It is only a matter of speculation how the company’s path could lead from the showers of public funding to compulsory liquidation. The company’s balance sheets prepared in recent years would provide some guidance, but since 2019, a line of auditors have refused to authenticate them one after another. In other words, the financial experts did not find the company’s account of the economic events and the evolution of the firm’s assets credible.
Yet not so long ago, OTT-One was one of the lucky pioneers that were given a chance to participate in the Chinese ventilator business totalling several hundred billion forints, led by Minister of Foreign Affairs and Trade Péter Szijjártó. The ministry didn’t bother with tenders; OTT-One previously told our paper that they had approached the authorities themselves and offered their services in the procurement process, citing their good Chinese connections. State agencies ordered life support devices from dozens of companies mostly unknown in the healthcare business, immediately paying the purchase price after signing the contracts. The deal looked like a great opportunity for OTT-One too, as
- on March 26, 2020, the firm signed a contract with the Ministry of Foreign Affairs and Trade for the China-based production and subsequent delivery of 500 ventilator units, with the ministry paying the 4.7 billion forints in advance.
- On April 23, the company reached an agreement with the National Healthcare Services Centre (ÁEEK) on a prepayment of 7.7 billion forints in exchange for OTT-ONE having 300 ventilators and several million masks manufactured in China and then delivering them to Hungary.
These orders, totalling over 12 billion forints, represented a huge leap in the life of the small stock exchange company, as its previous peak revenue – in 2019 – had not even reached 2.9 billion forints. Moreover, its profile had been quite different before the ventilator deals: the bulk of its revenues came from security technology (1.2 billion), custom software orders (1 billion), and video content services (498 million).
However, the large state orders and pre-paid billions of public funds did not result in any huge profits, stock price increases, or dividend showers for OTT-One. Instead, a dramatic turn of events followed: in April 2021, the Hungarian National Bank, tasked with overseeing stock exchange companies, suspended the trading of OTT-One’s shares. The immediate reason was that the company’s auditor had terminated his contract, also jeopardising the company’s ability to have an accepted balance sheet for the year 2020 by the April 30 deadline.
By then, the MNB had already begun a comprehensive investigation, and had even filed a report with the Budapest Prosecutor’s Office.
Gyapjas was included in the 2021 quality control plan of the public supervisory authority overseeing auditors under the Ministry of Finance, thus putting the audit of OTT-One right into the spotlight. The authority did not disclose whether it was a previously planned or an extraordinary inspection, but it is evident from its website that quality control audits must be conducted at least every three years for auditors serving entities of public interest (such as stock exchange companies). Documents submitted to the company court revealed that the Ministry of Finance gave Gyapjas a rating of “not meeting requirements” and, as we learnt, imposed a fine on him. Additionally, he underwent another regulatory inspection, as is customary in such cases. What’s more important from the perspective of OTT-One is that the authority also revoked Gyapjas’s audit of the 2019 balance sheet – Gyapjas, by the way, is no longer providing auditing services to entities of public interest.
Fraud and market manipulation suspected by the central bank
As mentioned earlier, the Hungarian National Bank had launched an investigation into the company in August 2020. The results were as follows:
- A supervisory fine of 4.5 million forints for violating extraordinary disclosure obligations,
- a fine of 22.5 million forints for breaching regulations on the public disclosure of insider information,
- and a market supervision fine of 84 million forints for violating regulations on market manipulation.
Ultimately, in last year’s October, the central bank ordered the delisting of OTT-One Inc.’s shares from the stock exchange, stating in its announcement that
In connection with the company’s operations, the MNB was forced to initiate criminal proceedings due to suspected violations of accounting rules, fraud, and illegal market manipulation.
When asked about the status of the investigation and criminal proceedings, the central bank suggested contacting the relevant investigative authorities. However, it is worth noting the information provided by Péter Polt, Hungary’s Chief Prosecutor, in response to a written question from Bertalan Tóth, the leader of the Hungarian Socialist Party’s (MSZP) parliamentary faction, back in last October. According to this response, four investigations were initiated based on the MNB’s report:
- The investigation into insider trading was terminated because “based on the available data and evidence, no criminal activity could be established.”
