Securities fraud: BMA Capital fined for front-running

Published: February 21, 2013
BMA earned Rs46 million by first buying shares from NBP for its own proprietary account and then selling them at a higher price to Bafin. PHOTO: (AFP)

BMA earned Rs46 million by first buying shares from NBP for its own proprietary account and then selling them at a higher price to Bafin. PHOTO: (AFP)


BMA Capital, one of the most respected investment banks in the country, has been fined the maximum Rs50 million by the Securities and Exchanges Commission of Pakistan, for front-running one of its foreign clients.

According to documents posted on the SECP website on Tuesday, BMA Capital bought 578,000 shares of Bata Pakistan at Rs920 per share from National Bank of Pakistan on August 24, 2012 in a negotiated, off-market block transaction and then on August 29 sold 587,500 shares in another negotiated, off-market transaction at Rs1,000 per share to Bafin (Nederland) BV, the holding company for many of Bata’s global subsidiaries.

Front-running occurs when a brokerage firm, after learning of a client’s order to buy shares, first buys shares on their own account and then – after the share price has gone up – buys shares on behalf of the client, giving their client a worse price than they could have gotten had the broker simply executed the trade immediately.

Hence the key question that the SECP tried to answer was when exactly BMA got the order to buy the shares. At a hearing held at the SECP offices in Karachi on November 12 (literally across the street from BMA’s headquarters), CEO Moazzam Malik and a lawyer representing the firm presented a letter sent by Bafin, stating that they placed their order on August 27.

“We consider BMA to be a highly professional company and look forward to doing further business with you in the near future,” wrote Tim Jude, vice president for finance at Bata Brands headquarters in Switzerland.

That e-mail would appear to put BMA in the clear: they bought Bata Pakistan shares before Bafin placed an order to buy them. BMA’s lawyers have insisted that the firm was engaged in proprietary trading when it bought the shares from NBP and also when it sold them to Bafin, and did not act as a broker in either trade.

But when the SECP followed up with Jude, they found out a little something more: “We have been discussing with BMA for quite some time [the] opportunity for acquiring shares. However, it was only around August 27, if I recall correctly, that a firm opportunity arose for Bafin to acquire some shares,” wrote Jude on December 4 in an e-mail response to the SECP’s inquiries.

And therein lies the dispute. Technically, BMA bought Bata shares before Bafin placed its order. However, as Jude’s second e-mail suggests, BMA clearly knew that a large order for Bata shares was forthcoming from Bafin. The SECP contends that, as a registered brokerage house, it was BMA’s responsibility to act only as an intermediary between NBP and Bafin, collecting only a commission.

Instead, BMA managed to earn a Rs46 million profit from the trade by first buying the shares from NBP for its own proprietary account and then selling them to Bafin for a higher price. That profit would be more than wiped away by the Rs50 million fine levied on BMA by the SECP.

There is also the inconsistency in BMA’s own defence arguments. In the first letter sent by the firm to the regulator on October 3, written by the CEO himself, BMA admitted that they were under “instruction from Bafin to try to reduce the price of the Bata shares we buy from National Bank to the best of our ability.” That suggests that the brokerage was acting on behalf of its client even in the first trade. In subsequent letters, drafted by BMA’s lawyers, the company claimed that its initial trade was a purely proprietary one.

BMA denies all wrongdoing. “We have always acted in accordance with the law,” Moazzam Malik told The Express Tribune. “BMA firmly believes that it has not violated any law or code of conduct set forth in the Brokers Rules and has decided to appeal the decision passed by the SECP,” Malik further said.

The firm may have a case: the line between proprietary trading and brokerage services when it comes to illiquid securities is a fine one, and one that even US regulators have struggled to define.

Published in The Express Tribune, February 21st, 2013.

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Reader Comments (10)

  • Nouman
    Feb 21, 2013 - 10:28AM

    I am in a different trade myself but talking to my friends in the past……….isn’t insider trading the NORM in Pakistan…….

