SEC battles to protect its integrity
The Securities and Exchange Commission and the Colombo Stock Exchange last week came out with their first statements about the ongoing investigation into the sale of shares of Aitken Spence.

Although brief, the SEC statement (see separate story) underlined the gravity of the matter where its own chairman, Michael Mack, is being investigated for alleged insider dealing in a company of which he was once a chairman.

The Commissioners are now reviewing the opinion of the Attorney-General's Department which said there is prima facie evidence to institute proceedings against the chairman. Two other former directors of Aitken Spence, Manil de Mel and Norman Gunewardene (a former chairman of the firm), are also being investigated.

A SEC inquiry into the share transactions of Gunewardene's son, Ajit Gunawardene, who is chairman of the Colombo Stock Exchange, and other family members who had shares in the conglomerate, is proceeding. Gunewardene is also a senior director of the conglomerate John Keells Holdings.

It is believed that Mack had withdrawn from SEC meetings which discussed the investigation into his share transactions. SEC Director General Dr. Dayanath Jayasuriya, who along with other SEC officials, has been gagged by the Commissioners, declined to comment, saying he had been confined to the brief statement the organisation issued.

Asked whether Mack had taken part in meetings that discussed the probe, Jayasuriya would only say: "Under the SEC Act, if a Commissioner has a conflict of interest he has to declare it and not take part in meetings pertaining to that matter. I can't speak about individual cases. But I can say that this practice has consistently been followed by the SEC."

Michael Mack takes leave of absence
The SEC issued a brief statement about the inquiry last week. It said: "The members of the Securities and Exchange Commission of Sri Lanka met on 12 November 2002 and are considering this matter with the utmost seriousness and are proceeding with their deliberations. In view of the continuing investigations, Mr. M.L. Mack, the Chairman of the SEC, has taken leave of absence."

In another statement, the Colombo Stock Exchange quoted its chairman Ajit Gunewardene as saying he has not been notified by any authority of any misdemeanor on his part regarding the sales of shares of Aitken Spence and Company.

"Mr. A.D. Gunewardene, Chairman (CSE) has informed the CSE that he has not been notified by any authority of any misdemeanor on his part regarding the above sales," the statement said.

"The SEC has confirmed in writing to Mr. Gunewardene that they have at no stage informed Mr. Gunewardene of any investigation concerning the above sales. Mr. A.D. Gunewardene has further stated that in these circumstances he could not have been and in fact has not been asked for an explanation whatsoever regarding such sales."

Those being investigated not notified
A former director of a company, charged some years ago for insider dealing and subsequently subject to a "compounded fine" by the SEC, said the usual practice of the SEC is not to inform those being investigated.

"I think that is the practice and this was followed in my case. I was only informed by the CID at the time charges were being filed ... after the SEC investigation was over. The SEC did not inform me at any point of time that an investigation was on," he said.

On the issue of insider trading, he agreed to compound the case and pay a fine as the court process was a protracted one and would have taken months or years. "It was dragging on and even though I felt I could have won the case, it was not worth the effort."

In his case, share prices in fact rose after the share transactions he allegedly concluded making use of inside information. "If share prices rose after I am supposed to have sold using inside information, how could this have affected shareholders ... can you call this insider dealings? If the prices crashed, then something has happened. I think the SEC provisions on this need to be reviewed."

Offences and penalties
The SEC Act of 1987 imposed a penalty of imprisonment not exceeding five years or a fine not exceeding Rs. 10 million or both for offences of insider dealing. However, by an amendment to the Act in 1991 a further provision was introduced by which it is possible to compound the offence for a sum not exceeding one-third of the maximum fine imposable. Such sum will be credited to the Compensation Fund, which will be used to compensate investors.

"Compounding is a very common thing in security related frauds," said Naomal Gun-awardena, corporate lawyer and a senior partner of the law firm Nithya Partners. "The normal function of criminal law is to punish the wrongdoer but in this situation there may be some innocent parties who may have suffered some monetary loss. Therefore compensating them is also a function of the SEC. What happens is most of the security related frauds are difficult to prove and most of them are compounded."

According to the SEC annual report, it probed seven allegations of insider dealing in 2001, of which five cases were terminated due to lack of evidence. In a case of insider dealing involving Ana Punchihewa, Managing Director of Pure Beverages Company, where he was alleged to have sold 20,000 shares immediately after a Board Meeting at which price sensitive information was tabled, the case was compounded for a sum of Rs. 481,980.

A former member of the SEC, who declined to be named, defended the punishments meted out by the Commission of compounding the offenders and merely imposing fines on them. "Compounding an offender means, the accused admits his guilt, which saves the SEC the trouble of litigating on such matters," he explained. "This is a good system. A court case might even take years to arrive at a decision and the result could go either way. If the accused is guilty, the judge may impose a fine of Rs. 250 which is absurd."

He said that in most cases where the SEC compounded the offender, the fine was almost double the amount of profit that the offender made on carrying out the illegal transaction. "In that manner, each case is treated differently, unlike in the courts where there is a maximum penalty for each crime."

After initial investigations are completed and the Director General has sufficient evidence, he may proceed to seek an opinion from the Attorney General. Once the AG decides that a prima facie case exists, the next step would be to prosecute the parties involved. However, the final decision on whether to proceed with the case lies in the hands of the commission.

The general practice is for the SEC to go by the decision of the A-G's Department, which is the SEC's lawyer, as it has no private lawyers. "To work contrary to the Attorney General's advice would be to question his integrity. No SEC board has ever done so before," said the former SEC member.

Gunawardena said that an inquiry would have to be quite serious in order to be referred to the AG. "The fact is that the SEC has its own legal section so they can obviously determine for themselves whether a matter warrants reference to the AG. Therefore, it is because in their minds they had some reasonable doubts about the issue that they have referred it to the AG."