Thursday June 28, 2012 Securities Commission wins another battle against market manipulators
By EUGENE MAHALINGAM
PETALING JAYA: The Securities Commission (SC) has won another battle against market manipulators after the Court of Appeal decided in the regulator's favour to increase the punishment meted on former Fountain View Development Bhd director Datuk Chin Chan Leong.
“In a landmark decision, the Court of Appeal imposed a jail term of 12 months, and a fine of RM1.3mil on Datuk Chin Chan Leong for market manipulation involving Fountain View shares,” the SC said in a statement yesterday.
Chin, who pleaded guilty to shares manipulation two years ago,was initially given a one-day jail sentence and RM1.3mil fine for the offence.
“This is the third conviction for market manipulation which the SC has successfully prosecuted,” the regulator said. The other companies were Suremax Group Bhd and Actacorp Holdings Bhd.
The offence took place over a two-month period from November 2003 to January 2004 during which the price of Fountain View shares increased from RM1.99 to RM6.05, raising its market capitalisation from RM885mil to RM2.73bil.
Fountain View was listed on the Main Board of the stock exchange. The company was delisted on Sept 22, 2010 for failing to submit a regularisation plan to the SC or Bursa Malaysia within the prescribed timeframe.
Chin was charged in 2005 but had only pleaded guilty on Feb 5, 2010 to the offence of creating a misleading appearance of active trading in Fountain View shares by indirectly being concerned in transactions for the sale and purchase of those shares, which did not involve any change in beneficial ownership.
Chin was found to be trading with 20 central depository system accounts which he beneficially owned through the companies that he controlled.
The one-day jail sentence was affirmed by the High Court in September 2010 which led to an appeal by the Public Prosecutor .
The Court of Appeal held that the offence under section 84(1) of the Securities Industry Act 1983 was serious with adverse consequences on the stock market and the economy and that the earlier sentence did not reflect the gravity of the offence.
“In deciding to impose a 12-month jail term, the Court of Appeal took into account the fact that the offence committed was pre-planned and well thought out.
“The SC has been proactively pursuing this and other market misconduct cases (such as manipulation, market rigging and insider trading) because such activities severely undermine investor confidence and tarnishes the reputation of the Malaysian capital market,” the SC said, adding that it would continue to be vigilant and take whatever action necessary to protect investors and to maintain a fair and orderly capital market.
Over the years, there had been a number of account mismanagement and share manipulation court cases. Among them were Kenmark Industrial Co (M) Bhd, Granasia Corp Bhd, Kiara Emas Asia Industries Bhd, Idris Hydraulic (M) Bhd, Aokam Perdana Bhd and Ekran Bhd.
In the case of troubled furniture company Kenmark, its Taiwanese managing directors and key management personnel went missing in May 2010. In June 2010, one Datuk Ishak Ismail emerged as a 32% shareholder, but sold all his shares two weeks later. The SC alleged that he had committed insider trading.
In the case of Granasia Corp Bhd, in March 2010, the Kuala Lumpur Sessions Court convicted Chan Kok Suan, the former managing director of Granasia for submitting false statements to the SC, namely the revenue and profit after tax of the company for the year ended Dec 31, 2002.
The information was submitted in connection with Granasia's proposal to list on the main board of the stock exchange.
Chan was convicted under section 32B(4) of the Securities Commission Act and imposed a fine of RM500,000 in default, 10 months imprisonment, according to the SC. He was charged on Feb 9, 2006 and pleaded guilty on March 1, 2010.
According to reports, the prosecution had filed an appeal against the sentence to the High Court.
Dealer’s rep sanctioned for false trading, market manipulation Written by Loong Tse Min Friday, 09 July 2010 11:06
KUALA LUMPUR: Bursa Malaysia Securities Bhd has publicly reprimanded and fined a commissioned dealer’s representative (CDR) of Kenanga Investment Bank Bhd RM100,000 for false trading and market manipulation in the trading of Axis Incorporated Bhd shares.
In a statement yesterday, Bursa Securities said it ordered that Lee Beng Huat be struck off the register, if he was still a registered person of the exchange.
The exchange said Lee had carried out false trading and market manipulation involving about 41 million Axis shares, out of the market turnover of 104 million Axis shares, for 87 trading days in 2006 and 2007.
It said during that period, Lee had dealt in Axis shares mainly through the accounts of 10 clients.
“He had entered buy and sell orders which were manipulative in nature and which had led to false or misleading appearance of active trading in, or market for, Axis shares and tantamount to stock market manipulations,” Bursa Securities said, adding that Lee had breached trading rules.
