19 January 2010

Nigeria: Aftermath of Meltdown - SEC, NSE Move Against Market Manipulations


The year ended December 31, 2009, will be remembered in the Nigerian capital market for several events that reach a climax after beginning during the previous year.

One that readily comes to mind is the sack of executive managements of eight of Nigeria's 24 banks for recklessness in the administration of their institutions, thereby putting depositors' funds at risk.

Before then, many watchers of events on the Nigerian Stock Exchange (NSE) had questioned the glaring manipulation of share prices on the trading floor, especially by the banks. Continued and often uninterrupted growth in share price over period spanning several weeks, at a time, became a sign that the particular company was coming to raise fresh capital from the market. There were very few quoted companies that did not engage in the unholy act to enable the management and their professional advisers fix a desired price for their shares when coming for an offer.

There was the case of an old generation bank whose shares were purchased at N2, which rose N15 within weeks, before being placed on technical suspension to enable the management raise fresh funds during its botched recapitalisation exercise. Today, the stock is valued at less than 200 kobo, which means those who bought at its peak may have to wait till almost eternity for it to return to that level. The price of another rose to N300 before its offer, which came at N275, it dropped to about N30 per share before its recent gains.

It is not as if the capital market's primary regulator, the Securities & Exchange Commission (SEC), and the Nigerian Stock Exchange (a self regulatory organisation) have not always known. At least, not after the bitter feud between former bosom friends, Aliko Dangote (now president and chairman of council of the NSE) and Femi Otedola, chairman, African Petroleum and also President of Zenon Petroleum.

Otedola had accused Dangote, who is chairman of two companies quoted on the NSE (Dangote Sugar Refinery and Dangote Flour Mills), of manipulating the share price of AP downward from N293.00 to N54.00 at the time in collaboration with Eugene Anenih, a stockbroker and his Nova Finance & Investment Limited.

The share price of several banks were also discovered at the time to be highly over-priced as depositors' funds were used to prop them up, painting a picture that all was well with them, using oftentimes their in-house capital market subsidiaries and willing stock broking firms. The banks, for most part, gave margin facilities to these brokers and investors to buy their shares, in addition to those of others, resulting in a situation where the brokers became heavily over-exposed to the banks, as was seen in the number of stockbrokerage firms listed among debtors to banks in the country. One stockbroker, using various companies and cronies, according to the list published by the Central Bank of Nigeria (CBN), owed the banks about N122 billion.

It was, therefore, not surprising to some that following the revelation on the banking crisis by the combination of the CBN and the Nigeria Deposit Insurance Corporation (NDIC), working in concert with the Economic & Financial Crimes Commission, stockbrokers and investors indebted to the banks have had to sell the shares to cover up their positions.

With these and more in mind and mindful of the need to reposition the market for growth and development, making it a safe haven for returns hungry investors, Prof. Ndi Okereke-Onyiuke, director-general of the NSE, had while reviewing "market performance in 2009 and the outlook for 2010," assured that measures have been put in place to check future price manipulations.

"Nobody can manipulate market price again. The system will not allow it, it would be discovered immediately", she stressed.

Such fraudulent transactions, she said, will not settle, as the exchange is currently using automated surveillance, instead of manual.

This, she continued, was achieved "with the help of Progenics Incorporated, Canada. The NSE was able to stop price movement within the last five minutes of (any) trading session," Okereke-Onyiuke said.

The decision to freeze price movement in the last five minutes of trading, explained a source close to the market, followed the discovery that some stockbrokers deliberately wait until the last minutes of the session to move prices. The move, which most times, is in a bid to perpetrate illegalities that cannot be manually detected.

Market watchers have since noted that the move is a tacit admission of the failure of control measures like the Trade Alert and various investment protection mechanisms to ensure market transparency.

It would be recalled that the SEC, some weeks ago, restated its zero tolerance for market infractions.

