Insider trading: Dawood Capital Management licence revoked, CEO fined

Tara Dawood, relatives, and associated companies redeemed their units before heavy losses realised.

KARACHI:

In what is perhaps the strictest action ever taken against an asset management company, the Securities and Exchanges Commission of Pakistan (SECP) revoked the licence of Dawood Capital Management and imposed a Rs20 million fine on its CEO Tara Uzra Dawood for insider trading.

The SECP issued its order on Friday, after having conducted a nine-month investigation into the matter. Tara Dawood, a graduate of Cornell University and Harvard Law School, was found guilty of having defrauded investors in the mutual funds managed by Dawood Capital by taking advantage of her position as CEO and her knowledge of an impending write-down in the value of the mutual funds.

According to the SECP’s findings, Dawood Capital Management, a First Dawood Group subsidiary, had invested in corporate bonds issued by several companies including Pace Pakistan, Maple Leaf Cement Factory, Pak Elektron, and Telecard, that had defaulted on their obligations to bondholders.

In a meeting of the company’s audit committee held on February 21, 2012, Dawood Capital’s auditors advised that the company take a write-down on the value of the investments in the bonds issued by those companies. The board of directors meeting held on the same day approved that course of action, though it was decided that the precise amount of the write-downs would be determined and approved at the next board meeting, to be held on April 28, 2012.

At that next board meeting, it was decided that the value of the Dawood Income Fund needed to be written down by 7.36%, the Dawood Islamic Fund by 16.8%, and the First Dawood Mutual Fund by about 9%. The new, lower values would take into effect on April 30.

But, before that meeting took place, between April 6 and April 26, Tara Dawood, her brother Ayaz, her mother Hamida, three other First Dawood Group companies, and Dawood Capital Management itself sold nearly Rs117 million worth of units in the Dawood Income Fund and the Dawood Islamic Fund.

Redeeming their units before the write-down led them to save themselves from a combined Rs18.2 million in losses, including about Rs489,000 in potential losses saved by Tara Dawood herself. Those losses, instead, were passed on to the other investors in the fund.

When the SECP began its inquiry in June 2012, however, the firm’s initial tactic appears to have been evasion. Dawood Capital Management submitted all records and minutes of board meetings that the SECP requested, but modified the minutes of the February 21 and April 28 meeting to eliminate any mention of the impending write-downs from the first meeting, and make it look like the matter was not on the agenda and was somehow spontaneously brought up at the second meeting. The company tried to make it look like the Tara Dawood and her family could not have known that the write-downs were coming when they made their redemptions.

But the SECP requested not only the final minutes of the board meetings, but also their initial drafts, which showed that the discussion on the impending write-downs had, in fact, taken place in February. It then also confirmed that this had happened through the four independent directors of the company, including the chairperson. Three of those independent directors – Masood Wahedna, Shabahat Hussain, and Nazimuddin Feroz – resigned after they learnt of the allegations against the company.

In hearings that took place in the first three months of 2013, Dawood Capital Management maintained that the redemptions by the CEO, her family, and the associated companies was purely a coincidence, and that the falsification of the minutes of the meeting was a clerical error committed by the CFO, Syed Kabiruddin. In their defence, the company argued that more than half of the accused parties’ investments in the company’s mutual funds were not redeemed.

The SECP did not find that to be a sufficient explanation. In an unprecedented action, it revoked Dawood Capital Management’s asset management and investment advisory licence. It fined Tara Dawood Rs20 million and Syed Kabiruddin Rs1 million. It told them that the fines could not be expensed to the funds. And it ordered the trustees of the mutual funds to dismantle them and return the proceeds from the sale of the stocks and bonds held in those funds to their investors.

Dawood Capital Management said they are reviewing the order and reserve the right to appeal it.

Incidentally, Dawood Capital is the smallest investment management company in the country, with less than Rs1 billion in assets under management.

Published in The Express Tribune, March 24^th, 2013.

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