Investor at Loggerheads with Capital Market Regulators over Direct Cash Settlement

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Olaseni Durojaiye

More than a year ago, under the leadership of the Securities and Exchange Commission (SEC), the Nigerian capital market commenced the Direct Cash Settlement (DCS) initiative, a direct payment of proceeds of sale of securities into an investor’s nominated bank account. This initiative was, amongst several other efforts, developed to protect investors and eliminate fraudulent activities in the Nigerian capital market.

The DCS allows cash proceeds from trades executed by brokers on the Nigerian Stock Exchange (NSE) to settle directly into investors’ bank accounts. It is, however, worth noting that before this could happen, an investor has to give his broker the mandate to sell his or her shares and duly complete the DCS mandate form which will be submitted to the Central Securities Clearing System (CSCS), the clearing and settlement system for Stock Exchange.

One year into the operation of this scheme, THISDAY can exclusively report that there is a brewing legal battle involving Partnership Securities Limited (PSL). The firm, which is a registered dealing member of the Nigerian Stock Exchange, was founded by Mr. Victor Ogienwonyi. The firm is involved in the case of conversion and misappropriation of N1,237,245,000 and US$80,000.00, being part of the proceeds of sale of 96,077,872 units of Ecobank Transnational Incorporated Plc belonging to Mr. Arnold Ekpe, a former CEO of ETI.

At the heart of the dispute is Ekpe’s belief that once you mandate your stockbroker to sell securities, the proceeds will automatically flow into the client’s account. However, the DCS process is such that an investor must opt for the settlement of proceeds of sale of securities into his account by filling a direct cash settlement mandate. This mandate will then be handed over to the stockbroker who then presents it to CSCS.

THISDAY sources, who preferred to be anonymous, revealed that subsequent to a notification sent to the regulators by Ekpe, a preliminary investigation was conducted into the matter with NSE issuing a notice of suspension to PSL on 17 October 2016 and the firm was suspended from trading on all floors of the exchange, effective 18 October 2016. This suspension was also published in the exchange’s online portal (BrokerTrax) in line with established tradition.

Furthermore, industry sources familiar with the matter told THISDAY that there was on-going extensive investigation by EFCC on one hand and SEC, CBN and NSE on the other hand. The source confirmed that Ekpe was collaborating with these agencies to recover his money from Ogienwonyi. In addition, Ekpe was said to have secured a Federal High Court ruling where one Justice Hassan of the Federal High Court appointed Mrs. Roselyn Sonuga as provisional liquidator with a view to assisting Ekpe and other affected investors recover their monies.

These steps, one source argued, aligns with the advice by NSE to Ekpe to focus on recovering his funds from Ogienwonyi instead of instituting legal charges against the exchange or any other market regulators.

Going by a copy of the petition of November 15, 2016 written by the Managing Partner, Sofunde Osakwe Ogundipe & Belgore, representing Ekpe, the law firm on behalf of the client accused the Nigerian Stock Exchange and CSCS of negligence by settling the proceeds of the sale of its client’s shares into the account of PSL rather than directly into Ekpe’s accounts as provided for under DCS System. The law firm further claimed that NSE and its agent, CSCS should have acted much quicker with the knowledge that PSL, having conducted itself in an unprofessional manner should not have been allowed to continue as a stockbroker licensed to trade on the exchange. Efforts to get a response from Ekpe proved abortive.

In its response dated 21st November 2016, NSE denied any wrongdoing stating that, “Please be informed that a review of CSCS’ records reveals that neither CSCS nor The Exchange was aware that your client had opted for the settlement of the proceeds of sales by PSL directly into your client’s bank accounts. The records further show that the CSCS Direct Settlement Form filled by your client containing your client’s preference for direct settlement was not submitted to CSCS by PSL in direct violation of the Exchange’s rules. The Exchange can therefore not be rendered liable for these deliberate actions and fraudulent concealment by PSL”.

The exchange also accused Ekpe of negligence as “under the X-Alert platform of CSCS, your client was duly notified and received several electronic alerts on all transactions made by PSL on your client’s behalf particularly as it relates to his shares in ETI between 30th June 2016 and 6th September 2016. Your client was therefore aware that the proceeds from the sale of his shares were not remitted directly into his account. Notwithstanding the above, your client informed neither CSCS, the exchange, nor any other regulatory authority of Partnership’s deliberate infraction of capital market rules.”

NSE further noted that Ekpe did not inform capital market regulators in a timely manner to assist in recovering his funds especially when contrary to its mandate to sell the shares at N16.00, PSL continued to sell the shares at N13.41, N2.59 below the mandated price.

In its defence, NSE claimed that “…had your client informed it that proceeds from the sale of his shares was not being remitted directly into his account, at the earliest opportunity, the exchange would have been better placed to prevent the fraud by PSL and mitigate the losses suffered by your client as a result of PSL’s deliberate actions.”

On the continued permission of PSL to trade on its exchange, the bourse stated that it received only one complaint against PSL, which was resolved in line with Securities and Exchange Commission’s Compliant Management Framework for the Nigerian Capital Market.

It informed Ekpe through his lawyers that, “Other complaints from investors were in respect of Partnership Investment Company Plc. As an entity which is neither a Dealing Member of The Exchange nor a listed company, Partnership Investment Company Plc is outside the exchange’s regulatory remit. The exchange did what any responsible regulator will do.”

When contacted, NSE’s General Counsel and Head of Regulation, Ms. Tinu Awe, declined to comment saying “the matter is before our regulator and we won’t be speaking on this matter at this point.” When pressed further if the exchange was culpable, the line went off and her response to our sms was ‘no comment’.

There is no doubting the fact that 2016 was a year that some stockbrokers tested the resolve of the capital market regulators judging by the number of sanctions and suspensions that occurred. It was also a year that regulators bared their fangs based on rules governing the capital market to demonstrate their zero tolerance to infractions and market manipulations.