- The National Tax and Customs Administration is currently investigating for violations of accounting rules and other crimes.
- The police terminated the investigation into market manipulation on the grounds that the act was not a criminal offense. However, the Budapest Prosecutor’s Office ordered the continuation of the investigation.
- Another investigation into insider trading is still on-going, and is currently at the investigation stage.
In the cases under investigation, the competent investigative authority is responsible for the process. However, we did not receive a response from the National Police Headquarters regarding which complaints they are dealing with and the current state of OTT-One’s case.
“Many have lost all their money”
One could only notice that the stocks had suddenly disappeared, and could no longer be traded. The company disappeared, along with its total assets, and many have lost all their money
– complained to our paper one of OTT-One’s former small shareholders. According to the investor, the central bank’s suspension and eventual delisting came unexpectedly. In his view, a series of crimes may have occurred, but “it is not people behind bars that we care about, in fact that’s what interests me the least; rather, we want to find the company’s assets and reclaim our money.” He writes: “the biggest question is where all the money has gone. Money doesn’t just disappear or evaporate; it’s out there somewhere.”
Our editorial team received reports that hundreds of small investors have already filed complaints. The National Police Headquarters did not respond to our questions regarding this notion, but a document that has been sent to us reveals allegations of significant fraud and misleading of investors, focusing on the responsibility of the management and individuals/organisations involved from 2018 to November 2022. To be exact:
- From 2018, the company had been providing false information to the public regarding the significant international development projects being carried out jointly with iSRV Plc.
- In 2020, the company announced an enormous revenue increase in connection with the ventilator procurement.
- Investors may have also been misled by that MKB Bank – which, until the suspension of trading, had been continuously monitoring the company and preparing analyses – set the target price for the shares at 275 forints. OTT-One also referred to this, stating that in the bank’s last published analysis, the institution still recommended the shares for purchasing.
In contrast, OTT-One’s new management publicly disclosed to its investors in 2023 that a newer, internal audit had revealed that the financial position communicated by the company’s previous management had been false. The company did not even have sufficient funds to pay for the auditor’s services, and its presence on the stock exchange was practically unsustainable.
Some also question the responsibility of the Hungarian National Bank. “Yes, this is how the stock market operates, there are risks involved, but here they shut off the tap from one moment to the next, without any prior warning, letting everyone’s money get stuck” said one small investor. “In previous stock market crashes, they gave investors several days to sell their shares, if and at whatever price they could, so at least so they wouldn’t get stuck” – he condemned the central bank for the frozen investments.
Profits invisible despite ventilators costing billions
Looking at the balance sheets that OTT-One had compiled and submitted to the company court (but were not authenticated by auditors), revenue was significantly boosted by the Covid-business: the firm reported revenue figures of 11.7 billion in 2020 and 6 billion forints in 2021. However, profits paled in comparison. While the other companies involved in the business reaped huge profits, OTT-One’s net profits were unusually low, at 202 million and 54 million forints, respectively. Moreover,
It seems that the significant revenue growth seen in 2022 did nothing at all to make the company more profitable.
The majority of OTT-One’s 11.7 billion turnover, 11.1 billion forints, was taken up by material costs, while net profit was lower than in 2019, when revenue was only 2.8 billion. The revenue breakdown doesn’t exactly reveal a great deal, either: the company lists 8.52 billion in “trade in healthcare products and related services” against 8.47 billion in costs and material expenditures. If this item entails the procurement of ventilator devices and face masks, then securing the state procurement contracts was hardly worth the effort.
