reports said that the 2Go had misdeclared its financial statements for the full year 2015

up to the
first quarter of 2017.

2Go’s net income in 2015 was supposedly P109.1 million, or lower by 90 percent than the P1.08
billion it had reported.

Its net profit for 2016 should be only P344 million, 74 percent lower than the P1.34 billion the
company had announced.

For the first quarter of 2017, 2Go should have indicated a net loss of P264.8 million, contrary to
a positive “net income”

Urban Bank Case on Track

10.13.2000

Notwithstanding the frantic, even misleading, efforts of the respondents in the Urban Bank case to cast
doubt on the merits of the charges filed against them on September 11, the fact is that they are facing
those charges based on hard evidence in the Department of Justice. As far as the Bangko Sentral ng
Pilipinas (BSP) and the Philippine Deposit Insurance Company (PDIC) are concerned, it is clear that
they conspired to misuse P2.8 billion of the funds of the Urban Bank Inc. (UBI), thereby defrauding or
prejudicing the interests of the Bank, stockholders and their own depositors, to be able to pay and
benefit selected clients and investors of their 40% owned affiliate, Urbancorp Investment, Inc. (UII).

This is a case that the respondents brought upon themselves. It is not in pursuit of personal agenda but
the protection and restitution of UBI depositors that the receiver and regulators have brought the case to
the DOJ. In the end it is the courts of justice that will decide the guilt or innocence of the
respondents.

BSP Did Help Urban

If truth must be told, the Bangko Sentral and PDIC were supportive of Urban Bank every inch of the
way, beginning on March 9 when Mr. Arsenio M. Bartolome, the Chairman, and Mr. Teodoro C.
Borlongan, the President & CEO, went to see Governor Rafael B. Buenaventura for the first time about
problems that the bank was encountering.

BSP and PDIC did help UBI as will be explained in some detail in this paper, contrary to the facetious
claims made in a slanderous white paper being circulated by e-mail. The reason Urban Bank collapsed
the way it did was because, unknown to the regulators and while Messrs. Bartolome and Borlongan
were dutifully making representations for bailout mechanisms, they resorted to the wrongful scheme of
buying “garbage receivables”, which is the subject now of the criminal complaint against them, to satisfy
favored clients. Looking back, even the P3.5 billion in emergency loans that BSP was willing to give
them if they had sufficient collateral, could not have stopped the hemorrhage.

The first request for assistance from Messrs. Bartolome and Borlongan was for the possibility of UBI
rediscounting their NFA (National Food Authority) promissory notes with the Bangko Sentral totalling
P2.4 billion. What BSP did was to refer the matter to the Land Bank instead and the result was that
NFA was given a loan that enabled it to pay the promissory notes. On top of this, UBI was able to
secure a loan from the Land Bank in the amount of P600 million with NFA papers as collateral. In other
words, they were able to generate liquidity amounting to P3 billion using their NFA papers, thanks to the
BSP.

UBI also wanted an emergency loan. As early as March 24, Messrs. Bartolome and Borlongan were
beginning to see a “pattern of withdrawals” in the bank and UII. BSP replied that it was willing to provide
advances up to P3.5 billion equivalent to 50% of their total deposits as allowed by law. However, they
opted not to avail of it because they found the requirements too stiff, e.g. producing collateral for the full
amount and submitting a resolution of the board of directors.

As an alternative to a BSP advance, liquidity support in the amount of P1.5 billion from PDIC was offered
based on their representation that they could produce collateral to support such a facility. The loan
documents were ready for signing but as it turned out UBI could produce collaterals which was
substantially less. As a consequence, they decided not to avail but instead declare a bank holiday.

One other request of Messrs. Bartolome and Borlongan was for BSP to help identify a “white knight” or
an investor to buy into Urban Bank to restore market confidence. They wanted SSS or GSIS but this was
discouraged given the policy of government to privatize. Governor Buenaventura suggested either
Equitable PCI Bank or Banco de Oro. He and Secretary of Finance Jose Pardo personally tried to
persuade these banks to help out on UBI’s behalf. They spent much of the Holy Week in meetings and
on the telephone.

On Easter Sunday, April 23, Governor Buenaventura called for a meeting of BSP and PDIC officials,
attended by Messrs. Bartolome and Borlongan, at the Manila Golf Club in a last-ditch effort to consider
the remaining options to avert the collapse of Urban Bank. Also present at that meeting were Tessie
Coson, Chairperson of Banco de Oro, (BDO) and Nestor Tan, President, who were there to discuss
possible acquisition by BDO, subject to satisfactory due diligence.