It said the dealing in Axis shares by Lee via the 10 accounts, which were the top buyers and sellers during the period, had several characteristics:
1. Entry of orders which were several bids lower than the last done price with no real intention to have the buy orders matched.
2. Lee also engaged in order splitting, entering a series of buy orders in succession through any one of the 10 accounts with the same price. These buy orders gave rise to and created an impression of continuous demand for Axis shares which led to false or misleading appearance of active demand/market for Axis shares.
3. The buy and sell orders executed in the 10 accounts:
• had cross-trades which were matched among each other for about 12 million units of Axis shares involving Lee as their common CDR; • resulted in the buy and sell transactions of Axis shares in the 10 accounts without any change to the beneficial ownership of Axis shares (NCBO trades) and during the relevant period, there were 65 NCBO trades involving 385,800 units of Axis shares; • were frequently matched with the corresponding orders keyed in by another CDR from another broker which indicated that there were some form of pre-arrangements for these trades to be matched; • resulted in trades which were rolled over periodically with the same or almost the same block of Axis shares which gave rise to the manipulative trading activities; and • had trades which were subsequently amended to other clients’ accounts resulting in a change of the original party to the contract which is not permitted.
Bursa Securities said Lee, by engaging in the manipulations, managed to sell about 72% of the sell orders (40.98 million out of 56.67 million units of sell orders entered for the 10 accounts) and bought about 55% of the buy orders (41.6 million out of 76.14 million units of the 10 accounts’ buy orders).
It said the higher volume and percentage of the buy orders, which were subsequently cancelled and/or lapsed due to the orders being lower than the last done price resulting in lower percentage of buy orders matched, gave an impression of and created an inflated demand for Axis shares.
This, it said, led to a misleading appearance of an active market for Axis shares.
Bursa Securities said Lee had failed to take heed of the concerns raised by the exchange on his irregular trading activities in Axis shares in the 10 accounts but had continued to trade in the irregular and manipulative manner.
This article appeared in The Edge Financial Daily, July 9, 2010.
Hmm... as stated in the article "Lee had carried out false trading and market manipulation involving about 41 million Axis shares, out of the market turnover of 104 million Axis shares, for 87 trading days in 2006 and 2007. ".
Here is the chart of Axis between 2006 and 2007... yeah... I can see the massive volume...
And what's interesting is what happened after 2008... here's the chart from 1 Jan 2008 to May 2009.
I wonder who were the big sellers were when the shares plunged in 2008. :P
Ok it's not very clear (LOL! yeah.. what's new! :P ) ... anyway, remember the posting Axis Inc Lodges Police Report!? I had an Axis chart posted?
Let me post an ammended chart now. :P ( I have now crossed out 2007 stock bumper year and changed it to 2007 Stock Manipulation time! :P )
Now see the bottom arrow on the volume...
Can you see what it suggests? Can you? *whistle*
Anyway.... I am glad that the dealer was caught but... I am wondering... is the dealer the chief 'tukang masak'?
"This makes the investor sit back and say, 'This is exactly why I'm not in the market. It's a good-old-boy network'" says one market pro of the Goldman Sachs charges.
The first thing you need to know about Goldman Sachs is that it's everywhere. The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.
Any attempt to construct a narrative around all the former Goldmanites in influential positions quickly becomes an absurd and pointless exercise, like trying to make a list of everything. What you need to know is the big picture: If America is circling the drain, Goldman Sachs has found a way to be that drain — an extremely unfortunate loophole in the system of Western democratic capitalism, which never foresaw that in a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy.
They achieve this using the same playbook over and over again. The formula is relatively simple: Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire process over again, riding in to rescue us all by lending us back our own money at interest, selling themselves as men above greed, just a bunch of really smart guys keeping the wheels greased. They've been pulling this same stunt over and over since the 1920s — and now they're preparing to do it again, creating what may be the biggest and most audacious bubble yet.
The basic scam in the Internet Age is pretty easy even for the financially illiterate to grasp. Companies that weren't much more than pot-fueled ideas scrawled on napkins by up-too-late bong-smokers were taken public via IPOs, hyped in the media and sold to the public for megamillions. It was as if banks like Goldman were wrapping ribbons around watermelons, tossing them out 50-story windows and opening the phones for bids. In this game you were a winner only if you took your money out before the melon hit the pavement.
