More could have been done to protect investors
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.