Rogue traders and sponsors run afoul of SECP

Published: May 5, 2013

Dishonest dealings: Rs46m is the amount of money made by BMA Capital by front-running an international client. In contrast, its full year profit for 2012 was Rs33m. PHOTO: FILE

KARACHI: 

This year has seen the Securities and Exchange Commission of Pakistan (SECP) take unprecedented action against two well-established financial groups for engaging in illegal trade practices and profiting at the expense of their clients.

In its order dated February 19, 2013, the SECP found BMA Capital guilty of front-running and thereby subverting the interests of one of its foreign clients in favour of its own to make Rs46.0 million. To put that number into context, BMA’s net profit last year was only Rs33.0 million, which means that this single act netted them 140% of their entire profit for 2012. Though such a breach entitled the SECP to suspend BMA’s licence, it chose instead to levy a fine of Rs50.0 million, the largest in the history of Pakistan’s capital markets.

On March 22, 2013, the SECP also revoked the asset management and investment advisory licence of Dawood Capital Management (DCML) – a subsidiary of the First Dawood Group, which counts First Dawood Investment Bank and Dawood Family Takaful amongst its associated companies. DCML CEO Tara Uzra Dawood, who graduated from Cornell University and Harvard Law School, was found guilty of insider trading when she redeemed her personal and company units before booking losses against defaulted corporate debt in DCML’s mutual funds.

Taking advantage of her privileged position and trading on non-public material information, she allowed herself, her close relatives and the company to save Rs18.2 million. More importantly, her actions meant that the remaining unit holders suffered significantly larger losses as a direct result of these redemptions. In addition to immediately revoking DCML’s licence, the SECP personally fined Dawood Rs20.0 million and ordered her to pay this amount out of her own pocket.

It is interesting to note that foreign courts often go a step further and incarcerate principals of financial firms who are found guilty of such misconduct. In 2011, the CEO of the Galleon Group (a Wall Street hedge fund) was sentenced to 11 years in prison for insider trading. More recently, the former Goldman Sachs director Rajat Gupta, who was convicted of providing insider tips to Galleon’s CEO, was imprisoned for two years. Perhaps the most famous case of a financial crime leading to jail time was that of Bernie Madoff, who in 2009 was sentenced to 150 years in prison for perpetuating a Ponzi scheme that defrauded investors of $18.0 billion.

It appears almost impossible to repair the damage caused by such individuals and companies and to win back the trust and business of clients. Both BMA and DCML are appealing against the SECP’s decisions, but, regardless of the outcome, it is hard to see how they will recover from the reputational loss of direct sponsor involvement in such grievous misconduct and continue to survive as a going concern in such a competitive market.

In BMA’s case, it is of great concern that there have been no repercussions other than the SECP fine. The group continues to manage and invest money on behalf of clients without being forced to improve corporate governance or enact Chinese Walls. Equally worrying is the mass employee exodus the company has faced over the last few years. The recent departure of several key personnel, including the firm’s CEO, CFO, COO and other key functionaries (head of research, fund managers) is undoubtedly a red flag for clients and regulators.

Despite the SECP’s action being limited to monetary fines and revocation of licences, it is important to laud the apex regulator and its most recent chairman, Muhammad Ali, for taking such decisive action against two influential and well-connected financial groups. Sending a message that reposes investor confidence in the integrity of our still nascent capital market is critical.  In the case of both BMA and Dawood Capital Management, however, the final arbiters of both companies’ fate will be the investors whose trust has been betrayed.

Published in The Express Tribune, May 5th, 2013.

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Reader Comments (4)

  • kasi
    May 5, 2013 - 12:09PM

    BMA bashing by ET

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  • Murtaza
    May 5, 2013 - 2:20PM

    Suprised that bma hasn’t been subjected to a comprehensive audit by the secp following this scandal.

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  • Zoro
    May 7, 2013 - 8:42AM

    I request all readers of ET to also check out Uzra Dawood’s timeline on Twitter @TUDawood . She is such a sweet angelic girl. The amount mentioned is peanuts compared to all the charity work, the baby fund, the women’s awards, reporting on all Fashion trends globally by physically journeying herself to extreme places like Paris & London and best of all an extremely humble person. This is a travesty.

    I protest !!!!!

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  • sehr.siddiqui
    May 14, 2013 - 11:13AM

    Actions taken by SECP against BMA and Dawood were actually dictated by a powerful and heavy weight broker of Karachi who had taken over SECP by getting his man appointed as
    the Chairman of SECP. as a result of this regulatory take-over the broker has received immunity for several insider tradings successfully.
    By the way the appointment of the Chairman was declared invalid by the Supreme Court bringing a question mark on the decisions and salary and perks taken by the man. Lets see
    what the Champions of Good Governance have to say on this issue.

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