It sounds obvious now, but what the average investor didn't know at the time was that the banks had changed the rules of the game, making the deals look better than they actually were. They did this by setting up what was, in reality, a two-tiered investment system — one for the insiders who knew the real numbers, and another for the lay investor who was invited to chase soaring prices the banks themselves knew were irrational. While Goldman's later pattern would be to capitalize on changes in the regulatory environment, its key innovation in the Internet years was to abandon its own industry's standards of quality control.
Goldman's role in the sweeping global disaster that was the housing bubble is not hard to trace. Here again, the basic trick was a decline in underwriting standards, although in this case the standards weren't in IPOs but in mortgages. By now almost everyone knows that for decades mortgage dealers insisted that home buyers be able to produce a down payment of 10 percent or more, show a steady income and good credit rating, and possess a real first and last name. Then, at the dawn of the new millennium, they suddenly threw all that shit out the window and started writing mortgages on the backs of napkins to cocktail waitresses and ex-cons carrying five bucks and a Snickers bar.
And what caused the huge spike in oil prices? Take a wild guess. Obviously Goldman had help — there were other players in the physical-commodities market — but the root cause had almost everything to do with the behavior of a few powerful actors determined to turn the once-solid market into a speculative casino. Goldman did it by persuading pension funds and other large institutional investors to invest in oil futures — agreeing to buy oil at a certain price on a fixed date. The push transformed oil from a physical commodity, rigidly subject to supply and demand, into something to bet on, like a stock. Between 2003 and 2008, the amount of speculative money in commodities grew from $13 billion to $317 billion, an increase of 2,300 percent. By 2008, a barrel of oil was traded 27 times, on average, before it was actually delivered and consumed.
The history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled-dry American empire, reads like a Who's Who of Goldman Sachs graduates. By now, most of us know the major players. As George Bush's last Treasury secretary, former Goldman CEO Henry Paulson was the architect of the bailout, a suspiciously self-serving plan to funnel trillions of Your Dollars to a handful of his old friends on Wall Street. Robert Rubin, Bill Clinton's former Treasury secretary, spent 26 years at Goldman before becoming chairman of Citigroup — which in turn got a $300 billion taxpayer bailout from Paulson. There's John Thain, the asshole chief of Merrill Lynch who bought an $87,000 area rug for his office as his company was imploding; a former Goldman banker, Thain enjoyed a multibillion-dollar handout from Paulson, who used billions in taxpayer funds to help Bank of America rescue Thain's sorry company. And Robert Steel, the former Goldmanite head of Wachovia, scored himself and his fellow executives $225 million in golden-parachute payments as his bank was self-destructing. There's Joshua Bolten, Bush's chief of staff during the bailout, and Mark Patterson, the current Treasury chief of staff, who was a Goldman lobbyist just a year ago, and Ed Liddy, the former Goldman director whom Paulson put in charge of bailed-out insurance giant AIG, which forked over $13 billion to Goldman after Liddy came on board. The heads of the Canadian and Italian national banks are Goldman alums, as is the head of the World Bank, the head of the New York Stock Exchange, the last two heads of the Federal Reserve Bank of New York — which, incidentally, is now in charge of overseeing Goldman.
But then, something happened. It's hard to say what it was exactly; it might have been the fact that Goldman's co-chairman in the early Nineties, Robert Rubin, followed Bill Clinton to the White House, where he directed the National Economic Council and eventually became Treasury secretary. While the American media fell in love with the story line of a pair of baby-boomer, Sixties-child, Fleetwood Mac yuppies nesting in the White House, it also nursed an undisguised crush on Rubin, who was hyped as without a doubt the smartest person ever to walk the face of the Earth, with Newton, Einstein, Mozart and Kant running far behind.
Rubin was the prototypical Goldman banker. He was probably born in a $4,000 suit, he had a face that seemed permanently frozen just short of an apology for being so much smarter than you, and he exuded a Spock-like, emotion-neutral exterior; the only human feeling you could imagine him experiencing was a nightmare about being forced to fly coach. It became almost a national cliché that whatever Rubin thought was best for the economy — a phenomenon that reached its apex in 1999, when Rubin appeared on the cover of Time with his Treasury deputy, Larry Summers, and Fed chief Alan Greenspan under the headline the committee to save the world. And "what Rubin thought," mostly, was that the American economy, and in particular the financial markets, were over-regulated and needed to be set free. During his tenure at Treasury, the Clinton White House made a series of moves that would have drastic consequences for the global economy — beginning with Rubin's complete and total failure to regulate his old firm during its first mad dash for obscene short-term profits.
