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Daka Designs Limited – Designers Of A Fraud


Case Overview

Shortly after Daka Designs Limited (Daka) launched its initial public offering (IPO) on the Mainboard of Singapore Exchange (SGX), it issued profit warnings. This led SGX to seek a special audit by KPMG. The special audit found the nondisclosure of possibly material information, including how capital raised was used and cash drawings and loans made to senior executives. The objective of this case is to allow a discussion of issues such as investor protection in IPOs, effectiveness of the board of directors in protecting minority shareholders, as well as the impact of cross-border listings on investor protection.

The Beginning

Founded in 1993 by Executive Chairman, Pat Y. Mah, Daka Designs grew to become one of the more prominent design and development companies in Hong Kong. Daka had its main operations in Hong Kong and primarily focused on the design, development and marketing of innovative products for the global consumer market. Daka’s drive to innovate culminated in the receipt of numerous awards and accolades1 since its incorporation.

Daka had plans moving forward to develop its distribution network in order to provide a more integrated and efficient supply chain as well as open up new markets to reach out to customers.

Initial Public Offering

In July 2004, Daka filed for an IPO on SGX with the aim of raising about S$14 million in net proceeds, 25.5% of the company’s enlarged share capital. It planned to use the IPO proceeds to expand its marketing network, product development, and for its expansion in China2 . In addition, its prospectus stated that the divestment of Daka Industrial Limited (DIL) was a result of Daka’s change of focus, from manufacturing to the design and development of products. Finally, the prospectus showed high turnover and profitability.

Profit Warnings

Shortly after its IPO, Daka issued a profit warning for the six months ending 30 September 2004, attributing it to a delay in its marketing network and product development plans. SGX queried Daka on its failure to alert the public prior to the IPO. Daka responded by citing the time lag between the IPO and finalization of the impact on bottom line figures. Consequently, Daka’s share price plummeted.

Another problem surfaced after Daka announced the financial results for its first financial year ended 31 March 2005. Daka disclosed that there might be repayment issues with Daka Manufacturing Limited (DML)3 . DML was whollyowned by DIL, which was 18%-owned by Daka. DML and DIL were supported by Daka through loans. Daka would then set off these loans against the cost of goods Daka purchased from DML. In Daka’s reply to SGX queries on this loan issue, Daka simply explained that it had not foreseen the loans having an adverse impact on Daka.

On 11 October 2005, Daka issued yet another profit warning, stating that reported financial performance may not meet market expectations. This round of profit warning was reportedly due to provisions made against the amount due from its subsidiary, DML. On 14 November, 2005, Daka reported an interim loss of HK$38.8 million for the six months ended 30 September 2005.

Daka had issued two profit warnings in a short span of just over a year since attaining listing on the Mainboard. This triggered SGX to appoint KPMG on 20 November to conduct a special audit to investigate Daka’s financial affairs.


KPMG faced difficulty in performing the special audit as Daka restricted KPMG’s access to its financial information and personnel despite KPMG’s and SGX’s repeated requests for Daka’s cooperation.

Raymond Chow, the CEO, was purported to have meticulously taken actions to impede KPMG’s review. He allegedly went to the office over the weekend to prevent the auditors from removing computer data4 . Furthermore, in their attempt to restrict KPMG’s access to sensitive company information, employees of Daka communicated through non-Daka web accounts5 to avoid the auditors’ scrutiny.

Despite obtaining limited information, KPMG was still able to derive certain preliminary findings. On 16 January 2006, SGX announced that Daka’s trading would be halted because it had breached listing rules6 by failing to cooperate in the conduct of the special audit.

Following the halt, the audit committee overruled company management’s decision to hinder the special audit and granted KPMG access to Daka’s financials and other information. Eventually, the CEO and management gave in.

Special Audit

Daka appointed the consultancy firm A&M Asia to act as interim managers on 22 May 2006 during the course of the special audit. Kelvin Flynn and Eric Thompson were appointed executive director and CEO respectively. On 25 May 2006, Mah, Chow, CFO Kevin Leung and executive director Rose Chow decided to relinquish their managerial positions and took leave of absence from the Board of Directors. This was to prevent further erosion of confidence in the company management and corporate governance of Daka.

In the special audit report released in June 2006, KPMG raised concerns regarding possible breaches of the Securities and Futures Act (Chapter 289) and other laws in Singapore.

According to its prospectus, Daka had planned to use S$6.3 million of the IPO proceeds to expand its marketing network, S$5.6 million for product development and the remainder for working capital and expansion in its PRC market. Instead, it used HK$64.8 million raised from the IPO - 84% of the capital - to repay existing bank loans. This intention was not disclosed in its prospectus. Since this was material information which could have affected potential investors’ perceptions, the non-disclosure was in breach of the listing rules.