By the time UBI went into a bank holiday on April 25, Banco de Oro was a candidate to buy Urban
Bank.

Considering the foregoing, the poison e-mail “tale of vindictiveness” about Governor Buenaventura is a
blatant lie. What the authors of that e-mail do not know is that at some point shortly after the hassle that
followed the closure of UBI and UII, Messrs. Bartolome and Borlongan appeared before the Monetary
Board and Mr. Borlongan spoke to say “Archit and I are extremely grateful to you, Governor” and went
on to acknowledge that “the Bangko Sentral bent backwards to accommodate us.”

UBI Closure Justified

The impression given that the closure of UBI on April 26 was done in haste and without sufficient
justification also needs to be corrected. Monetary Board Resolution No. 634, which placed Urban Bank
under receivership was based on a memorandum from the BSP’s Department of Commercial
Banks (DCB II), declaring the bank to be “capital deficient” and “suffering from illiquidity, and therefore
unable to pay its liabilities as they become due in the ordinary course of business.” These are conditions
prescribed by Section 30 of The New Central Bank Act (Republic Act 7653).
These conditions are confirmed in UBI’s letter of April 25 advising BSP of its declaration of bank holiday
on April 25 and a certification about a special UBI board meeting approving the declaration of bank
holiday.

The financial condition of Urban Bank is worse than what appears on the surface.

Since the early part of February up to April 25, when it declared a bank holiday, UBI was resorting to
heavy inter-bank borrowings to meet its mounting liquidity requirements. It is on record that UBI was a
net borrower in the interbank market in 17 out of 20 banking days in February, borrowing a total of P5.8
billion. In March, in 19 out of a total of 23 banking days, UBI’s borrowings totalled P5.7 billion. In the
period from April 1 to 24, in 13 out of 18 banking days, UBI borrowed P5.7 billion.

Affidavits submitted by examiners from BSP and PDIC showed that UBI’s non-performing loan ratios as
early as December 1999 consistently exceeded the industry average. The examiners also found that
UBI’s capital had been deficient from January to March, meaning that it could not meet the P2.4 billion
required capitalization of a commercial bank.

UBI Bought Trash Receivables

Notwithstanding the bank’s precarious financial condition and while the

UBI/UII chairman, Mr. Arsenio M. Bartolome, and the president and CEO, Mr. Teodoro C. Borlongan,
were negotiating for BSP financial assistance, they and the other respondents went ahead on April 19
to use P2.8 billion in UBI funds to purchase for cash at face value, including accrued and unbooked
interest, sub-standard and/or doubtful receivables from the UII’s trust department. This is obviously a
case of “overpricing” at the expense of the depositors of UBI. The receivables were the “garbage” or
“trash” receivables so described in the complaint-affidavit filed in the Department of Justice. The
proceeds were used to service the continuing massive withdrawals and pre-terminations of placements
of UII clients and investors, among whom are the relatives of Mr. Bartolome.

The respondents were accordingly charged with estafa. The charge was on four counts because the
P2.8 billion was paid to UII in four manager’s checks. The charge was based on a violation of the
Revised Penal Code as well as the respondents’ fiduciary duty to prudently and faithfully administer the
funds of the bank.

What is a “garbage receivable?” The transaction in an investment bank like UII begins with an investor
putting his money in the bank on the expectation that the bank would be able to lend it and make a profit
for the investor. In the case of UII, many of the loans in the millions had soured and the investors
knowing this were demanding their money back. It was at this point that Urban Bank decided to buy the
loans made by its affiliate, regardless of the quality of these loans, to enable UII to pay the pre-
terminations, including accrued interest.

UBI is today stuck with these loan receivables, many of which the examiners describe as “substandard”
or “doubtful” according to criteria provided under BSP Circular 210. By definition, substandard loans
involve “unreasonable degree of risk” while doubtful loans are substandard loans with the added
characteristic that makes collection “highly improbable.” They were all paid for with UBI
depositors’ money at face value including interest, accrued or unbooked.

Two such “trash” loan receivables, for example, belonged to a troubled realty company amounting to
P190 million. UBI purchased not only the principal at full face value but also the unpaid accrued interest
amounting to P25.4 million for a total of P215.4 million.