After the oil bubble collapsed last fall, there was no new bubble to keep things humming — this time, the money seems to be really gone, like worldwide-depression gone. So the financial safari has moved elsewhere, and the big game in the hunt has become the only remaining pool of dumb, unguarded capital left to feed upon: taxpayer money. Here, in the biggest bailout in history, is where Goldman Sachs really started to flex its muscle.
It began in September of last year, when then-Treasury secretary Paulson made a momentous series of decisions. Although he had already engineered a rescue of Bear Stearns a few months before and helped bail out quasi-private lenders Fannie Mae and Freddie Mac, Paulson elected to let Lehman Brothers — one of Goldman's last real competitors — collapse without intervention. ("Goldman's superhero status was left intact," says market analyst Eric Salzman, "and an investment-banking competitor, Lehman, goes away.") The very next day, Paulson greenlighted a massive, $85 billion bailout of AIG, which promptly turned around and repaid $13 billion it owed to Goldman. Thanks to the rescue effort, the bank ended up getting paid in full for its bad bets: By contrast, retired auto workers awaiting the Chrysler bailout will be lucky to receive 50 cents for every dollar they are owed.
Immediately after the AIG bailout, Paulson announced his federal bailout for the financial industry, a $700 billion plan called the Troubled Asset Relief Program, and put a heretofore unknown 35-year-old Goldman banker named Neel Kashkari in charge of administering the funds. In order to qualify for bailout monies, Goldman announced that it would convert from an investment bank to a bank-holding company, a move that allows it access not only to $10 billion in TARP funds, but to a whole galaxy of less conspicuous, publicly backed funding — most notably, lending from the discount window of the Federal Reserve. By the end of March, the Fed will have lent or guaranteed at least $8.7 trillion under a series of new bailout programs — and thanks to an obscure law allowing the Fed to block most congressional audits, both the amounts and the recipients of the monies remain almost entirely secret.
Converting to a bank-holding company has other benefits as well: Goldman's primary supervisor is now the New York Fed, whose chairman at the time of its announcement was Stephen Friedman, a former co-chairman of Goldman Sachs. Friedman was technically in violation of Federal Reserve policy by remaining on the board of Goldman even as he was supposedly regulating the bank; in order to rectify the problem, he applied for, and got, a conflict-of-interest waiver from the government. Friedman was also supposed to divest himself of his Goldman stock after Goldman became a bank-holding company, but thanks to the waiver, he was allowed to go out and buy 52,000 additional shares in his old bank, leaving him $3 million richer. Friedman stepped down in May, but the man now in charge of supervising Goldman — New York Fed president William Dudley — is yet another former Goldmanite.
The collective message of all of this — the AIG bailout, the swift approval for its bank-holding conversion, the TARP funds — is that when it comes to Goldman Sachs, there isn't a free market at all. The government might let other players on the market die, but it simply will not allow Goldman to fail under any circumstances. Its edge in the market has suddenly become an open declaration of supreme privilege. "In the past it was an implicit advantage," says Simon Johnson, an economics professor at MIT and former official at the International Monetary Fund, who compares the bailout to the crony capitalism he has seen in Third World countries. "Now it's more of an explicit advantage."
Fast-forward to today. It's early June in Washington, D.C. Barack Obama, a popular young politician whose leading private campaign donor was an investment bank called Goldman Sachs — its employees paid some $981,000 to his campaign — sits in the White House. Having seamlessly navigated the political minefield of the bailout era, Goldman is once again back to its old business, scouting out loopholes in a new government-created market with the aid of a new set of alumni occupying key government jobs.
Gone are Hank Paulson and Neel Kashkari; in their place are Treasury chief of staff Mark Patterson and CFTC chief Gary Gensler, both former Goldmanites. (Gensler was the firm's co-head of finance.) And instead of credit derivatives or oil futures or mortgage-backed CDOs, the new game in town, the next bubble, is in carbon credits — a booming trillion- dollar market that barely even exists yet, but will if the Democratic Party that it gave $4,452,585 to in the last election manages to push into existence a groundbreaking new commodities bubble, disguised as an "environmental plan," called cap-and-trade. The new carbon-credit market is a virtual repeat of the commodities-market casino that's been kind to Goldman, except it has one delicious new wrinkle: If the plan goes forward as expected, the rise in prices will be government-mandated. Goldman won't even have to rig the game. It will be rigged in advance.
