The answer would have been a bit clearer two weeks ago than it is now.

a (simplified) scorecard to the structure of the Stanley Ho empire

SJM is the publicly traded holding company whose operating subsidiaries run the largest casino operation in Macau.  The SJM empire consists of 17 casinos, four slot machine lounges and two hotels.

Sociedade de Turismo e Diversões de Macau (STDM) holds a 55.7% stake in SJM (through a 99.99% owned subsidiary, STDM Investments) and therefore controls the casino company.  STDM is, in turn, controlled by its largest shareholder, Lanceford, a company that octogenarian Stanley Ho has/had 100% ownership of.

That’s the simplified corporate structure.  Among other complications, Stanley Ho holds stock options directly in SJM, as well as B shares in SJM’s operating subsidiaries.  In addition, Lanceford holds other assets, including about a 10% fully diluted stake in MELCO, another entrant in the Macau gaming market.  At least one family trust enters into the picture, too.

complex structure isn’t so uncommon outside the US

This labyrinthan corporate structure, though strange to US eyes, is very much the order of the day in European or Asian markets.  That’s not where the recent trouble has arisen, though.  The flurry of legal activity that erupted last week in Hong Kong, and resulting JSM shareholder unease, concerns Lanceford.

trading halt in SJM…

On the 24th, SJM requested a trading halt for dissemination of information, namely that:

–Stanley Ho had folded his 4.8% directly held stake in STDM into Lanceford, making Lanceford a 31.7% owner of STDM

–Mr. Ho had distributed 50.55% of Lanceford to Action Winner Holdings, a firm owned by his third wife, and

–he had distributed 49.45% of Lanceford to Ranillo Investments Limited, a company owned by his five children by his second wife.

According to SJM, this left Mr. Ho with no shares in Lanceford (other reports assert he holds two shares, out of 10,000) a mere 100 shares in STDM, so that he no longer had “an attributable interest” in SJM.

…followed by follies

What followed from the SJM announcement was a farcical series of events:

Mr. Ho denied having authorized the transfer and threatened to sue.

He was shown documents he apparently signed instructing his bankers to turn the assets over to the parties listed above.  Mr. Ho denied having signed them–then allowed that his signature might be on the papers but said he hadn’t understood what they were.

The next day, he appeared at a press conference with his kin saying he was fine with the asset transfer.

The day after, he was headed back to court to reverse his asset loss.

As the situation stands now, wife #2 and the children of wife #3 say that the lawsuit has been dropped.  According to Macau Business Mr. Ho’s lawyers say no one has informed them, and the suit is still on.

an elephant in the room remains politely ignored, however

At least, Americans think of it as an elephant.  The Financial Times points out, in an excellent article chronicling the Ho family and this incident, that although rumors abound about Mr. Ho’s triad connections, no official inquiry “has turned up evidence.”

Stanley Ho has, however, been determined by various regulatory agencies in the US and Canada, including the New Jersey Casino Control Commission, to be “unsuitable” to hold a casino license.  Why?  …his links to organized crime in China and his willingness to allow organized crime to operate and “thrive” in his casinos.

The most recent affirmation of this stance came when New Jersey forced MGM Grand to leave Atlantic City when the company refused the Casino Commission’s request to sever ties with Mr. Ho’s daughter Pansy.  Any evidence the Commission considered has not been made public, presumably because the sources of the information would be compromised by doing so.

Though such allegations would be enough for virtually any American professional investor to avoid SJM–and to think that Sands China and Wynn Macau will be the ultimate winners in the Macau gambling market because they have no association with the Ho family.  Not so in Hong Kong, where the only “scandal” referred to in the press is the question of how many of his wives Mr. Ho has actually been legally married to (The Financial Times points out–something I didn’t know–that polygamy was legal in Hong Kong until 1971.)

Lack of concern about underworld influences ironically creates a second investment issue in this case.  With new controlling shareholders, some of whom are unfamiliar to the local financial community and who may have little experience running a company, succeeding an iconic figure, will the day to day management of SJM change for the worse?  As well, what’s the story with the flip-flopping by Stanley Ho?  Would it be a good thing for the Mr. Ho, who is approaching 90, to retain the reins?