Moreover, several large cash drawings and loans from Daka were made by Mah and Chow between 2003 and 2004. The amounts outstanding from the directors as at 31 March 2003 and 30 September 2003 were described in the financial statements of the Daka Group as “non-trade in nature, unsecured, interest-free and repayable within the next twelve months”10. No further details on the directors’ drawings were revealed in the prospectus, although this information should have been disclosed under the Securities and Futures Regulations.

 Daka had been trying to boost profits by recording sales prior to goods being delivered as well as generating fictitious sales as early as 2002. Undelivered goods were also shifted away from the factory to avoid being accounted for in their stock. As a result, HK$12 million revenue was recorded for Daka in the final month of 2004, despite only earning HK$8 million in the first 11 months.

In addition, Daka failed to disclose the Group’s plan in 2001 to acquire 100% of DIL, as part of its IPO plan. In fact, Daka did acquire a 100% stake in DIL in 2002, by acquiring a certain Lawrence Chan Kam Tong’s 50% stake in DIL. Following this acquisition, Daka had sufficient control and influence over DIL and DML (wholly owned by DIL). However, prior to IPO in 2003, Daka chose to divest its stake in DIL to Chan, effectively reducing its interest to 18%.

The conclusion drawn from the special audit was that information provided in the prospectus was completely inconsistent with the firm’s actual activities and objectives. KPMG also believed that Daka’s true intention of the divestment had been to improve the performance of Daka in anticipation of the IPO.

In addition, Daka staff and management appeared to be involved in the operations and decision-making of DML. The authorised signatories for DIL’s bank account were Daka staff, and they were also found to be financing their operations, and maintaining the accounting system and finance function of DIL. On the other hand, Chan, who effectively owned 82% of DIL, had no control over DIL and had assisted DML only at Daka’s request. This suggested that DIL was a controlled subsidiary, and the investment in DIL was likely to be more than the prima facie 18%. This should have warranted the need for DIL (and wholly-owned DML) to be consolidated for accounting purposes. Including DML’s losses in the consolidated accounts - which was not done - would have reduced Daka’s profits by HK$19.2 million.

Navigating Through Murky Waters

To release Daka from its past liabilities, a proposal was drawn up to sell Daka Group to Daka Direct for HK$42.5 million12. The sale converted Daka into a shell company with only a cash asset of HK$12 million13. Following the sale, Daka was renamed Carats Ltd. In order to remain listed, Carats pursued opportunities for the company to secure new business through a reverse takeover. A reverse takeover seemed to be the best exit option for its minority shareholders since they would be able to have a stake in a viable business and benefit from any upside in share price of the new company. However, several attempts for a reverse takeover failed and Carats was eventually delisted a year later.


The Hong Kong ICAC prosecuted the top three former senior executives, Pat Mah, Raymond Chow and Kevin Leung in September 2009. They were charged for their respective roles in a conspiracy to defraud the SGX and misleading existing and potential investors through the misrepresentation of Daka Designs’ true financial position. In view of their serious breach of trust, Mah and Chow were sentenced to 24 months and 38 months in jail respectively in October 2011, and disqualified from taking up any directorships for five years in Hong Kong. This conviction also disqualifies them from holding any directorship in Singapore under the Companies Act Section 154(1).

Discussion Questions

  1. Did the directors breach any laws pertaining to directors’ duties?
  2. Are the prospectus disclosures adequate for investors? If not, how can they be improved?
  3. In this case, divergence of control and cash flow rights occurs because the majority shareholders were able to exercise excess control than their shareholdings. Does this divergence between control and cash flow rights of the majority shareholders result in lower protection for minority shareholders? If that is the case, how can we resolve it?
  4. Do you think there exists a conflict of interest between the CEO’s position as management of the company and his position on the Board?
  5. How might a cross-border listing contribute to the reduction of investor protection? Are Singapore’s corporate governance rules geared for fraud perpetrated across borders? What can be done to mitigate this problem?

Title: Daka Designs Limited – Designers Of A Fraud
Length: 2 pages (575 Words)
Style: N/A


Fraud Case Study

Answer 1

The directors broke many laws pertaining to their duties. The first breach of duty was to impede KPMG from carrying out a special audit. This is a demonstration of presence of fishy activities in the company that they did not want to have them revealed. The directors were also found to have breached the Securities and Futures Act, among other business laws in Singapore. For instance, instead of using the borrowed IPO proceeds for the intended intentions of expanding the business, the directors watched as the money went into repayment of bank loans. This is despite the fact that the intentions were not revealed in the prospectus. The breach by company directors also involved recording of exaggerated profit margins please investors.


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