Goldman Sachs, which emerged relatively unscathed from the financial crisis, was accused of securities fraud in a civil suit filed Friday by the Securities and Exchange Commission, which claims the bank created and sold a mortgage investment that was secretly devised to fail.
Goldman itself profited by betting against the very mortgage investments that it sold to its customers.
The instrument in the S.E.C. case, called Abacus 2007-AC1, was one of 25 deals that Goldman created so the bank and select clients could bet against the housing market....As the Abacus deals plunged in value, Goldman and certain hedge funds made money on their negative bets, while the Goldman clients who bought the $10.9 billion in investments lost billions of dollars.
According to the complaint, Goldman created Abacus 2007-AC1 in February 2007, at the request of John A. Paulson, a prominent hedge fund manager who earned an estimated $3.7 billion in 2007 by correctly wagering that the housing bubble would burst.
.. the deck was stacked against the Abacus investors, the complaint contends, because the investment was filled with bonds chosen by Mr. Paulson as likely to default. Goldman told investors in Abacus marketing materials reviewed by The Times that the bonds would be chosen by an independent manager.
Robert Khuzami, the director of the S.E.C.’s division of enforcement, said in a statement. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”
But when Goldman sold shares in Abacus to investors, the bank and Mr. Tourre only disclosed the ratings of those bonds and did not disclose that Mr. Paulson was on other side, betting those ratings were wrong.
This is just the tip of the iceberg. The Wall Street Banks are knee deep in fraud.
No one can obtain the kind of systematic returns that Goldman was producing without either cooking the books or engaging in some other frauds. That is the same 'tell' as the steady and outsized returns that Madoff is producing.
Let's see if this goes any deeper, and if serious punishments and reforms result.
The SEC can only enforce the Securities Laws, but cannot bring criminal charges. Certainly Goldman will be subject to civil lawsuits and discovery. But the real test of the Obama government will be any role that the Justice Department does or does not take in this. They could of course defer, using the show trials of the Financial Crisis Inquiry Commission as a rationale to take no action.
This is blatant robbery, outright fraud, being conducted by an organization that is paying half the Congress and the Administration, and staffing key positions in the government with its employees.
Stocks skidded Friday, snapping a six-day winning streak, after the SEC shocked the market, charging Goldman Sachs with fraud over its handling of subprime mortgages.
The market had already started in a sour mood as the latest batch of earnings were solid but fell short of the market's lofty expectations and consumer sentiment unexpectedly fell.
"The market was going along pretty good. We were a little weak, that's for sure, but we had good news the other day from JPMorgan, great earnings today from Bank of America, and then for this to come out, really put a damper on the whole sector," Alan Valdez, vice president of Hilliard and Lyons, said on CNBC.
FORMER director of Fountain View Development Bhd, Datuk Chin Chan Leong, was fined RM1.3 million or in default of 13 months' jail as well as sentenced to serve one day in prison for manipulating the share price of the company seven years ago.
Chin pleaded guilty yesterday to the offence committed between November 18 2003 and January 20 2004 for creating a misleading appearance of active trading of Fountain View shares on Bursa Malaysia through at least 20 CDS accounts.
These accounts were beneficially owned by the accused through the companies that Chin controlled.
Hiew Yoke Lan, a former Avenue Securities Sdn Bhd remisier, was also fined RM1 million or 10 months default jail sentence for abetting Chin in the offence. Hiew was responsible for executing and relaying orders for the sale and purchase of the shares during the material time to various stockbroking firms.
In a statement issued yesterday, the Securities Commission (SC) said this is the second conviction for market manipulation which it has successfully prosecuted.
The regulator said it has been proactively pursuing this and other market misconduct cases such as manipulation, market rigging and insider trading because such activities severely undermines investor confidence and tarnishes the reputation of the Malaysian capital market.
I remember this one.
Anyway, let's have an idea on what happened. "A misleading appearance of active trading of Fountain View shares on Bursa Malaysia through at least 20 CDS accounts".
The offence was committed between November 18 2003 and January 20 2004.
From yahoo finance, these are the historical stock prices I am looking at for Fountain View.
During this period, Fountain View had a low of 1.99 and a high of 6.15!!!!
And here is the nice handy work.
Now consider this also. Fountain View has 444.940 million shares. Currently, Fountain View is suspended at 22 sen. At 22 sen, Fountain View carried a market cap of 97.8 million.
Back in Nov 2003, at a low of 1.99, Fountain View carried a market cap of 885 million.
And at the peak of this share manipulation of around 6.15, Fountain View carried a market cap of 2.73 billion!!!
