Friday, June 06, 2008. 8:23:16 PM       
 
   

 
How Stockbrokers Rip Off Investors

The Securities and Exchange Commission moves to tighten the noose on capital market operators whose stock-in-trade is to swindle investors. Will this put an end to market infractions?

By TONY MANUAKA


Nigerian Stock Exchange
She never had any inkling that a stockbroker could turn out to be a swindler. So, after a long period of ruminating on how best to manage what she could rightly term her savings for over six years as an oil worker, Ada Ijene, 34, decided to invest in the stocks of First Bank of Nigeria. Not long afterwards, she concluded arrangements and handed a cheque of N1.3 million to a mere acquaintance who had over time, paraded himself as a stockbroker. The shares were to be bought from the secondary market, so it was agreed that the certificate was to be delivered in two weeks’ time. Even though she knew next to nothing about operations of the stock market, she felt at ease with the promise. That was how several weeks rolled by and there was nothing to show that there was any transaction between Ijene and the self-acclaimed stockbroker.
Several months later, it dawned on her that she may have been swindled. All along, the fake stock broker had maintained that the chief executive of the stock broking firm where he works had travelled to the United States and kept shifting the date of her return. With the intervention of some family members from both sides, it was later revealed that the N1.3 million was rather invested in a haulage business. Ijene broke down in tears but it was rather too late as the conman had already concluded arrangements to travel out of the country.
But her case was just one out of several others in recent times. On September 20, 2007, the Securities and Exchange Commission, SEC, invited 19 complainants to its Lagos office for a meeting. Made up of individuals and corporate bodies, the complainants had brought allegations of illegal sale of their shares by Eagle Stockbrokers Limited. Besides this, another stockbroking firm, Akintorch Securities Limited, had 12 cases of irregularities listed against it. But, according to information made available on the website of SEC, there were 45 other cases against the operator as at 2005. That brings to 57 the number of cases brought against the company by shareholders between 2005 and 2007. That is not all.
Investigations carried out by the magazine indicate that some market operators employ sundry methods to defraud unsuspecting investors these include non-lodgment of shares, non-payment of sales proceeds, failed requests for share transfer, non-purchase of shares paid for, non-receipt of share certificates and statements of accounts, fraudulent dealings on Central Securities Clearing System, CSCS, accounts, insider dealings, unauthorised conversion of shares, price manipulation and non-refund for unprocessed applications. There is also a preponderance of cases of stockbrokers divesting their clients’ investments hoping to reap higher returns in their own names. Yet, there are several cases of illegal operators in the market who are not registered by the regulators but who go about scouting for funds to manage for investors.
Further investigations, however, show that the most prevalent form of infraction in the capital market is unauthorised sale of investors’ shares by stockbrokers. For instance, all the 40 cases that the capital market regulator is currently investigating against AAA Stockbrokers Limited, a Lagos-based operator, are on illegal sale of shares.
The stockbrokers are not the only operators that are involved in market infractions. But among others, Sterling Registrars tops the list of market players in its category with no fewer than 27 cases which are now being investigated by SEC. It is followed by First Registrars, which has 11 complaints listed against it. A stock market analyst who spoke to the magazine on the condition of anonymity put the value of  illegal transactions carried out by market operators in the last few years in excess of N300 million.
In meeting with the challenges of preventing fraudulent and unfair trade practices in the market, the commission investigated over 1,500 complaints against operators between 1999 and 2006. Within the same period, SEC successfully prosecuted 91 cases and handed over to the police 14 cases of illegal operators for further investigation and prosecution. Also, SEC sources confirmed that 14 cases were referred to the Economic and Financial Crimes Commission, EFCC.
However, if fresh steps being taken by SEC are anything to go by, then the days of scam operators in the market are numbered. Musa Al-Faki, director-general of the regulatory agency, has, over time, reaffirmed his resolve for zero-tolerance on capital market infractions as part of the ongoing financial sector reforms. To meet the challenges of a growing market with capitalisation in excess of N800 trillion, the commission is said to be working towards setting up a committee that will monitor activities in the market. Furthermore, SEC has strengthened its working relationship with the EFCC to facilitate the prosecution of criminal cases in the stock market.
Lanre Oloyi, spokesman for SEC, told the magazine that although some of the cases listed against stockbrokers have been decided, investigation on several others are still ongoing. “The management of SEC frowns at any form of illegality in the market. Our target is to support the federal government’s vision to be one of the top 20 economies in the world by 2020. The market is rule-based and all operators are expected to obey the rules of the commission, otherwise they will be shown the way out”, said Oloyi.
Further to that, SEC is adopting a full disclosure policy by which it would assist the public in knowing the background of any individual or corporate body that applies to be licensed as an operator in the market. The commission is also gradually embarking on enlightenment campaigns across the nation on the activities of the capital market. This, the magazine gathered, is necessitated by the growing awareness in the country on investments in the capital market.
According to market sources, what appears to be a surge in capital market infractions began with the banking sector consolidation that compelled many banks to head for the stock market in search of funds as part of their recapitalisation efforts. It is, however, sad to note that quite a large number of people who took interest in investing in shares do not understand the dynamics of the market. It is this flaw on the part of investors that some criminal-minded stockbrokers and registrars are capitalising on to defraud the investors.
For example, in the case of illegal sale of shares, what stockbrokers do is to sell off their clients’ shares without notifying them or without getting any form of authorisation to trade the shares. In most cases, the stocks are sold when their prices are high. Sometimes, the stockbroker buys the shares when the price would have fallen, in which case, if there is dividend or bonus share within the period, the returns go to the beneficiary of the illegal sale.
There are also cases where share certificates are deliberately withheld by registrars for longer than necessary. In this case, the shareholder can not sell his shares at will, even when the prices are going up. This, according to market analysts, is usually done in connivance with other operators like quoted companies to create artificial rise in price.
Oloyi describes the situation as regrettable, advising investors to insist on registering the accounts with the CSCS. This way, he said, investors would have joined the league of electronic dividends and bonus payments.
Adebayo Ajayi, a stockbroker with Support Services Securities, finds hope in the introduction of e-offer, e-bonus and e-dividend by the Nigerian Stock Exchange, NSE, and SEC. “By the end of the year, all offers will be done electronically. Shareholders who are to benefit from companies’ bonuses, after opening a CSCS account, will now have the bonus sent electronically instead of the certificates. Also, dividends will now be paid into investors’ bank accounts”, Ajayi said. 
In 2005, the NSE introduced the Trade Alert, an electronic service that operates with the mobile phone and alerts an investor if and when a transaction is carried out on his account. The controversy it generated pitched the NSE against stockbrokers, who were opposed to its introduction. The service was finally launched last year amid hopes that illegal trading on investors’ shares may have become a thing of the past. But that appears not to be so.
Olusegun Owolabi, national president, Concerned Shareholders’ Association of Nigeria, says Trade Alert should have been able to address the issue of illegal sale of shares and that the purpose for which it was introduced has not been achieved. He lays the blame on the doorsteps of both the regulators and the investors. Said he: “Investors share the blame in the sense that those who have a quantum of investment and do not subscribe to Trade Alert should have themselves to blame, and for the fact that the market is growing and foreign investors are looking at us, the regulatory authorities should apply stiffer penalties on erring stockbrokers. If the EFCC is involved and with stiffer penalties there will be sanity”.
But Gboyega Babalola, managing director, Sterling Registrars, says the issue of non-receipt of share certificates, dividends and bonuses are normal in the capital market. He also blamed the rising cases on the bad mailing system in the country. He told the magazine that the safety measure adopted by his organisation is ensuring that mandate forms are signed by investors in the presence of their stockbrokers before verification is carried out. However, this is one practice that does not obtain in several other firms where shares are sold based on mere verbal instruction, sometimes on telephone.
In line with Owolabi’s thinking, a frontline stock market analyst told the magazine that if Trade Alert is made to be more effective, investors could be quickly alerted when illegal deals are being carried out on their shares. But besides other measures that are being put in place to tame operators with criminal tendencies, the analyst recommends that SEC should sustain the push for a rise in the share capital of all categories of operators in the market. This, he said, would deter operators from engaging in shady deals knowing that they have much to lose if they are caught in the act.
Last April, SEC raised the minimum paid-up capital for different categories of operators. By the new standard, issuing houses had their capital increased from N150 million to N2 billion while brokers and dealers had theirs increased from N70 million to N1 billion. Others are fund and portfolio managers, N20 million to N500 million; registrars, N50 million to N500 million; and corporate sub-brokers, N5 million to N50 million. This is part of the reform aimed at sanitising the market. The commission also directed a 40 per cent reduction in all market fees. Along the same line, SEC recently brought to an end the verification of investments, which was discovered to be a major cause of delay in the issuance of share certificates by issuing houses.
It would also be heart-warming for many investors to note that they have little or nothing to lose if a case of infraction is established against any market operator. Oloyi confirmed to the magazine that once an operator is caught, the firm or individual is made to restitute what the investor is deemed to have lost.
Some of the measures by which SEC enforces its regulations are fines, suspension of operator, revocation of licence, suspension of trading in the securities of an erring quoted company, expulsion from the market and closure of office of any illegal operator. The commission can also institute a civil action in court through its litigation office.
Although many stakeholders contend that no society is crime-free, the concern is how far the current effort of SEC can go in fighting crime in the market.
Additional reports by
MAUREEN POPOOLA and ABIOLA ODUTOLA   




