KARACHI, May 31: When the top financial sector regulators: The Governor State Bank of Pakistan (SBP) and the Chairman Securities and Exchange Commission of Pakistan (SECP) on different occasions denied that they had been approached by the Federal Bureau of Investigations (FBI), the regulators stopped short of confirming or denying the presence of US investigators in the country.
Reports circulating in the media of the activities of a team of four FBI officials have not been backed by tangible sources. “If they were here wouldn’t they see the regulators first?” asked an irate stock broker.
The controversy over the visit of US spies triggered after the Securities and Exchange Commission (SEC) of the US unearthed an ‘insider trading’ of stocks scam involving an investment banker Aijaz Rahim at the time working for a bank in Karachi. The New York Times has been quoted as saying that warrants for arrest of Rahim have been issued for making more than $7.5 million in illegal profits.
Another Pakistani Hafiz Mohammad Zubair Naseem then working for Credit Suisse in New York was arrested on May 3 for leaking details about nine deals to his friend Aijaz Rahim. Those deals included the largest-ever $45 billion leveraged buyout of TXU, the Texas energy giant
He has been implicated on the basis of his “repeated calls to Rahim’s home and cellphone from his office phone at Credit Suisse” divulging information about deals in which the bank was an adviser. The prosecution holds that shortly after the calls, Rahim would buy shares in companies involved in the transactions.
Ever since the news was first splashed in the local press, bankers, brokers, politicians and even some government officials in the country seem disturbed. Not as much as of their involvement or otherwise in the insider deals, but perhaps more about what turn the events might take.
Knowledgeable sources contend that only two other ‘individuals’ had bought shares of TXU in Pakistan that day. Did they do it on the basis of leaked information or a proper analysis of the merit of the security? It would never be known.
No one wants to shield the culprit who must be brought to book, but a corporate lawyer observed that one has to study the definition of “insider trading”. He observed that any ‘trades’ other than those executed by the ‘informer” and the direct recipient of insider information, all other transactions, if they were undertaken by different people would be considered ‘secondary market transactions’ and it would be very difficult to pin blame of insider trading on any third person.
He explained: “Suppose Rahim were to suggest in an informal meeting of friends that he considered TXU to be a good buy and 50 people bought knowing him to be a sharp investment banker, can the blame of insider trading eventually rest on all those 50 men, when they also happen to reside in another country?”
Rahim himself has argued that he entered into ‘options’ on ‘technical analysis’ since the stock was ripe for major upsurge, having broken the 100-day moving average. According to him TXU deal was a public knowledge several days before it was executed.
Even the principal accused Hafiz Naseem who had visited Pakistan in late April returned to US of his own free will, while investigations were underway against him. A source close to Naseem says that the prosecutor had earlier brushed aside the case as being of purely “inferential” nature.
The source said that normal daily trading volume in TXU is about 2 million shares, but on the day of the deal, the volume had jumped to 7 million shares. Aijaz had not traded in shares but in 6,700 options, which would be worth well below a million shares, translating into investment of $3 million.
The prosecution is turning a blind eye to the rest of other abnormal high volume of 7 million shares, he said. Who bought those and on what grounds? he asks. And interestingly, Hafiz Naseem is not known to have made any profit from those deals, nor has the prosecution accused him of having done so.
“The insider deal case has no feet to stand on,” contends the source, adding that Naseem has vowed to vigorously defend himself for which he has hired the services of law firm of a former Mayor of NY, Rudy Giuliani.
No banker or broker wants to go on record here as having commented on the matter. But most were sore of those who were deliberately trying to tarnish the image of Pakistan, which has been witnessing phenomenal growth in its financial sector. They say that it is understandable when ‘Times of India’ publishes stories such as on May 29 headlined: “Pak PM under FBI lens in stock scam”.
The story went on to name more than half a dozen top bankers and stock brokers as involved in the crime of insider trading. The story pulled in even the adviser to PM on Finance and the Pakistan PM himself.
“It is hilarious,” said one banker. Do these people have nothing else to do, he asked and added, suppose if the PM wished to buy TXU shares benefiting from insider information, would he do it in his own name?
Dawn’s communication with Times of India raised suspicion that the story writer was quite blank about the issue and had crafted the story from information drawn through unnamed sources. It looked like the writer had mixed up the two issues: one of the insider trading and the other the March 2005 stock crash and he hardly knew the difference.
“Even the FBI has not once suggested any massive scale of investigation and accused none except the two persons,” said a broker.
But it would be naïve to suggest that bankers and brokers are not terrified. Talk to any of them and you get an idea of a bundle of nerves. If it isn’t the involvement in the TXU scam, what is it?
An influential person watching the events from sidelines hinted: “What would you say may happen if cupboards are opened?” And he himself answered: “It is possible that skeletons can drop out which may have nothing to do with this particular matter”.
