Photo courtesy JDS

We understand that the Securities and Exchange Commission (SEC) is planning to compound undisclosed securities fraud by some billionaire investors. Media reports have begun to circulate that Environmental Resources Investments (ERI) and its Directors have agreed with the SEC to pay an insignificant fine of Rs 10 million and compound an offence related to securities trading. While the nature of the fraud has not been made public it was well known that the SEC was investigating ERI for trading and disclosure related matters.

While the SEC is yet to make an announcement on this matter and acknowledging that this statement is based on media reports we nevertheless believe it is the SEC’s duty, as the regulator, to take swift action against fraudulent activities under the SEC Act.  The Act calls for prosecution. If ERI has not committed any fraud they will be found not guilty but if convicted the perpetrators shall be imprisoned and fined accordingly.

The reason for tough action is to discourage white-collar crime. Why US prosecutors are seeking a near 25-year sentence for Raj Rajaratnam is to drive home this point. However the cancer of insider dealing, front-running and money laundering that is going on at the Colombo Stock Exchange (CSE) is well known but nothing is being done about it. For instance, while the conflicts of interests with the Central Bank using Employees Provident Fund (EPF) to trade in shares of commercial banks have been pointed out on numerous occasions and shown to violate its own code of conduct for investments in the CSE, the Central Bank continues to buy and sell shares of almost all commercial banks.

When the SEC keeps silent it sends the wrong message on white-collar crime at the CSE and destroys the confidence among bona fide investors.  The status quo does not augur well for the CSE or the economy in the long run. This is particularly so when Sri Lanka is looking for large scale private investments to sustain the post-war development effort.

With respect to ERI, it is known that ERI was under the watch of the investing public and analysts for quite some time for its transactions with hardly any solid information to substantiate its various claims. The unprecedented and sudden rise of its share price from Rs 28 to Rs 275 based inter alia on news of purchasing a company purportedly with access to platinum assets and the subsequent outflow of some USD 18 million to the British Virgin Islands as part payment had been under constant query by market watchers.  It has now been revealed that the shares of the said company; Environment Resources Limited (ERL), ironically sounding almost similar to ERI, has been sold to a company who’s ultimate owner is the same entity that ERI originally purchased the shares from.  In this background allegations of money laundering and market manipulation continue to be rife.

Paradoxically, ERI, boasting of mega profits from global and local investments have just filed a consolidated loss of Rs 23 million for the quarter ending 30 June 2011 as opposed to Rs 418 million profits for the year ending 31 March 2011.

Market watchers have also levelled allegations of overseas criminal convictions on at least one of the Directors of ERI bringing in to question the record of the so-called whiz kids behind this company. Allegations of non-disclosure of related party transactions have been made on at least two Directors with regard to a company by the name of Knight Trade that happens to be the second largest shareholder of ERI which is owned by a company named Yenom which coincidentally is owned by the said two Directors of ERI. Questions have been raised if this company has the authority to use the official ‘Lion’ logo of Sri Lanka.  It is further alleged that ERI uses the identical logo for a stock broking company in Sri Lanka named ‘DNH Financial Private Limited’ and for a company named ‘DNQ Financial Private Limited’ based in Dubai to confuse investors and undertake deceptive transactions.

In an almost unbelievable development, as per the official bid book, ERI had agreed to build the 2018 Hambantota Commonwealth Games Village along with Sri Lanka Insurance Corporation and become the largest private sector investor of the Games while the SEC was investigating the company for alleged securities fraud and or disclosure offences. This almost seems like buying oneself out of trouble and most certainly a conflict of interest.

Given there is no information forthcoming from authorities it is anyone’s guess as to the validity of these allegations. Therefore, as a responsible opposition safeguarding the interests of the public and the nation it is our duty to call for action to either prosecute or clear the persons involved.  Having seen the fallout of scandals like Golden Key where innocent middle class families lost all their savings it is a matter of serious concern that repetitions are avoided.

The irony however is that it seems every time high profile persons get caught for fraudulent activity the SEC seem to cut deals with them to leave them out of jail in return for insignificant fines by compounding their cases.  The last publicized case of compounding was that of two Directors of Nawaloka Group who paid petty fines of Rs 3.3 million each for conspiring to manipulate the share price of Nawaloka Hospitals.

In this background the SEC cannot any longer afford to turn a blind eye to the allegations at the CSE.  It is certainly detrimental to the country’s development drive. The SEC must act swiftly and with the full force of the law to punish fraudsters to make the CSE a place for bona fide investors; both local and foreign. The fact that the All Share Price Index (ASPI) is up only by a marginal 3.6 percent for the entire year is sufficient proof to show that the CSE is not performing at the level it was expected to, and more need to be done to build investor confidence.

It is noteworthy to point out that in 2005 ADB wrote in its Sri Lanka: Financial Sector Assessment Report that compounding of charges is only compounding the problem of insider dealing. The SEC should cease the practice of compounding charges.”

It is high time the powerful Board of the SEC heeded this advice before the CSE loses its already shaky credibility as a place that honest people can do business in.