This, according to Ms. Daisy Ekineh, the then Acting Director-General, has made the commission adopt a name and shame approach to infractions, as part of the determination to see the market play its developmental role in the economy. The commission's management may not be oblivious of the fact that the CBN got significant mileage when it used the unconventional method by publishing, twice, the names and amount owed to 10 banks by various organisations and individuals. The loans, which are mainly oil and gas, real estate and margin facilities' related, were listed by the apex bank as having gone bad. Some of the debtors are believed to have paid down large chunks of their debt to avoid the scandal associated with the publication of their names in the national dailies, despite the fact that such approach by the apex bank has been criticised as criminalising an otherwise civil bank-customer relationship.

While announcing plans to migrate to risk-based supervision in line with international standards, Ekineh hinted of ongoing installation of software that would link the Lagos office of SEC to the NSE. This is would trigger any unusual activity on the stock market, thereby warranting investigation, rather than relying on human monitaoring that may not be effective, as the fact that such could be comprised. Such a measure, she assured, is in the commission's bid to create stronger institutions that would effectively and efficiently intermediate in the capital market.

"We are doing quite a lot to stabilise the market and stem abusive practices. We are migrating to the International Financial Reporting Standard (IFRS)," she explained, following the understanding among stakeholders that such provides better transparency and information.

The acting DG thereafter noted that there is now better compliance with market rules and regulations, but warned that the commission "would swiftly deal with anybody that is caught engage in insider dealing and manipulating the market. We will first discredit anybody who wants to discredit the market."

This did not, however, tally with the report presented by Okereke-Onyiuke, when she noted that a total of 417 complaints were received against dealing (stock broking) firms in 2009, representing an increase of about 168 or 58.53 per cent over the 249 complaints received last year. A total of 130 such cases are still being investigated and pending resolution, she said, noting that the bulk of the cases carried over from 2008 were mainly from inactive dealing member firms.

As in cases reported over the past years, she noted that "complaints received during the period under review were observed to border mainly on the unauthorised sales of shares and failure to remit sales proceeds".

Case of illegal sale of shares, are believed to be the most rampart of infractions committed by stockbrokers who sell off their clients' shares without the mandate of their clients. Most cases, involve the sale of such shares while their prices hover around peaks, only for such to be bought for the unsuspecting client when the prices are down.

Okereke-Onyiuke blamed this on the illiquidity suffered by the majority of dealing firms, aside the desperation of banks to recoup outstanding margin facilities. The stockbrokers were also found wanting in the critical aspect of the Article 102 of the rules and regulations governing dealing members, as it relates to the "know-you-client" requirement, often leading to the "fraudulent sales of shares to persons who are not real owners of the shares."

The NSE boss also reported the suspension of six stockbrokerage firms - Century Securities Limited, Transafrica Financial Services, Empire Securities Limited, Crossworld Securities Limited, Dependable Securities Limited, and Monument Securities & Finance Limited, that failed to submit audited accounts, contrary to Article 15(h) of the rules and regulations governing dealing members.

The NSE boss also noted that the exchange is closely monitoring developments in t he EFCC/CBN investigation into the alleged mismanagement of eight banks, and that disciplinary actions would be taken against stockbroking firms indicted by the outcome of the investigations.

Previous Market Frauds

The first major stock market fraud, which has come to be known as the Bonkolans Case, when in 2002, some stockbrokers led by Lawrence Okufulueze, MD/CEO of Bonkolan Investment Limited, who cloned the shares of their unsuspecting clients worth about N314 million for sale. In order to avoid the prying eyes of the exchange, the fraudsters carnibalised the shares into bits. These were then passed to equally unsuspecting stockbrokers, who then sold then over a period of time. The stock broking firms fraudulently introduced the share certificates included 3,130,469 units of Nestle Nigeria Plc into the Central Securities Clearing System (CSCS). These were cleared and sold. Upon this discovery, the CSCS alerted the NSE, which then carried out an in-house inquiry into the incident and found that Bonkolans Investment through its accredited dealing clerk, Okwufulueze, was responsible for the fraudulent sale of the shares. After ascertaining the brokerage house that initiated and executed the fraud, the matter was reported to the police following, which those suspected to be connected to the misdeed were arrested. But Okwufulueze absconded and has since remained at large.