    I can’t imagine AKD having the brains to really analyse as though he was a CFA…..these crooks have always worked by rigging the game.


  • Iqbal saeed
    Feb 21, 2013 - 12:29PM

    they should be penalized at the maximum to first safeguard the name of the country and on the other hand to protect the interest of the parties involved in trading. Ethically, it is wrong and they know it very well does not matter it the law has the fine line or not.


  • Mirza
    Feb 21, 2013 - 1:17PM

    BMA reduced the price to the best of their ability and managed to make a PKR47m profit!!!
    What a joke.
    They were acting in the best interest of their client and should not have made a profit from this . . . just charged expenses at actual plus their advisory fee.
    There is no grey area here.
    BMA and its associates like many others in this field are showing their true colours . . . opportunists.


  • Talha
    Feb 21, 2013 - 2:31PM

    @Nouman. He doesnt need brains or a CFA charter for that. He is a broker. A broker acts as an intermediary between 2 parties. Much like a property dealer a broker brings together a seller and a buyer and takes commission for it. Brokers generally dont buy stocks on their own balance sheet so your argument is invalid. Also AKD might not be a CFA charterholder himself but im sure a lot of the analysts who work for him are!


  • Javed
    Feb 21, 2013 - 8:30PM

    Before blaming BMA, we must analize that BATA is the most illiquid and non traded blue chip shares listed in Pakistan. BMA safeguarded the interest of the foreign buyer as getting half a million shares worth over Rs 600 million on a normal market could have triggered the price of Bata shares to touch Rs: 1500/=. There is another side, executing such a huge block sale order is always tricky and carry underlying risk for all parties. BMA took risk and exposure of over Rs: 500m, had the buyer backed out of its subsequent purchase order, BMA’s loss would have been un-imaginable. This is a general problem in most of the emerging stock markets and I do not blame BMA, who had been ‘pioneer’ in getting foreign investments to Pakistan. Some local brokerage houses who are deprived of attracting foreign investors are unnecessarily shouting.


  • Sajid
    Feb 23, 2013 - 12:26AM

    This looks like a case of insider trading, rather than front running here. An insider trader acts on tips and chances as well, and not necessarily on firm news. Had it been a case of a firm order, then this would have been front-running. Imagine a world where everyone knew beforehand that Bafin is out to buy Bata’s shares. In such a case BMA would never have got the price they got. This is the proof that the early purchase of Bata shares was insider trading.
    Just my opinion. For others’ comments.


  • Javed
    Feb 23, 2013 - 10:25PM

    Refering to Mr. Sajid’s comments on insider trading. This is absolutely not an insider trading case either. In sider trading originates from corporate results leak out or companies negotiating merger and some investor knowingly takes postion to make quick money. This transaction falls under the flaws of ’emerging market’ illiquid trading position where each block buyer/seller has to take act differently to safe guard its interest to contemplate the transaction.


  • Shan
    Feb 24, 2013 - 12:13PM

    @Sajid: you’re right, this is more insider trading than front running. BMA had inside information and used it to make an illegal benefit.


  • Sajid
    Feb 24, 2013 - 12:15PM

    This is for general knowledge of all:

    Investopedia explains ‘Insider Trading’
    Insider trading can be illegal or legal depending on when the insider makes the trade: it is illegal when the material information is still nonpublic–trading while having special knowledge is unfair to other investors who don’t have access to such knowledge. Illegal insider trading therefore includes tipping others when you have any sort of nonpublic information. Directors are not the only ones who have the potential to be convicted of insider trading. People such as brokers and even family members can be guilty.

    The broker should have waited for executing the block trade till getting the order, knowing that trying to buy/sell stock now that would constitute insider trading. If indeed the stock is so illiquid then let the buyer take price risk and not the broker.


  • Asif Ahmed
    Mar 18, 2013 - 4:04PM

    well said dear


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