Nearly half of all material expenditures were raised against iSRV. OTT-One states the company to have been “the main asset supplier of the company during the 2020 business year.” The specification of assets referred to in the statement was not disclosed. However, there is evidence that occasional audits were carried out to examine the contracts related to the company’s 2020 ventilator procurement and sales, as well as contracts between the company and iSRV Plc., and Polaris IT Group SA. (As mentioned, iSRV was previously a shareholder of OTT-One with more than 5% of ownership, while Polaris IT is the parent company of iSRV.) There is no indication of significant profits at iSRV either, but it’s a fact that in the Covid era, their revenues spiked to an even greater extent than for OTT-One: the figures were 10.2 billion and 9.4 billion in 2020 and 2021, respectively.
2021 was not any better in terms of financial results; it was only in that year’s January that the 300 ventilators left over from the previous year were received by the National Healthcare Services Centre (the legal successor of which is the National Directorate General for Hospitals). Against revenues of 6 billion, the company listed 5.8 billion in material expenditures. The term “ventilator” does not even appear in the textual supplement, but trade in healthcare products and other services accounted for 4.9 billion of total revenue, essentially matched by material expenses, meaning either that the company didn’t make a profit on the ventilators at all, or that the profits were accrued somewhere else.
From 2022 onwards, the reports were compiled by a completely new management. The board concluded that certain events had occurred in the company that give reason to expect very slight revenue figures, and which also led to
Moreover, the company’s ability to fulfil its payment obligations may be severely constrained, while maintaining the business in its current form does not seem to be a reasonable decision – summarised the new company management.
The reports revealed that the company’s revenue had shrunk to 1.1 billion forints against material expenses of a similar magnitude. Coupled with the significant depreciation and write-offs encountered in the business year, the company accrued a total loss of 3 billion forints. One of the items described in the statements is a billion-forint server park acquired by OTT-One in 2021, on which the management was unable to determine ROI due to lacking documents.
The losses dragged OTT-One’s equity into negative territory, meaning its liabilities exceeded its assets, resulting in a risk that “in the event of any legal proceedings, there would be no liquid assets available to settle the obligations” – projected the new management. The statement seemed heavy and sincere, but it was not enough to have the latest financial reports authorised by an auditor. About the 2022 balance sheet, the auditor informed the MNB that they needed to issue a qualified opinion, the reasons for which were contained in the audit report, which they could not provide to the company as it had not yet fulfilled its contractual obligations necessary for the report to be handed over. In the interpretation of the company’s small investors, this meant that OTT-One was not even able to pay for the audit. This was the state of affairs in the summer of 2023. And in October,
Intentional deception and harm must be proven
The case of fraud and misleading information to influence stock prices, raised by the firm’s small shareholders, can be successful if they can prove that the company intentionally communicated false information to mislead public opinion – according to Gábor Dióslaki, president of the Association of Individual Stock Exchange Investors (TEBÉSZ). If a compensation claim based on this is successful, then it is primarily the company that can be held liable, as well as the company’s management, board of directors, and supervisory board members. However, in the case of the national bank – performing supervisory roles – Dióslaki believes that the suspicion of causing damages can hardly be established. The MNB plays more of an administrative role, monitoring whether stock exchange companies disclose all the information required by law. These obligations were fulfilled by the central bank, and it also took action to file reports and issue fines as soon as it learnt of the problems with the firm’s financial reports. If the fines imposed by the central bank were not overturned by the court, then these measures could prove the unlawful operation of the stock exchange company, which could also justify compensation claims.
However, investors must also prove that they suffered damage due to the shares’ loss of value, and that it was actually due to the misleading information that they bought or held onto their shares. In response to the suggestion of small investors that the high target price on part of the stock analyst company – maintained until the very last moment – is also a form of deception, Dióslaki stated that such an analysis is an opinion based on the company’s statements. Should it turn out that the analyst had different information and deliberately communicated falsehoods in light of that, then the question of liability may arise, but that is an unlikely scenario. However, the responsibility of the auditor could be further scrutinised, considering that he did accept the 2019 financial statements which were later withdrawn by the Ministry of Finance, stating that it did not meet requirements – he added.
