In a July 11 BullionStar article, “SPDR
Gold Trust gold bars at the Bank of England vaults”, I highlighted
that the SPDR Gold Trust (GLD), in it’s Q1 2016 filing to the Securities and
Exchange Commission (SEC), disclosed that during the January – March 2016
quarter, the GLD custodian HSBC had employed the Bank of England as a
sub-custodian to hold some of the Trust’s gold bars, and that the largest
quantity of gold that the Bank of England had held on behalf of GLD during
the January – March 2016 period was 29 tonnes.
Note that the financial year-end for the SPDR Gold Trust is 30 September
each year, so that its Q1 is October – December, its Q2 is January to March,
its Q3 is April – June, and its Q4 is July – September with a year-end at the
end of September.
The GLD disclosure for the calendar first quarter of 2016, which revealed
details of sub-custodians that the SPDR Gold Trust uses, had begun to appear
in the 10-Q filing specifically at the behest of the SEC, which on 29 March
2016 had sent a
letter to the GLD Sponsor, World Gold Trust Services, directing the
Sponsor to:
“In future Exchange Act periodic reports, to the extent material,
please disclose the amount of the Trust’s assets that are held by
subcustodians.”
The letter was sent to World Gold Trust Services by the SEC’s Senior
Attorney Office of Real Estate and Commodities, Kim McManus.
To Recap, for the quarter ended 31 March 2016, (which is the SPDR
Gold Trust’s Q2), the 10-Q
report stated:
“Subcustodians held no gold on behalf of the Trust as of March 31,
2016. During the quarter ended March 31,
2016, the greatest amount of gold held by subcustodians was
approximately 29 tonnes or approximately 3.8% of the Trust’s
gold at such date. The Bank of England held that gold as
subcustodian.“
I also pointed out in my previous article that:
“Note that the wording of the 10-Q is such that it does not preclude
the possibility that the Bank of England also held GLD gold at other times
during Q1 2016, since it states “the greatest amount of gold” that the Bank
of England held for the Trust was 29 tonnes. This implies that the Bank
of England vaults could, at other times during Q1, have held less than 29
tonnes of gold on behalf of GLD.“
My early July article also documented that:
“The second quarter saw a 15 tonne shrinkage of GLD’s gold
holdings in April, but a very large 64.5 tonne increase
in May, and a 81.4 tonne increase in June, making for a
Q2 increase in GLD’s gold bar holdings of 130.77 tonnes.
Very large 1-day gold bar additions occurred on 24 and 27
June (18.4 tonnes and 13 tonnes
respectively). Overall, that’s 307 tonnes added to GLD in
the first half of 2016.”
Finally, I also looked forward to the release of the 2nd calendar
quarter 10-Q filing with the SEC, saying:
“The SPDR Gold Trust 10-Q for the 2nd quarter of 2016 will be
filed with the SEC in about 3 weeks time, at the end of July. With
the continuing large inflows into GLD in Q2 2016 it will be interesting to
see whether the name of Bank of England as subcustodian of GLD reappears in
the Q2 filing?”
As it turns out, the Sponsor of the SPDR Gold Trust, World Gold Trust
Services, which is a fully owned subsidiary of the World Gold Council, and
which is responsible for compiling and submitting GLD quarterly and annual
financial reports, actually filed its latest GLD 10-Q report (for the 3
months to June 30, 2016) on 2 August 2016, a few days later than it
usually would do for a quarterly report.
Smoke and Mirrors
Quite shockingly and in my opinion misleadingly, this latest
GLD 10-Q filing only says the following about sub-custodians:
“Subcustodians held no gold on behalf of the Trust as of June 30,
2016. During the nine months ended June 30, 2016,
the greatest amount of gold held by subcustodians was approximately 29 tonnes
or approximately 3.8% of the Trust’s gold at such date. The Bank of England
held that gold as subcustodian.”
This 10-Q report is signed by the CEO and CFO of WORLD GOLD TRUST
SERVICES, LLC, Sponsor of the SPDR® Gold Trust, namely:
- Aram Shishmanian, Principal Executive Officer (CEO)
- Samantha McDonald, Principal Financial and
Accounting Officer (CFO)
In my opinion the latest sub-custodian statement by World Gold Trust
Services is misleading in its entirety, as well as being evasive and
disingenuous. By failing to address the quarter ended June 30 2016, the
World Gold Trust Service CEO and CFO are avoiding disclosure of the quantity
of gold that was held by subcustodians of the GLD during April, May and June
2016. Recall the ordinance from the SEC on 29 March:
“In future Exchange Act periodic reports, to the extent material,
please disclose the amount of the Trust’s assets that are held by
subcustodians.”
This latest 10-Q statement is not in compliance with the SEC’s directive.
It also goes against the spirit of the SEC’s request – since it doesn’t
address the holdings of sub-custodian during the quarter that’s being
reported on, i.e. the April to June 2016 period. The language used in the
latest 10-Q seems to conveniently circumvent the SEC’s disclosure request by
using evasive phraseology.
