shareholders to the tune of £365m.

But is this an isolated situation that could have happened on any market in any country, or does the case prove that veteran US investor Wilbur Ross, famed for restructuring failed companies, was right earlier this year when he accused AIM of being “clearly dangerous”?

Certainly, the multijurisdictional nature of Langbar’s business model, which arguably played a role in covering up the alleged fraud within the company, has become a mark of AIM in recent years.

As The Lawyer’s recent AIM survey (4 June) showed, the number of foreign entities listing on the junior market has greatly increased in recent years, with companies from countries such as China, Kazakhstan, Malaysia and the Ukraine no longer looking out of place next to English retail chains or Irish bookmakers.

Langbar certainly pushed its internationalisation to the limits, having been incorporated in Bermuda and contracted to carry out construction for the Argentinian government, while its major investor, Lambert Financial Services, was described as a fund for Jewish pensioners living in South America and Israel. The company even banked on an international scale, with the missing £365m having been deposited between Banco de Brasil and Dutch bank ABN Amro.

But none of this is unusual and, with more than 2,000 companies currently listed on AIM, a great many of which have just as convoluted geographic footprints, it’s a tribute to the advisers bringing them to market that such scandals are rare.

During the two years that Langbar’s shares traded on AIM it received legal advice from Lawrence Graham (now LG) partner Michael Storar as well as financial advice from accountant Baker Tilly and brokers Arden Partners, Nabarro Wells and Insinger Townsley.

Given the way that AIM operates, with nomads taking regulatory responsibility, surely the onus must fall on all of the company’s advisers to ensure the company is sound. Clients turn to legal and financial advisers for guidance on how to steer themselves through a particular set of rules, whether these are as onerous as the FTSE All-Share’s or as light as AIM’s.

Investors, who make their own decisions about the level of risk they are willing to take on, surely have the right to expect those advisers to pick up on any dubious activity.

Lawrence Graham, which declined to comment on the Langbar situation, could find itself up in court, with Langbar’s lawyer, Sion Richards of Jones Day, rumoured to be considering action in a bid to regain some of the shareholders’ lost cash.

However, David Collins, head of corporate finance at Berwin Leighton Paisner, points out that AIM was designed for young, high-growth companies, meaning the potential high reward they can bring will come with a commensurate level of risk. That does not mean the market is dodgy, of course, and Collins is quick to point out that the fall of Langbar is hardly an “Enron-type disaster” that will call the entire market into question.

“When AIM first started in 1995 it was a replacement for the unlisted securities market and there was a lot of scepticism around at the time in relation to how well that market would perform,” recalls Collins. “Its growth and its success has been a testament to the London Stock Exchange [LSE] and the responsible approach it’s taken in terms of regulation.”

Anthony Brockbank, head of the AIM team at Field Fisher Waterhouse (FFW), agrees, pointing out that, while the junior market has always been lightly policed, the LSE has moved to tighten up its regulation in recent months.

“Earlier in the year the LSE put greater obligations on nominated advisers [nomads] to ensure that the right kind of companies were coming to the market,” says Brockbank. “The nomad is now the regulator and arbiter of what’s listing.

“My feeling is that the change to the nomad rules will have an effect on the market rather than the result of an individual accident. Of course, there will be criticism following Langbar, there always will be, but I’m hopeful that it’s not going to have a significant detrimental effect on the market.”

From the market’s point of view, regardless of how much it is regulated, it will always be difficult to insulate against fraud of every kind.

“I’m of the view that a fraud is a fraud, whether it’s on AIM, the full list or any other market,” emphasizes Brockbank. “The Maxwell case was a fraud by Robert Maxwell against the Mirror Group, and it was a fully listed company. I don’t think the Langbar situation is a direct result of the company being listed on AIM.”

“At the end of the day,” adds Collins, “no matter how much due diligence you do – and there’s a lot more being done now – you can never put in systems per se that will mitigate against getting a legging over. I think on the whole the market’s regarded as a huge success story.”

Of course, Lawrence Graham continues to be one of the most prolific AIM firms in the City and its involvement in the Langbar case can to some extent be viewed as pure bad luck.

His AIM practice, which comes under corporate head Christopher Tite’s remit, has acted on 15 AIM deals since April, according to Deal Monitor. Among these was a £50m fundraising for a UK real estate company, the £55m flotation of an Indian film company and the $125m (£62.67m) listing of an African investment fund.

Whether the firm’s involvement with Langbar was bad luck or not, the fallout from the scandal should serve as a stark warning to all in the legal community.