Which meant that some 1.845 billion in market cap was created via the share manipulation!
Let me side track a bit. Do you know that back on 14 Feb 2004, there was this news clip involving Fountain View.
Fountain View in talks to buy Kurnia Setia stake
BY JOSE BARROCK
FOUNTAIN View Development Bhd is eyeing a stake in plantation counter Kurnia Setia Bhd. It is believed that talks between both parties have just commenced and therefore, details are not forthcoming.
Kurnia Setia – a little known main board plantation counter with a market capitalisation of only about RM69.32 million – has some 11,522 ha of oil palm and rubber plantation, and is controlled by the Agricultural Development Board of Pahang with a 45.41 per cent stake in the company.
It is believed that Fountain View Development is looking to increase its presence in the plantation business, especially in oil palm cultivation, capitalising on high crude palm oil (CPO) prices to boost its earnings. The company has been suffering losses since financial years 2001 and 2002.
The financial year just ended may not bring much cheer to Fountain View Development shareholders as well. The company, for the nine months ended September 2003, posted a net loss of RM3.84 million on the back of RM56.32 million in sales.
CPO prices have been on an upward trend since September last year, gaining some 35 per cent to close at RM1,892.50 on Thursday.
“The problem is with the company's property development arm which is based in Johor. A focus on plantations will boost earnings, especially with the current high CPO prices,” the source says.
Fountain View has about 11, 570 ha of plantation land, of which almost 70 per cent is cultivated with oil palm while the remaining are planted with rubber and cocoa. Previously known as Plantation and Development (Malaysia) Bhd, Fountain View was a PN4 counter.Under a restructuring scheme, Plantation and Development became a wholly owned subsidiary of Fountain View after a share swap, capital reduction exercise, issuing of irredeemable convertible unsecured loan stocks and debt compromise. News of Fountain View's interest in Kurnia Setia has yet to hit the market. Kurnia Setia shares closed at RM1.11, down three sen from its close on Wednesday. It hit its 52-week high of RM1.25 on Dec 8 last year while its low of 63 sen was on Feb 27 last year.
Fountain View shares have risen six fold, since listing at RM1 on Nov 18 last year. The counter closed at RM5.80 on Thursday.
The Board of Directors wish to inform that the Company has never been involved in any talks to acquire a stake in Kurnia Setia Berhad and as such wish to deny the following statement :
And which company benefited from such news article? See the jump in Kurnia Setia after such news reporting:
See the jump in volume and share price for Kurnia Setia? Nice eh? The power of the press using words like 'it is believed' and 'according to sources'.
On 31st May 2005, there was this article on the Weekly Edge.
31st May 2005
Cover Story: A wake-up call for bursa malaysia Stories by Lim Ai Leen, M. Shanmugam & Cindy Yeap
Banks and stockbrokers continued to cut their credit lines on selected stocks last week, sending investors scurrying for cover yet again as prices tumbled.
In the latest line-up of stocks to bite the dust were Gula Perak Bhd and SAAG Consolidated Bhd. By last Friday, both companies had seen their value reduced to a third of what it was when the trading week began.
It's been a month since Fountain View Development Bhd started this selldown snowball rolling, and the stock market is still suffering the effects.
There is talk of financial executives being axed for breaching internal risk management and control procedures. "A large securities house is investigating a number of its executives for owning cars and properties beyond their means," says one market watcher.
Retail participation is low, as spooked banks and stockbrokers review their exposure to so-called speculative counters, stop credit lines on these stocks and slash their positions. Forced selling has exarcerbated the price plunge, with few buyers willing to dip their toes in to stem the cascade.
Market talk is that the selldown has affected quality stocks too, as these are sold to make up for losses on the speculative counters. And even though there are punters who believe that the sold-down stocks have been beaten way below their fundamental values, the herd instinct to stay away still holds strong.
"There is still value in these companies. Unfortunately, lenders have a policy of forced selling to cut their losses. If there was measured selling, then the drop wouldn't be so drastic," observes an industry veteran.
This state of affairs is raising questions about the integrity of the Malaysian bourse. Should market regulation be stepped up? Do these incidents reflect the poor quality of listed companies? Is the share margin financing facility to blame? Why are syndicates still loose on the stock market?
Equity market participants are grappling with the answers, even as the stockbrokers lick their wounds over their losses and the regulators go about their business of investigating. But there's no doubt that measures must be taken quickly, before the stock market loses its credibility.