For example, what if the Bank of England as GLD subcustodian held 28
tonnes or 20 tonnes of gold bars on a particular day during the second
quarter of 2016, would Aram Shishmanian and Samantha McDonald not
consider this material enough to tell the SEC about. That’s what their signed
statement would suggest. More importantly, what would the SEC think about
such a non-divulgence of a 28 tonne or 20 tonne sub-custodied position during
any day of the April to June 2016 period, when it had specifically asked to
be informed of such occurrences via the 10-Q filing? Recall that there were
very large increases in GLD’s holdings during May and June, and some huge
one-day increases in GLD gold bar holdings on 24 June (18.4 tonnes) and
27 June (13 tonnes).
Side by Side Comparison
Let’s take the latest quarter and previous quarter sub-custodian
statements and compare them side by side. For the quarter ended March
31, 2016, the 10-Q report said:
“Subcustodians held no gold on behalf of the Trust as of March 31,
2016. During the quarter ended March 31, 2016,
the greatest amount of gold held by subcustodians was approximately 29 tonnes
or approximately 3.8% of the Trust’s gold at such date. The Bank of England
held that gold as subcustodian.”
For the quarter ended June 30, 2016, the 10-Q report said:
“Subcustodians held no gold on behalf of the Trust as of June 30,
2016. During the nine months ended June 30, 2016,
the greatest amount of gold held by subcustodians was approximately 29 tonnes
or approximately 3.8% of the Trust’s gold at such date. The Bank of England
held that gold as subcustodian.”
The very fact that the WGTS CEO and CFO revert to repeating a statement that
was issued in the previous quarterly report and that applied to the first
quarter of 2016, i.e. the statement in red above, shows that they are
implicitly evading disclosure of new information from the April to June
period. The statement in red is also irrelevant since it had already
been disclosed in the previous 10-Q. By bundling it up and referring to the
nine months ended June 30 2016, this smoke and mirrors tactic becomes
obvious.
Given that it was only on March 29, 2016 that the SEC requested that WGTS
disclose sub-custodian information, and that it requested “In future
Exchange Act periodic reports … please disclose“ also underscores that
the first three months of the nine-month period (i.e. October 2015 – December
2015) are irrelevant, and again highlights the deceptive nature of using a
nine month time-frame in the latest statement. The SEC never asked for a
disclosure about Q1 (October – December), just for disclosures about the
quarters going forward.
Furthermore, the previous quarter disclosure specifically referred to “the
quarter ended March 31, 2016”, and not the ‘six months’ ended March
31 2016. So why change the duration reporting to a “nine months ended
June 30 2016” phraseology when it was previously a “quarter ended”
phraseology? By moving to this ‘nine months’ misleading reporting
device, it conveniently masks the disclosure of any sub-custodian details
that might be applicable to the April – June quarter, such as Bank of England
sub-custodianship of gold bars held within the SPDR Gold Trust.
And furthermore still, if you look at the latest 10-Q you will see that
all of the other reporting in the 10-Q, such as financial highlights,
divulges full data for three and nine month periods ended
June 30, 2016. For example:
“Financial Highlights:
The Trust is presenting the following financial highlights related to
investment performance and operations of a Share outstanding for
the three and nine month periods ended June 30, 2016 and
2015.”
Therefore, the financials in the latest 10-Q follow a reporting
format of both 3 months and 9 months, but the WGTS does not see fit
to report a statement about sub-custodian holdings during the latest 3 month
period. This is inconsistent reporting and again points to a desire not to
address sub-custodian activity during April – June 2016, specifically at
the Bank of England.
Given that the revelation in the previous 10-Q report about the Bank of
England being a sub-custodian of the SPDR Gold Trust was quite substantial
news, surely the GLD Sponsor would want to address this topic in its
subsequent 10-Q, even if it was to say that no GLD gold whatsoever passed
through the Bank of England during the April – June period? However, it
appears that they chose to construct and craft a selection of words through
which to avoid addressing the issue.
Omission of Facts
Each 10-Q report submitted by World Gold Trust Services includes a number
of appendices, one of which is an Exhibit
31.1, which is known as the “Certification of Chief Executive Officer,
Pursuant to Rule 13a-14(a) AND 15d-14(a), Under the Securities Exchange Act
of 1934, as Amended”. For the latest GLD 10-Q, this Exhibit 31.1 includes the
statement that:
“I, Aram Shishmanian [WGTS CEO], certify that:
Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect
to the period covered by this report.“
I would contend to the above certification, that the latest GLD 10-Q
report does omit a statement of a material fact, i.e. disclosure of
sub-custodians’ holdings as obligated by the SEC to disclose, or in the SEC’s
words “the amount of the Trust’s assets that are held by
subcustodians”; and that by omitting this information, the latest
10-Q report is “misleading with respect to the period covered”, which
is the 3 months from 1 April 2016 to 30 June 2016.
The statement about sub-custodians in the latest 10-Q does not cover the
period covered, i.e April – June 2016. It covers a nine month period. If none
of the SPDR Gold Trust’s gold bars were held by sub-custodians during the
April – June period, then why not say so?
Conclusion
It would be very interesting to see what the SEC thinks of this latest
lack of disclosure from WGTS. It surely will raise some eyebrows at the SEC,
since this is not what the SEC intended when it stated in its March 29 letter
to WGTS that:
“Since the company and its management are in possession of all facts
relating to a company’s disclosure, they are responsible for the accuracy and
adequacy of the disclosures they have made.”
It also goes against the spirit of the request
from the SEC’s Kim McManus, Senior Attorney Office of Real Estate and
Commodities in her 29 March letter, and the promise by World Gold Trust
Services’ CFO Samantha McDonald in her March 30, 2016 signed reply to the SEC
that:
“We will, to the extent material, disclose in future periodic reports
the amount of the Trust’s assets that are held by subcustodians”
I will contact WGTS directly and ask for their opinion on the above, and
whatever response is received, if any, I will update readers via this forum.
Ronan Manly
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