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US experts clear KSE brokers

November 22, 2006

ISLAMABAD, Nov 21: Forensic investigators from the United States have rejected the findings of a task force headed by Justice Saleem Akhtar on the 2005 stock market crash, terming it ‘speculative’, and claimed that they did not find ‘sufficient evidence’ against the 13-high profile brokers accused of orchestrating a series of ‘wash trades’.

They blamed the withdrawal of Badla financing for the crash.

Most of the findings of the US team contradict the taskforce’s report, which was compiled in close coordination with the former chairman of the Securities and Exchange Commission of Pakistan (SECP), Dr Tariq Hassan.

However, almost all members of the National Assembly’s Standing Committee on Finance and Revenue -- who were briefed on the report on Monday – dismissed it as being ‘inconclusive’ and a ‘cover-up’ aimed at letting the ‘big fish’ to escape justice.

Questioning the criteria for appointing the US firm, Diligence, they said that the investigators were never provided the required data about multiple roles major brokers played in the KSE.

“Our report about the apparent manipulation was also inconclusive. That’s why we recommended a forensic probe to ascertain or negate our claim. But, this forensic report is also inconclusive. What was the (use of) the forensic investigation?” asked Dr Mohammad Zubair, a member of the taskforce.

He said that a few individuals made the stock market rise and fall which suggested manipulation.

It is yet another dark day in the history of justice of this country. Those who deprived small investors of billions of rupees are now freed (of blame), said MNA Sardar Tufail Ahmed.

He challenged the SECP and officials of the Ministry of Finance to declare on oath if they were satisfied with the way the forensic investigation was conducted. No-one took up the challenge.

SECP chairman Raziur Rehman was reluctant to reveal the names of the 88 brokers allegedly involved in the futures contracts, saying that the move would have dire consequences for the stock market. But, he disclosed the names after some members threatened to boycott the meeting. The names of these brokers are now available on SECP’s website.

Adviser to the Prime Minister on Finance Dr Salman Shah said that if proven guilty, all those responsible for the crash would have to wind up their business as they would be blacklisted.

“We do not find sufficient evidence to support the paramount scheme of manipulation in the manner put forth by the task force,” said David Wolfe of Diligence while briefing the committee.

The US team had examined the primary allegations related to the withdrawal of regulated Carry Over Transaction (COT) financing, in-house Badla, wash trades and violations of Clause 3(b) of the Regulations Governing Futures Contracts (exceeding the Rs 50 million reporting threshold).

However, Diligence was not tasked with examining and, therefore, the report did not systematically analyse trading activities and related issues on the Lahore and Islamabad stock exchanges during March 2005.

The report stated that under the existing circumstances, and on the basis of the evidence examined to date, the team rendered findings and conclusions that greatly differed, in many respects, with the findings and conclusions rendered by the task force.

The report says that the US team had not found sufficient evidence to support the withdrawal of COT that was ‘ostensibly’ responsible for the fall of market prices. It found no patterns of activity or credible evidence to support the ‘theory’ that certain influential brokers ‘systematically and manipulatively’ inflated and then deflated market prices, reaping substantial profits in the process.

COT WITHDRAWAL: Contrary to the task force’s findings -- which blamed the withdrawal of Badla financing for the crash – the investigators found that there was, in fact, a withdrawal of certain regulated COT during February and March of 2005.

This activity was attributable to two independent factors: (1) the execution of the SECP’s previously planned and announced phase-out of COT funding for certain scrips, which had begun in October 2004; and (2) the temporary suspension of New COT availability for two heavily-traded scrips, Pakistan State Oil (PSO) and Pakistan Telecommunications Company Limited (PTC), in connection with their respective moves to Spot trading to execute announced dividend payments – a necessary trading practice and normal course of business event, it stated.

WASH TRADES: Given the lack of unique client identification codes at that time, an examination of potential wash trades between different brokers was not possible, contrary to statements made by the task force.

The forensic probe also did not find any systemic patterns or evidence to suggest influential brokers had collectively orchestrated multiple series of wash trades for purposes of broad-scale market manipulation. They have, however, found numerous individual and isolated incidents of potential violations of Section 17(a) of the Securities and Exchange Ordinance, 1969, generally applicable to ‘wash trades’. Details on these matters have been provided to the SECP for action according to law.

FUTURES CONTRACTS: The report identified 2,491 instances across 88 brokers with net sales positions in March 2005 futures contracts alone that exceeded the Rs50 million threshold for a particular scrip, which was a violation of the rules concerned. Many of the cases, if substantiated as being non-compliant with Clause 3(b), could represent serious violations.

Using share data obtained from CDC, the team has further identified 13 brokers trading on the Futures counter in potential breach of Clause 3(b) and Section 17(a) of the Securities and Exchange Ordinance. The more serious potential violations amounted to hundreds of millions of rupees in value in unaccounted shares and, if substantiated, would represent a serious violation of the securities regulations.