"It's a wake-up call," says Yusli Mohamed Yusoff, CEO of Bursa Malaysia. No one is kidding themselves that this is a new problem. It's just that this time around, the losses have hit the institutions, and not retail investors as much. Also, the speculation has had a contagion effect on other stocks and is taking place in a damp, bear market, not a hot, bullish one.
"This is not a new feature of the market; these guys [price manipulators] have been around the market for years," says Yusli matter-of-factly. Which raises the question of why they have.
No quick fix is at hand. The long-term solution, it appears, lies in a whole host of issues, from fundamental analysis to brokers' risk management systems to information sharing. It also depends highly on cooperation amongst a long line of people that spans investors, intermediaries, regulators and the judiciary.
Speculation versus manipulation The instinctive reaction when artifically high share prices and volumes come crashing down is to call for regulators to rid the market of manipulators. But every healthy stock market needs a good dose of speculation to generate volume and interest.
A common refrain in financial circles is that it's a thin line between speculation and manipulation. Where does a healthy risk appetite end and an unhealthy greed for the quick buck at any expense begin? And how is the lender or investor supposed to tell the difference?
According to Yusli, the line is drawn where collusion begins. "It's difficult for these speculators to do it [keep prices artificially high] on their own. They need the cooperation and support of other market participants," he says.
Which means manipulation can be nipped in the bud if "everyone starts toeing the line and is that much more careful." Retail investors can refuse to buy on rumours. Lenders and stockbrokers can refuse to extend credit.
And how is a potential investor or lender to know whether the price quoted on the exchange is reflective of a stock's value?
Self-defence would seem to be the best offence in this case. Investors and financial intermediaries can arm themselves with more in-depth knowledge of a particular stock. And valuation tools like fundamental analysis will alert them as to whether a stock is trading at unusually high levels.
"There has to be some form of benchmarking of share prices, which compares real-time PE (price-earnings) ratios, NTA (net tangible assets) per share and dividend yields, for example. Otherwise, people can get away with selling Protons for the price of Mercedes Benzes," remarks Datuk Ali Abdul Kadir, ex-chairman of the Securities Commission and a well-known car aficionado.
Enforcement and prosecution There is little doubt that manipulators continue to prey on the local bourse and have been doing so for years. But why have their activities continued all this time, apparently unhindered?
The regulators say they have to walk the fine line between regulating the market and interfering with its development. The intermediaries say the regulators need to be more on-the-ball and market savvy. And the lawyers say manipulation is a tough offence to prove.
"You can't have a policeman on every corner of the street. There should be reasonable policing, and you wait for informants under the whistle-blowing provisions [Section 140 of the Securities Commision Act protects the identity of informants]. The idea is to let the market develop, but where there is manipulation, the regulator goes in with a big stick," says Ali.
Though this stick may have more bark than bite.
The thin line between healthy speculation and deliberate manipulation means that buyers and sellers are free to invest and divest any way they want, as long as they do not collude with each other to distort prices or volumes. Most prosecutions, says a litigation lawyer, fail when it comes to proving that a series of trades was manipulation, and not normal speculation.
"The hardest part is to prove the mens rea, or the intention to create a false trade or manipulate prices," says the lawyer. "If someone didn't mean to create a false trade, it's a defence to the charge."
If, however, the SC can prove that the buy and sell accounts all belong to one person via his or her nominees, then the burden of proof shifts to the defendant to show that he was not manipulating prices.
"These syndicates are highly skilled at their game. It's tough to try and catch them with their hand in the cookie jar," says Yusli.
Another hurdle, says the lawyer, is the general lack of understanding of securities laws and manipulative trading practices amongst the judiciary. This shortcoming may be addressed once a special court is set up.
"... the Chief Justice has approved the SC's proposal on the establishment of a dedicated court for capital market offences, which is expected to expedite the disposal of such cases. In support of SC's commitment, the Attorney General also appointed three of the SC's senior enforcement officers as Deputy Public Prosecutors," says an SC spokesperson in an e-mail reply to The Edge.
In the absence of hard evidence, it would seem that the exchange and the commission will rely less on the legal system, and more on warning bells and preventive measures.
One such tool is the Bursa Malaysia query to companies regarding the unusual trading activity of their stock. The standard form, non-informative responses from these companies, which seem to be accepted by the exchange without further question, have, however, turned this exercise into a meaningless ritual.
"We query these companies when we think there is some indication that some parties have been acting in concert. We do investigate further after the companies reply. The market should take our query at face value [that we suspect some manipulative activity], but we will do more to publicise why the company is being queried. Also, we have to be careful about unnecessarily alarming the market," explains Yusli. A common complaint is that the exchange and the SC are not seen to be investigating or coming down hard on these speculative companies.