Another fraud that rocked the market since then was in 2005, when an older Kingsley Ikpe, then managing director/CEO of Thomas Kingsley Stockbrokers Limited, was jailed 163 years by a Lagos High Court, for pocketing N61 million of the N135 million given him between May 15, 2002 and February 4, 2003, to buy shares for Anthony Ezenna, chairman of Orange Drugs and his bosom friend, who sought to buy shares of Nigerian Breweries to get a board seat subsequently.

He did not execute the mandate, contrary to the SEC rules made pursuit to Rule 182of the Investment and Securities Act, 1999, which gives a time frame of five days for carrying out a client's instruction. He had explained then that he was making the purchases based on availability of the said stock on the floor of the stock exchange.

Kingsley Ikpe, 60, trained in Harvard University and American Graduate School of International Management all in the United States of America, (USA), then Chief Executive Officer of Thomas Kingsley Securities Limited, was jailed for 151 years by Justice Joseph Olubunmi Oyewole of the Lagos High Court.

In the aftermath of the CBN sack of the executive managements of eight banks on August 14 and October, the SEC had late last year invited market operators to appear before the SEC Administrative Proceedings Committee from November 9, "to explain their roles in unwholesome practices in the market."

The SEC, in a statement by Lanre Oloyi, its spokesman, explained that the summons arose from findings in the report submitted by the team that reviewed transactions of capital market operators. Those to appear include the banks whose executive management teams were sacked for recklessness and lack of corporate governance by the CBN. They include Oceanic Bank International, Afribank Nigeria, Union Bank of Nigeria, Finbank and Intercontinental Bank, who got a cumulative N420 billion, after being accused of recklessness and housing a non-performing loans book of N747 billion, a figure that has since reportedly found to be much more, following new discoveries. On October 2, Bank PHB, Spring Bank and Equitorial Trust Bank, had their executives fired and new chief executives appointed and armed with a N200 billion life support, two others- Unity Bank and Wema Bank got away with an order for the owners to recapitalise them before June 30, 2010.

The list of debtors released for the two groups by the CBN subsequently revealed several capital market operators, most of whom were accused of using borrowed funds to manipulate share prices on behalf of the various banks leading to huge non-performing loans, after the crash that began in March 2008. One of the biggest examples is Peter Ololo, chief executive of Falcon Securities Limited, accused of owing three of the first five banks about N88 billion, while owing Bank PHB alone a total of N201.266 billion in the name of Falcon Securities and Petosan Oil & Gas.

The banks were also found to have used their capital market subsidiaries to borrow money allegedly to play the market. Some examples, include Platinum Capital (owing N11.009 billion), and PHB Assets Management, N6.541 billion; Wema Securities & Finance, N6.067 billion, Wema Assets Management, N8.142 billion.

"At the end of the hearing, the Commission would impose appropriate sanctions on erring operators found to have engaged in acts that have brought disrepute and erosion of investors' confidence to the capital market.

Incidentally, it would be recalled that Ololo was appointed by the regulators as chairman of the Interim Management Committee of Thomas Kingsley Securities Limited.


With stockbrokers and other operators successfully circumventing measures put in place by both capital market regulators, especially the trade alert, which was at one time thought to be fool-proof, there are worries as to whether the new measures can checkmate fraud in the market.

This fear has been hinged on the empirical fact that operators are always ahead of regulators, hence the need for adequate and functional training of staff of regulators. There is also the issue of human elements at the apex of the regulators. For example, the SEC, during the tenure of Musa Al-Faki announced plans to investigate six companies. The result is still being awaited till date, after almost three years. Do the operators influence decisions by the regulators? Is it true that there are sacred cows when infractions occur?

The sincerity of the management of both SEC and NSE are critical to checking the preponderance of fraud in the market and whether both organizations can help boost investor confidence in the country. The actions and inactions of the SEC under the leadership of Ms Aruma Oteh, who resumed recently as DG, will to a greater extent tell the direction the market would go in the coming months and years of her five-year tenure.

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