Many of the receivables cited in the complaint-affidavit have been past due and restructured several
times. Some have incomplete documentation. Still others belong to companies that have been
consistently incurring losses resulting in negative capital and net worth. No prudent banker mindful of
the interest of its depositors would have bought these. They are “trash receivables.”

In her letter to the interim receiver, one of the respondents, Ms. Corazon Bejasa, the corporate secretary
of both UBI and UII, admitted that indeed “heavy withdrawals from trust funds occurred on April 19, 24
and 25, 2000 and that in order to service these withdrawals, certain receivables of UII were sold to the
bank, the proceeds of which were used to fund the manager’s checks purchased from the bank by UII
and issued to UII clients in payment of their withdrawn funds.”

Ms. Bejasa admitted that indeed documentation of these receivables might not have been complete but
this was due to “the heavy volume of transactions on these dates and the extreme pressure to service
the numerous withdrawals. . .”

The series of poison e-mail letters ignores these facts which are all on the record in the formal
complaint-affidavit and annexes filed by BSP and PDIC in the Department of Justice. It prefers to float
innuendoes besmirching the person and questioning the motives of the BSP Governor and one
particular member of the Monetary Board, a normal reaction, of course, of people in desperate straits.

Reopening Difficulties Explained

Why is the reopening of the Urban Bank slow in coming? There are several reasons for this. It must be
realized that reopening hinges on technically merging four banks into one: Bank of Commerce, which
will be the surviving entity, Urban Bank, Pan Asia Banking Inc. and Traders Bank. This is easier said
than done.

The more difficult part of the rehabilitation and reopening of Urban Bank is the merger of the bank and its
affiliate, UII, into the Bank of Commerce. This is necessary because of the intertwined activities and
transactions between the two institutions which precisely led to the closure of Urban Bank. Furthermore,
since the closure of Urban Bank came about when it ran out of cash, sufficient cash must be ready for
its resumption of operation. This means raising funds from investors, including the existing depositors
and shareholders of all the institutions involved under terms acceptable to them. In other words, the
rehabilitation plan must be approved by them.

The public can rest assured, regardless of what the respondents in the Urban Bank case claim to the
contrary, that both the legal case and the plan to reopen Urban Bank as part of the Bank of Commerce
are on track. The BSP, the PDIC and the Securities and Exchange Commission, the government
regulators involved, are working closely together to bring justice to bear on the people responsible for
the collapse of Urban Bank. It is time that discipline is made to prevail in the banking system not only to
protect the banks and depositors but more importantly to show the rest of the global community that in
the Philippines the rule of law works.

The 2GO business case study

Posted on July 31, 2017
Corporate
Quite suddenly, Sulficio Tagud, Jr. retired both from the Watch
management and the board of 2GO Group, Inc. in April, and Amelia H. C.
Dennis Uy became president and chief executive officer Ylagan
(Rappler, 05.18.2017.). Frederic DyBuncio of SM Investments
was elected ExCom chairman. Then waves of rumors and
speculations of accounting overstatements of previous years’
income bore holes on the shipping company’s credibility and
integrity -- was it sinking? The Philippine Stock Exchange (PSE)
suspended trading of 2GO shares for two days after the logistics
firm submitted revised financial results for 2015, 2016 and the
first quarter of 2017 (ABS-CBN News, 07.10.2017). “The
Securities and Exchange Commission (SEC) is investigating the
alleged discrepancy in bookkeeping of leading logistics provider
2GO Group, Inc. unearthed by the new investor group now running the company,”
business news headlines flashed (Philippine Daily Inquirer-PDI, 07.10.2017).

Perhaps whispers grew bolder and embroidered upon gossip when Dennis Uy and his Udenna Corp.
kept coming up in the news. In May, Uy, through his Chelsea Logistics announced that it locked in a
$200-million (P10.96 billion) loan with Bank of China granted under the initial $3-billion financing
package it committed during the state visit of President Duterte to China in October 2016 (Rappler,
05.18.2017). Chelsea Logistics said it plans to raise about P8 billion more via initial public offering this
year. This will be the second company of the Udenna group to go public after Phoenix Petroleum
Philippines, Inc.