Tengku Zafrul Aziz, group managing director of Avenue Capital Resources, says: "I feel that the relevant regulators have to come in early and be stringent with any counters that they feel are being manipulated. I know this is easier said than done given the vested interests of the brokers and their clients. The monitoring mechanism must be in place so that brokers can be informed of certain 'red flag' counters."
Ali says what's lacking is "on-the-spot fire-fighting". He also believes that the regulators could benefit from having more "market-savviness".
Information sharing "It may be difficult to prove actual price manipulation, but we would like to see regulators who are more on-the-ball, who know what's happening in the market before it ends up in this sort of situation," said one stockbroker, when the Fountain View selldown started to affect other stocks a few weeks ago.
The SC seems to be taking steps in this direction. "It has asked the brokers to submit weekly reports for counters that it specifies," says the CEO of a local stockbroker. "It wants to be proactive." This request was made at the meeting between the brokers and the SC on May 16 — a meeting convened to discuss the Fountain View affair and losses of hundreds of millions of ringgit said to have been borne by banks and stockbrokers.
At this meeting, which the CEO described as "sobering", the SC also proposed better information sharing among the brokers, Bursa Malaysia and itself. "This could help reveal weaknesses in credit and margin-financing practices," he explains. In particular, players will be able to see what sort of credit exposure the entire market has to a specific stock.
Margin financing Is slashing credit lines purely a knee-jerk reaction to the recent selldown? Or are margin financing facilities a contributing factor to plunging share prices?
According to Yusli, margin financing in itself is not the culprit. "Margin financing is a great way for banks and stockbrokers to earn healthy profits, without having to extend these facilities to shady characters. The rules are in place. Everyone who takes in shares will have to decide how they want to conduct their business — in a volatile way or in a steady, fundamental manner," he says.
But these internal systems and controls can be enhanced further, says Tengku Zafrul, with better information at hand. "... it's all about having adequate internal systems and controls... Different brokers have different risk appetites and will thus take different risks when it comes to margin financing. Therefore, we should let market forces dictate what risks each broker wants to take when it comes to giving lines. However, brokers would be better off if we had access to better information of the client's credit exposure relating to his securities with other brokers and with other financial institutions."
But there are also those who think that the days of brokers relying purely on margin financing and transaction fees as main income-earners are over.
David Chua, managing director of ECM Libra, believes that financial intermediaries should start trading up their skills. "Intermediaries need to match up to more educated and affluent investors. It's not just about providing prices; they have to improve their value-added services," he says.
Quality of companies What is worrying investors now is, how many more companies out there have shareholders who prefer to make their big bucks from ramping up the share price instead of from growing the company's business?
"It's unfair to say that this is reflective of the whole market," stresses Yusli. "There are honest people out there who want to make decent returns from investing in a sound market. But it's the few bad apples who are out to make a quick buck at everyone else's expense, without a business plan, without growing the business like normal, healthy companies. These people are taking a short cut and are looking for victims."
The stock market abounds with stories of companies that list and tank soon after — for example, KSU Holdings Bhd and YCS Corp Bhd. Fountain View itself only listed in 2003, via a reverse takeover of Plantation and Development (M) Bhd.
But the regulators say that the domestic listing requirements are not too blame. Ali believes that the listing requirements have been set high enough to separate the wheat from the chaff. "You can't reject them once they meet the rules," he says.
"It's not so much the quality of the companies that we list but the intentions of the people behind them," observes Ali. "Unfortunately, there are those who want to make money by exiting when the company lists. I would advise them to build up the business once it's listed. The returns to the controlling shareholder comes from capital appreciation and dividends when the business grows."
Looking ahead These suggestions and measures will take time to show results. In the meantime, anecdotal evidence suggests that industry professionals continue to scan the market for potential selldown candidates.
Though, there are those who believe the shakeout is over. "It's gone past the worst now. Most of the bad apples have fallen off the tree," says the CEO of a local stockbroking firm.
Yusli believes that market confidence will return "once everyone comes to their senses and invests in prudent fundamentals. There are still many good companies that don't participate in speculative kinds of activities."
Savvy investors, meanwhile, are out bargain-hunting. "They threw the baby out with the bath water. There are quite a few pickings amongst these counters," says the industry veteran. He is obviously betting that market confidence will return — and soon. Hopefully, this time it stays
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