News
Pump-and-dump trading: Pan Asia links to Perpetual/EPF probed
Pan Asia Banking Corporation (PABC) is vigorously defending itself against wrongdoing after the Central Bank (CB) slapped a six-month suspension on the bank’s primary dealership over the bond scam in the light of evidence of involvement in ‘pump-and-dump’ trades.
Asked to comment on the suspension, PABC CEO Nimal Tillakeratne told the Sunday Times on Friday that the bank would be appealing against the suspension “as it had not done anything outside the legal framework”.
While other primary dealers, who the Sunday Times spoke to, agree that legal proof against this dealer may not be that easy, there is some evidence — from a PABC official’s own testimony before the President-appointed Commission of Inquiry — to show Pan Asia Bank’s and also DFCC’s involvement in pump-and-dump trades in and around March 2016 manipulated by suspect trader Perpetual Treasuries Ltd (PTL).
Both, Pan Asia Bank and DFCC were named in a leaked, confidential report by a CB team in late 2016 titled “Perpetual Treasuries Ltd – Onsite examination”. There, it was revealed that PTL had sold bonds to PABC and DFCC, which, in turn, sold them to the Employees Provident Fund (EPF).
This week, the CB said its decision to suspend Pan Asia Bank from August 15 as a primary dealer was based on an investigation carried out by the banking regulator pertaining to Pan Asia Bank’s transactions with PTL. The suspension move resulted in some panic in the market pertaining to Pan Asia Bank as a commercial bank with some customers asking whether their deposits were safe. Aware of the possible repercussions of its move, the Central Bank in the announcement also said that it “wishes to inform the general public that the above regulatory action does not in any way affect PABC’s ability to carry on banking activities”.
However, the regulator’s move, some analysts argue came late in the day and only follows after revealing evidence before the Bond Commission by Deputy General Manager of Treasuries, Pan Asia Bank – Richie Dias, who also acknowledged that there had been ‘pumping and dumping’ trades.
The CB was also slow to move against Saman Kumara, Senior Manager of Treasury Transactions in the EPF Department of the CB, suspending him several months after the bond probe began last year – though the pattern of pump-and-dump trades was known earlier. In a March 2016 story, the Sunday Times in its Business section (Business Times) reported how PTL had sold bonds to EPF, raising suspicions since EPF is eligible to buy direct in the market. What was not reported at the time, and known only later, was that these transactions went through parties (Pan Asia Bank/DFCC/Nimal Perera) so that there was no link between PTL and EPF.
Mr. Kumara’s involvement in ‘pump and dump’ trades emerged during his evidence. The EPF move in buying bonds in the secondary market, designed to help PTL, has caused huge losses to the fund and in turn losses to the public. The fund is a primary dealer and should have purchased at lower cost in the primary market like any other dealer, instead of the secondary market where individual investors also make purchases.
Money market sources said that complex deals were revealed before the Commission, where PTL sold bonds to Pan Asia Bank and DFCC. Pan Asia Bank, in turn, sold these bonds to the EPF while there were also reports to show that former Bank Chairman Nimal Perera’s own company had bought these bonds from PABC, then re-sold it to PABC which then were sold to the EPF, a pattern of pump-and-dump trades.
In another development, the former DFCC Bank treasury dealer who allegedly ‘assisted’ PTL was hired by the National Savings Bank as its chief dealer after the first bond scam was exposed, a development that was reported by the BusinessTimes. This dealer, it is learnt, has gone abroad on a scholarship after public calls grew for a proper probe into the bond scam.
While PTL selling bonds through counter-parties is permitted in the market, the question that is being asked is whether there were motives behind and objectives which may have contravened CB regulations, one of the reasons also why Pan Asia Bank was suspended.
It was also established during evidence led before the Commission that the Pan Asia Bank was instructed by its then chairman Mr. Perera to act as an intermediary. Though this is not a violation of any law, the move is seen as unusual in the industry and once again points to a nexus between PTL, PABC and EPF with a particular, non-market-related motive.
“There is a need for a forensic audit which will clearly show these trends of pump-and-dump and insider dealing,” one dealer said. Mr. Perera was a former advisor to businessman Dhammika Perera. ‘Pump-and-dump’ deals in the Colombo stock market in around 2014 led to the downfall of two chairpersons of the Securities and Exchange Commission (SEC) – Indrani Sugathadasa and Tilak Karunaratne who tried to take action before being eased out during the Mahinda Rajapaksa regime. Efforts by the present SEC leadership led by Mr. Karunaratne (chairman) to take action against the suspect traders of that era have been slow with the SEC saying they have passed all the ‘files’ to the FCID.
Financial analysts are also questioning the slowness of the CB in taking action against those in the EPF Department based on incriminating evidence showing that the fund should have operated as a primary dealer and traded in the primary market rather than in the secondary market, at a loss.
Interest rates in the bond and securities markets operate slightly different to the normal bank rates where banks offer higher interest rates to depositors and in turn lend at higher rates, keeping a margin. In the money markets, government securities (including bonds) are sold to primary dealers at a particular interest rate and in turn sold to a third party (individuals or institutions) at a lower rate (but which works out to a higher cost to the buyer). Thus, in a real-time case scenario in the bond scam, Perpetual Treasuries sold bonds to Pan Asia Bank and DFCC which in turn sold directly to EPF with all these parties profiting at every point and the EPF losing by virtue of the fact that it was buying bonds that had passed through three or four intermediaries
Meanwhile, Pan Asia Bank’s involvement with Perpetual Treasuries in the bond issue is being further examined and will lead to a cancellation of the dealership if the allegations are proved beyond reasonable doubt, a Central Bank official said on condition of anonymity.
He also acknowledged that the preliminary investigations had revealed a pattern of pump-and-dump trades and that Pan Asia Bank is suspected of aiding and abetting in these trades.
In its defence, Pan Asia Bank CEO Tillakeratne noted that from the internal data analysed so far, the bank had neither deviated from industry norms in providing concessionary margins for high trade volumes nor deviated noticeably from the CB’s indicative rates.
Mr. Tillakeratne noted that under current laws and regulations, a dealer is not required to report on trades even if they significantly deviate from the indicative rates.