Small shareholders complain to SEC over malpractices by their brokers
A 5-member team representing the Small Investors’ Association (SIA) of Kurunegala has complained to the Securities and Exchange Commission (SEC) on the injustices and malpractices by their stockbrokers and some regulators.
The host of complaints range from opening margin accounts without their consent, trading on these accounts without their consent, misleading them on the type of shares they should trade on, trading on their on-line accounts arbitrarily and enticing them to open accounts on behalf of their close relatives and trading on these third party accounts.
Pradeep Somaratne, President SIA, along with Sanath de Silva, Palitha Samarakoon, Harshana Tennakoon and Harshani Wijenaike submitted their complaints to the SEC earlier this week saying they had lost all hope that they will recover ‘any’ of their total Rs. 12 million investment over the past three years.
“We complained last year and we were treated indifferently by officials of both the SEC and the Colombo Stock Exchange (CSE). We lost all hope. Then we went directly to new SEC Chairman Thilak Karunaratne who promised redress and said that he’ll appoint a 3-member team to probe this,” Mr. Somaratne told the Business Times. He said they formed the SIA two years ago, mainly because of what happened to them during 2011 to 2012.
The 50-member strong SIA has investors from different strata of society, he added, noting, “There are doctors, lawyers, accountants, other professionals, civil servants – all and sundry irrespective of their standing in society are members at SIA”.
He alleged that the so-called big-time investors connived with their stockbrokers to bring the small investors down. “Some big-timers took up SEC positions and then complaining to the regulator at the time was inconceivable, because we knew from the way SEC and CSE officials treated us that they were in connivance with the stockbrokers.” Ms. Wijenaike added that she ‘never’ wanted a margin account. “When my broker opened an account, they didn’t adhere to the 50 per cent rule in granting margins to the clients. They well and truly misled us,” she said.
Mr. Silva added that a particular powerful stockbroker was granting margin accounts through a firm which didn’t have a margin trading licence. “This was simply due to this particular firm being a ‘buddy’ of the stockbroking company’s CEO,” he alleged. Ms. Wijenaike conceded that at 21 years of age she had become a debtor of Rs 2.6 million without her consent.
Kurunegala investors speaking to the Business Times.
She was also cheated. “My broker got me to send a copy of my mother’s identity card by e-mail to him citing some long-drawn reason. Then I found that he had opened a Central Depository System (CDS) account on her behalf, ‘without her signature’. Some Rs. 280,000 was traded on this account last year. When I went to the CSE, the CSE officials found fault with me for sending the ID copy and didn’t reprimand the offender for opening the CDS account. I have also lodged a complaint with the Special Crimes’ Investigation Division – Kandy on this matter,” she explained.
Mr. Somaratne added that when he called the SEC on his complaint, the relevant top official was off-hand is and told him that they have better things to do and to send his complaint to CSE, because that’s what SEC would do too. “The official had said that when a complaint is made, we direct it to CSE and then it comes to us . I was really disappointed at the way he treated us,” he said.
Meanwhile SEC chief Mr. Karunaratne making a presentation at this year’s National Law Conference titled “Legal Summit 2015 on Governance, Regulation and Investment – Way Forward” said that the investor protection contemplated by SEC is to incentivise whistleblowers (payments scheme), strengthen corporate governance (auditors to report issues of PLCs to SEC), not using the compounding mechanism for serious market misconduct and disallowing market offenders to serve on boards of PLCs.
“Promoting capital formation and maintaining fair and efficient capital markets must be at the core of any effort to protect investors,” he said, noting that promoting capital formation leads to broader and deeper markets that provide more opportunities to more investors, while ensuring that those markets are fair and efficient allows investors the confidence to enter and remain in those markets.
He reiterated that stagnant, unfair, or inefficient capital markets would drive away investors.
He said stocks were pumped and dumped on unsuspecting investors during a stock market bubble which peaked around 2011, adding that those who lost money during the period are still calling and making complaints against some brokers and margin providers to the SEC.
“I am trying to do justice to those who got really played out,” he said, adding that the amendments to the SEC Act may take up to 18 months to be passed in parliament. The new law will no longer allow serious frauds to be “compounded” or to settle with a fine without agreeing to guilt and there will be provisions to encourage whistle blowing and to give bounties.
Further explaining the salient features of the proposed draft law, he said introducing the reduction of systemic risk as an objective of the SEC, providing for the regulation of a Demutualized Exchange which includes a Stock or Derivative Exchange with robust ovrsight powers given to the SEC over the Demutualized Exchange are important. Also providing for the regulation of private placements, oversight of listed companies and powers over prospectus’ of companies, are top of the list.
“To provide for the establishment and the effective regulation of a Central Counterparty and Central Depository System – i.e provisions to establish infrastructure to mitigate systemic risk, and to introduce new civil and administrative sanctions – i.e introduction of penalties, issuing reprimands and disgorgement of ill-gotten gains and payment for compensation to investors is also important.”
Mr. Karunaratne noted that the perception of the SEC by the public is that it doesn’t prosecute anyone for serious market misconduct (e.g. insider dealings market manipulation), there’s inconsistency in policies (e.g. Credit Rule), there are delayed actions (e.g. Price Band/Market Infrastructure), there’s lack of confidence in the regulator/the system and that there’s lack of long term vision.
He added that the draft amendments, policy papers and the comparative table will be submitted to the Ministry of Policy Planning and Economic Affairs and they’ll obtain cabinet approval for the policy.
“The Legal Draftsman is to prepare the draft provisions, AG to review constitutionality of the draft provisions, the Legal Draftsman to incorporate changes recommended by the AG and submission to the Ministry are to be tabled in Parliament,” he said.