Monday, August 30, 2010

SEC and impunity in stock market

“Financial institutions which are poorly governed pose a risk to themselves and also to others and could pull down financial markets. Recent experience in the Nigerian financial market attests to this fact.” SEC DG, Ms. Arunma Oteh at the International Conference on Good Governance and Regulatory Leadership, May 2010

Yours truly is an investor in Nigeria's capital market having bought small units of shares in some of the quoted companies on the Nigerian Stock Exchange. I had been taken in by the huge return on investment and the humongous profit after tax that many of the companies listed in the NSE declared at their annual shareholders meeting.

That was before the bubble burst in March 2008. Today, my shares are not worth the share certificates on which they were written. My personal loss is miniscule compared to many big time investors in the stock market. Many lost millions and probably billions.

The total loss is actually in trillions. My sense of loss was relieved on 5 August, 2010 when the new DG of Securities and Exchange Commission, Ms. Arunma Oteh gave the marching orders to the then Director General of the Nigerian Stock Exchange, Prof. Ndi Okereke Onyiuke and also placed a suspension order on the president of the council, Aliko Dangote. The move which is long envisaged came on the heels of earlier vow in January, 2010, when the SEC DG promised before the House of Representatives Committee on Capital Market that the era of sharp practices and malpractices in the nation's capital market was over.

Ms. Oteh assumed duties at the regulatory agency on 11 December 2009. She was quoted during the 2010 budget defence session at the House of Reps as saying that “henceforth, SEC will ensure that “inappropriate behaviours” of capital market operators will not go unpunished.” At the forum, she allegedly pledged a new regime of zero tolerance to share price manipulation, insider dealings and other sharp practices bedevilling the nation's capital market over the years. She further said that the Commission would strengthen its regulatory oversight, intensify monitoring activities and collaborate with other regulatory agencies in the financial sector to ensure the restoration of investor confidence in the capital market.

I believe it is the promise of January that is being kept in August 2010. Unfortunately, this seems like medicine after death. To my mind, the SEC hammer should have come on the NSE authorities much earlier to save Nigeria's investing public from further loss having lost trillions of Naira between March 2008 and now. A news report in Thisday of 1 January, 2010 had said that “the Nigerian stock market dipped by 34 per cent in 2009. The dip was caused by external pressure from the global financial crisis and internal ones such as over- speculation and arbitrary pricing of shares.”

It is an open secret that there have been a lot of underhand dealings at the Exchange. In recent times, there were claims and counter claims over the share manipulation of African Petroleum (AP) stocks. It is disheartening that it took the petition of the suspended President of the Council of NSE, Alhaji Aliko Dangote that the Stock Exchange is insolvent before the SEC sprung into action by removing the NSE DG and suspended the whistle blower.

While giving a background on events leading to the tsunami of 5 August in NEXT on Sunday of 22 August 2010, information attributed to the office of DG SEC says “as part of moves to determine the true state of affairs, SEC in April engaged a team from the US Securities and Exchange Commission which compiled a confidential report detailing lax oversight at the Nigerian Stock Exchange and the financial regulators. The report detailed cases of bribery inside the Stock Exchange, dysfunctional enforcement, “complicated and entrenched governance problems”, “clear instances of insider trading and market manipulation that resulted in no action”, and “woefully inadequate” surveillance, a clear indictment of the NSE authorities.

“The allegations regarding the leadership and membership of the council of the exchange against the NSE are very grave and that is why in our opinion, the SEC has decided to take this step in exercising its powers under the Investment and Securities and other applicable regulation.” In my own opinion it is on the basis of these revealing indictments that the DG of NSE should have been removed alongside the NSE Council Executives, however, SEC curiously directed the council to implement a clear succession plan and for the DG to handover to a successor by June. This is untoward.

Anyway, apart from the intervention at the NSE, the SEC, we are told, has also concluded moves to sanction about 260 stock broking firms alleged to be involved in unethical practices. While the Commission is still working on how and when to bring the erring stockbrokers to book, the Economic and Financial Crimes Commission (EFCC) on 12 August preferred a 22-count charge against the duo of Adeniyi Elumaro and Rakiya Mamman, who allegedly used their stock broking firm to defraud some notable Nigerians of a total of N405 million.

This, the report said, happened between January 2006 and December 2008. Scam in stock exchange is not the exclusive preserve of Nigerians, Bernard Madoff, an American investment manager, defrauded investors of about $50 billion in what probably is the largest swindle in Wall Street history. He is currently serving 150 years in prison having pleaded guilty to 11 felony counts on 12 March 2009, and sentenced on 29 June 2009.
All said, the issues herein have shown that Nigeria's financial sector has been in a quagmire over time. Just about this period last year, the incumbent Governor of Central Bank had removed eight Managing Directors of some ailing banks.

There is no gainsaying the fact that the capital market and its operators need to engender good corporate governance through their disclosure, reporting and transparency requirements. It, however, behoves, the regulator to ensure compliance. My prayer is that all Nigeria's equivalent of Bernard Madoff should have their days in court and get their deserved punishments. The culture of impunity in Nigeria's financial system must be halted if Nigeria's economy will ever get out of its current doldrums. As rightly observed by the SEC DG: “Government's macroeconomic policies will come to naught if financial institutions are not well governed.”

Article first published in Daly Sun of Monday, 30 August 2010