RMB fingered

More could have been done to pro­tect in­vestors

Finweek English Edition - - News -

THE OF­FI­CIAL IN­SPEC­TION RE­PORT into the col­lapse of de­riv­a­tives bro­ker­age Deal­stream Se­cu­ri­ties re­veals a litany of woes: from gov­er­nance fail­ures to cor­po­rate mis­rep­re­sen­ta­tion, mis­man­age­ment and ap­par­ent fraud. It also sug­gests more could have been done to pro­tect in­vestors, who lost up to R134m. Founder and CEO Rus­sell Leigh has skipped the coun­try and is thought to be holed up in Is­rael.

The re­port high­lights a se­ries of is­sues that should have sent se­ri­ous warn­ing sig­nals to mar­ket par­tic­i­pants and reg­u­la­tors and rec­om­mends that FirstRand’s in­vest­ment bank­ing sub­sidiary RMB – which acted as the clear­ing­house for Deal­stream – should be in­ves­ti­gated. In­spec­tors are con­cerned that it ex­tended credit to the firm. They’re also wor­ried about the fact it didn’t en­force set­tle­ment rules but al­lowed those to roll over for up to three weeks.

The fail­ure of Deal­stream raises se­ri­ous ques­tions as to why the firm was al­lowed to op­er­ate de­spite clear signs it was flout­ing the law. The JSE wrote at least four let­ters to the com­pany in early 2006, in­clud­ing one from its lawyers to de­mand it de­sist from cre­at­ing the im­pres­sion its prod­ucts were reg­u­lated by the ex­change. Leigh seems to have ig­nored that in­struc­tion and sub­se­quent let­ters in­sist­ing the firm de­sist in its be­hav­iour.

Ernst & Young says it only re­cently dis­cov­ered its brand­ing was be­ing used on the Deal­stream web­site to cre­ate the im­pres­sion it was in part­ner­ship with the busi­ness. It did have a small stake in the busi­ness via a trust, which it’s in the process of sell­ing. It doesn’t help that non-ex­ec­u­tive di­rec­tor Saul Co­hen, who co-op­er­ated with in­ves­ti­ga­tors, has an email linked to the Ernst & Young do­main. A search of the Ernst & Young web­site also turns up var­i­ous ref­er­ences to a Saul Co­hen ad­dress­ing is­sues on pri­vate eq­uity.

It’s a fur­ther em­bar­rass­ment to RMB, which is be­lieved to be out of pocket to the tune of R215m.

In­spec­tor of Fi­nan­cial In­sti­tu­tions Da­wood See­dat writes in the in­spec­torate re­port: “It is ev­i­dent that RMB al­lowed Deal­stream to con­tinue miss­ing its mar­gin set­tle­ments and al­lowed the sit­u­a­tion to con­tinue for at least the last three weeks, de­spite Deal­stream be­ing un­able to meet its mar­gin com­mit­ments.” A fur­ther in­ves­ti­ga­tion is also likely into con­tra­ven­tions of the Na­tional Credit Act, as Deal­stream ex­tended credit to clients rather than clos­ing out po­si­tions daily.

Reg­u­la­tors ap­pear to have only be­come aware of con­cerns sur­round­ing Deal­stream in July this year, af­ter a client re­ceived a de­mand for a lump sum trans­fer into their ac­count. In Au­gust the Fi­nan­cial Ser­vices Board (FSB) in­structed Deal­stream by let­ter to stop sell­ing CFDs un­til proper ad­min­is­tra­tion had been put in place. How­ever, Leigh ar­gued Deal­stream was a reg­is­tered mem­ber of the JSE and ev­ery trans­ac­tion was reg­u­lated through the sin­gle stock fu­tures mar­ket.

The re­port rec­om­mends the FSB should con­sider reg­u­lat­ing CFDs.

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