How Greed and Negligence Fueled Capital Market Fraud

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In this article, James Atobale attributes the recent scandals rocking the capital market to greed and negligence

With the rise in inflation up to two digits, shrinking disposable income, it is understandable as few Nigerians with extra cash continue to patronise investment schemes that are not only illegitimate and risky but smacks of greed and negligence of care for their monies. A few days ago, news broke about how several investors lost as much as N4.8billion to a renowned stockbroker, Mr. Victor Ogienmonyi, through his many companies – Partnership Securities Limited (PSL), Partnership Investment Company (PICO) amongst others.

It seems there are three set of people who have been hoodwinked in the various investment schemes by Ogiemwonyi. Group one consists of those who invested in the Partnership Securities Deposit Account Scheme (“PSDA Scheme’), using his PICO to woo investors to deposit money with the company and reap 30% returns monthly. This scheme is only good as MMM, the Russian Ponzi scheme that had many Nigerians’ monies trapped. Another group consists of people who were pitched to transfer their shares to Ogiemwonyi and promised 10% cash interest on the value of their shares, payable half yearly whilst they continue to enjoy dividend payment, bonuses issues etc. This group will not even bother to ask – what is in it for Ogiemwonyi for this attractive proposition. The final group is those who operate by the time tested values of investment banking and trust Ogiemwonyi their money to buy shares and sell on their behalf. In this group, is a prominent banker and erstwhile CEO of Ecobank, Mr. Arnold Ekpe, who claimed Mr. Ogiemwonyi is indebted to him to the tune of N1.2billion.

Ogiemwonyi’s firm, PSL fraudulently converted and misappropriated the sum 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.
Ekpe gave Partnership Securities Limited a mandate to sell to 96,077,872 units of his ETI shares at the price not less than N16 per share. The firm however sold at a cumulative average price of N13.49 per share and did not remit the proceeds to Ekpe.

To resolve this, Ekpe wrote to the NSE for intervention. Upon receipt of the complaint, sources noted that The Exchange on 17 October 2016, suspended PSL from trading on all floors of The Exchange, effective 18 October 2016 after a preliminary investigation was conducted. PSL remains under suspension from trading on the floor of the Exchange.

Apparently, being the ‘clever’ broker that he is, Ogiemwonyi took advantage of Ekpe’s friendship with him and exploited the Direct Cash Settlement initiative, introduced by the Securities and Exchange Commission.

How DCS works

Direct Cash Settlement (DCS) is a process where cash proceeds from trades executed by brokers on the Exchange settles directly into investors’ bank account. 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.

The DCS process starts when a client gives his broker the mandate to sell his or her shares. When the Broker executes mandate at the NSE an alert is sent to both buyer and seller of securities. Once those shares are sold, payment is made directly into the client’s account. This is in contrast to the practice where proceed from sale of securities is paid directly into the stockbroker’s account and stockbrokers then deduct transaction fees and remit the balance to the client’s account.

Where an investor does not elect to come into the direct cash settlement scheme, settlement of transactions carried out on behalf of such client whose account details are not provided to CSCS shall be done by payment into the account of the client’s broker-dealer firm. In the case of Ekpe, there was no direct cash settlement mandate so the proceeds were paid to Ogienwonyi’s firm.

Investors Duty of Care and the Role of Greed in Frauds
Though capital market regulators have the responsibility to protect investors, some analysts have also advised that it is important that investors themselves are made aware of their duty of care to protect their investments. According to a source, who preferred not to be named, “the capital market in Nigeria today has become robust in terms of rules, oversight functions, surveillance, monitoring and technology compared to where we were about 5 to 8 years ago. However, we continue to see some of these infractions due to some negligent actions even on the part of investors.”
In response to the claims by Ekpe, the NSE via its letter of 21 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”.

According to our investigations, Ekpe received 79 alerts and did not inform the Exchange until 3months after when it seemed the monies have been misappropriated. In addition, also he did not make complaint when PSL continued to sell the shares at N13.41, N2.59 below the mandated price shares at N16.00, PSL was mandated to sell the shares. NSE further noted 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”.

The interesting angle to the many claims of these investors is the role of greed. They were all hoodwinked by the promise of 10% interest on the value of shares whilst still been able to retain their shares, enjoy their dividends and other financial benefits from the scheme. One of the investors who wished not to be named admitted that they were impressed with the pitch on the benefits and did not step back to think if the scheme bore any semblance to a ponzi scheme like nospecto, MMM and the rest. There is ongoing extensive investigation by EFCC on one hand and SEC, CBN and NSE on the other hand. Ekpe is collaborating with these agencies to recover his money from Ogienwonyi. In addition, Ekpe has secured a Federal High Court ruling where one Honourable 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.

The Role of Investor Education

Education is a significant component, which among other factors influences investors’ performance, risk-taking and stock market participation. Educated investors participate more actively on the stock market and they tend to make more rational investment decisions than investors with lower educational level.

Regulators in the Nigerian capital market should know that enhancement of public education and awareness about capital markets is an important part of its mandate if it were to grow the market. . An educated investor is a protected investor and a protected investor is always a more willing player in the capital market place. Investor education should be seen as t the most effective regulatory tools.

To protect investors and increase investor confidence in the market, a more deliberate effort to progress investor education to another level with a view to addressing the prevailing low financial literacy and the resultant ‘herd mentality’ in financial products selection among some sections of the investing public, is a task all market participants must undertake.

– Atobale, a capital market analyst wrote in from Jos