President Rodrigo Duterte rang the bell for Phoenix Petroleum at the Philippine Stock Exchange (PSE)
-- the first Philippine president in recent history to attend the anniversary of the listing of a company
at the PSE (Rappler, 07.11.2017). Dennis Uy donated P30 million for Duterte’s presidential campaign
in 2016, according to Rappler, reportedly in appreciation of then Mayor Duterte’s saving him from a
smuggling case in Davao (as revealed in an anecdote by Duterte himself at that PSE speech) (Ibid.).
Duterte has appointed Uy Presidential Adviser on Sports and Uy has joined some of Duterte’s official
foreign trips (Ibid.). “The Dealmaker who bet big on Duterte is building a casino-to-oil empire,” a
Bloomberg news article bannered (05.26.2017).

But Dennis Uy’s reportedly unwelcome takeover of 2GO, in partnership with SM Investments makes an
intriguing case study, according to one retired business management professor. The restatement of
the company’s reported earnings for 2015 and 2016 is curious, according to him, because it does not
immediately appear to benefit the new owners of 2GO. The recent special audit was supposed “to
establish the baseline accountability of the new management.”

Interviews with insiders with knowledge of various elements of the case gave background facts and a
timeline: the 2GO integrated transport solutions provider group was formerly the Aboitiz Transport
Corp. (of the Superferry brand) which was part of the Aboitiz conglomerate. Aboitiz Equity Ventures
sold the unit to the Negros Navigation Company, Inc. (NENACO) in 2010 for $81 million (Rappler,
04.10.2017). NENACO had two major funders/investors, the Kuwaiti KGLI-NM Holdings, Inc. (2008)
and the China-ASEAN Marine B.V. (2010). By 2016, both funders were willing to sell, and the 2GO
president, Sulficio Tagud, Jr. called on the company’s “right of first refusal” (per contract of sale) to
buy their shares before these were offered to a third party.

Mr. Tagud signed a Term Sheet for the buy-back of the Kuwaiti shares in May 2016 and obtained
approval for a loan of $120M for this purpose from Banco de Oro (BDO), NENACO’s primary banker.
However, due to the conditions of the loan which NENACO could not easily comply with, the deadline
for the option of first refusal came on June 29 and lapsed. Then in August 2016, Tagud was informed
in a letter from Udenna that it had already acquired the Kuwaiti shares, apparently through a $120-M
loan also. No, Uy did not use the $200-million loan with Bank of China (acquired after Duterte’s state
visit) for the 2GO purchase, one insider opined, as he related above incidents.

Meanwhile, Tagud worked on the buy-back of the Chinese shares, acquiring approval of a $100-M loan
from the Philippine National Bank (PNB) and the Standard Chartered Bank, after a P10-M deposit on
the purchase. In December 2016 Undenna filed a complaint with the SEC questioning why a
mandatory Tender Offer was not filed by Tagud for the purchase of the Chinese shares. The
controversy coupled with the Uy purchase of the Kuwaiti shares perhaps alarmed Standard Chartered,
and the closing date of Dec. 31, 2016 for the loan to Tagud was not met.

In January 2017, SM Investments bought the Chinese shares, and in March a nominee company of the
SM Group, Unique Choice Global Ltd, bought out the rest of the shares of Tagud’s group.

The recent SGV audit review significantly altered bottom lines, with net income for 2015 cut by 90%
to P105.13 million from the P1.08 billion previously reported; 2016 profit slashed by 74% to P344.03
million from P1.35 billion; and this year’s first quarter recording a P264.863-million net loss from a
P267.562-million net income originally (bworldonline.com, 07.13.2017). One business professor
observed that one of the oldest tricks in the new manager’s playbook is downplaying the past
performance of the previous manager (by downgrading his financial results) so that current and future
results turned in by the new manager will look even better to his masters.

But why would SGV, a respected audit firm, reverse its own audit findings and change accounting
policies with respect to certain accounts from its own earlier audits of the same company? SGV was
the auditor of the Aboitiz group even before the Aboitiz-Negros Navigation merger, and remained so
until 2014, when there was disagreement with management on the treatment of some P385M
deferred tax assets to be deducted from future income taxes. Tagud replaced SGV with
KPMG/Manabat, also a highly respected audit firm, which audited the company from 2014-2016.
KPMG followed the accounting policies that SGV had been using previously, “adhering to all standards
and best practices in auditing financial statements and in view of the findings of the SGV special
audit,” KPMG chairman Roberto Manabat said (The Philippine Star, 07.13.2017).

The business professor wonders if there is actually more than meets the eye in this business case.
Was it a hostile takeover, a show of power of big corporations? Were there questionable professional
practices, bending of rules and regulations? What is the problem, the alternative courses of action,
and the recommendations, in the 2GO business case study?