 

Operators Under SEC Investigation

OFFENDERS                                       

Akitorch Securities Ltd.                                 
Solid Rock Securities and Investment Ltd.
Assets Plus Securities Ltd.
Morgan Trust and Asset Management Ltd.               
Beachgrove Securities and Investment Ltd.
Premium Securities Ltd.
Calyx Securities Ltd.
ET & T Investment Company Ltd.
Excel Securities Ltd.                           
CSL Stockbrokers
Best Link Investment Ltd.
Lakesworth Investment  & Securities Ltd.
Eagle Stockbrokers Ltd.
Marimpex Finance Investment
Transglobe Securities Ltd.
Newdevco Stockbrokers
Anchoria Investment Ltd.
Davandy Finance & Securities Ltd.
Heritage Investment Ltd.
Floodsate Finance & Securities Ltd.
May Field Investment Ltd.
Nigeria Stockbrokers Ltd.
Futureview Securities Ltd.
First Atlantic Securities Ltd.
IBN Securities Ltd.
Centrepoint Investment Ltd
AIL Securities Ltd.
Intercontinental Securities Ltd.
Cashcraft Asset Management Ltd.
Decannon Investment Ltd.
Royal Trust  Ltd.
Riverside Securities Ltd.
Genesis Investment Securities Ltd.
Apex Securities Ltd.
UBA Securities
Gosord Securities Ltd.
First Equity Securities Ltd.
Foresight Securities & Investment Ltd.
 

NATURE OF MALPRACTICE

Fraudulent sale of shares

Withholding of share certificates

Unauthorised conversion of shares

Non-remittance of dividends

Non-lodgment of shares

Outright misappropriation of funds for purchase of shares


source: BROAD STREET JOURNAL .   http://www.bsjournal.com/news/articles/071120-1/news/cover_stockfraud.html

Oh my, ALL those companies under investigation!