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The Sundaytimes Sri Lanka

SEC probes, margin calls put ‘mafia’ traders in a tizzy

By Duruthu Edirimuni Chandrasekera
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Probes by the regulator and colossal debt accumulated through margin trading have ‘swallowed’ some high net-worth traders who are attempting to influence the removal of key officials at the Securities and Exchange Commission (SEC). The investigations against them are ‘rapidly’ unraveling manipulative patterns, while their margin calls by banks are getting closer, an official from a brokerage, planning to quit the Colombo Stock Brokers Association (CSBA), said.

The association is divided over issues raised by its membership. For example most CSBA members were unaware of the presentation that was to be made to the President at the July 20 meeting he had with the stakeholders recently and that they didn’t have a hand in preparing it. “We were given 20 hours notice to prepare for this meeting and some of us didn’t know that Mr. (Dilith) Jayaweera, an investor, was planning to make a presentation,” he said.

He said that some CSBA members felt the presentation (the only one made at the meeting) had little to do with the request for credit extension but blamed the SEC for over regulation and accused the media of creating a fear psychosis. He said that the presentation ‘was a side show’ while there’re underlying burning issues.  “The new surveillance system that the SEC has put in place is an effective and integrated surveillance and monitoring system which generates alerts out of unusual market movements,” he said, explaining that it identified unusual trading patterns, such as chronological connections with customer orders. He added that during last year the SEC’s Surveillance Department, headed by Chandu Epitawela was able to detect possible market violations and picked up many trading patterns which are questionable. “The executors of these transactions are high profile.”

He said that last year under the past Chairperson, Indranee Sugathadasa these reports were put to some meetings of the SEC, where investigations were encouraged to be started. “Since she left the probes were at a standstill but when the new Chairman Thilak Karunaratne stepped in, he wanted all of them to be reopened. This is what has got most of the ‘agitators’ started and lobbying the President,” he explained.

Small cog
Though the SEC’s Surveillance Department is a small ‘cog’ in the wheel, it’s easy to suppress detections at this level. Once a referral is up, it’s on record.  While there was a high growth in the Colombo stock market seen in 2009, 2010 and in the first quarter of 2011, it also caused a high degree of price volatility and many regulatory and supervisory issues.

“This was the reason that the regulator was forced to step in and take several – perhaps not very popular – measures to restrain the volatility and to lessen the systemic risk in the market,” a stockbroker who was present at the meeting with the President told the Business Times.

He said the ‘arrogance’ and the impunity with which some ‘high net-worth’ investors were acting at the recent meeting with the President has raised questions whether they have immunity against alleged crimes. Some CSBA members are unhappy with what’s going on, he said adding that all are in a difficult situation because of a handful of traders and that some are contemplating leaving the CSBA.
“Their line of argument was flawed,” he explained adding that it said that the regulatory intervention and the fear psychosis created by the print journalists were the main reasons for Colombo Stock Market to drop. He added that for the ‘uninitiated’ this held water and that it aptly looked a conspiracy, but not for those who are aware of the goings on.

“The ‘anger’ is based on their ‘disappointment’ at not being able to stop the probes,” he said. He noted that some traders have invested in illiquid and fundamentally weak stocks. “Some stockbrokers have also extended on extensive amount of credit,” he said, adding this is why some brokers are smarting.

“Manipulation creates an externality in the form of destroying the market,” he said, explaining that a small number of traders are responsible for the turnover. “The turnover is dominated by a small number of players – as many as 2,000.   “This isn’t a national issue as it’s turned out to be,” he said.

An analyst said that last year between 10th August and 7th September HVA Foods saw a price increase of 417% when its Earnings Per Share (EPS) was 13 cents, Net Asset Value (NAV) was at Rs 7.35 and the public float was 29.84%, noting that this is a clear case of suspected market practice. “The Colombo Land price which was at Rs 18.80 on May 4 last year rose 275% by September 1, 2011 which saw it hitting Rs 70.50. Its EPS was zero, while the NAV was Rs 16.65. In a similar instance Asian Alliance was pushed up 204% from Rs 125.30 to Rs 380.90 during September 16 to October 3 last year,” he said, noting that Dankotuwa Porcelain which had a negative EPS saw a price increase of 607% during June 23 to August 4 in 2010.

At a meeting chaired by Treasury Secretary Dr P.B. Jayasundera on Wednesday, the SEC agreed to a formula to revive the market in a way that would serve the interests of all investors and not those with individual agendas. “These are the powerful but debt-ridden investors who want the market to move. One investor has at least Rs 1 billion in debt from margin trading from a private commercial bank which itself shouldn’t have lent so much to one individual. The Central Bank should be checking the accounts of this bank because of these irregularities,” one source said.

Dr Jayasundera, who is said to have conducted a cordial meeting, was quoted as saying owing to political considerations the market needs to move up and suggested that some confidence-seeking measures may need to be introduced. The SEC then agreed to come up with a formula whereby credit would be more ‘generous’ than before but not to ill-liquid stocks and those involved in ‘pump and dump’ trading, which in the first place led to the market collapse.

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