Rogue trader,

The following year, however, was disastrous for Bancap. Its gains on the sale of T-bills took a 130% nose dive, with net losses almost reaching P1 million and its deficit bloating to P1 million. Since then, from 1991 to 1993, the company no longer declared any gain on the sale of securities. These were also the years it started disclosing “advances to affiliates” as part of its assets.

In 1992, the firm changed its external auditor from L.E. Carmona and Associates (whose owner Leslie Carmona was reportedly a relative of Ms. Nite) to Sicangco, Menor, Villanueva & Co. (allegedly owned by Ms. Bradley’s relatives). The change also led to certain discrepancies in the declaration of “advances to affiliates” even as the bottom line remained the same.

In its statement “as of end-1992” audited by L.E. Carmona, the “advances to affiliates” amounted to P464,443 in 1992. However, in its statement “as of end-1993” audited by Sicangco, Menor, Villanueva, the firm declared zero “advances” for 1992 and P1.088 million for 1993. The external auditors did not declare any changes in accounting procedures in the financial statements.

Incidentally, it was also in 1992 when Bancap started its “unauthorized” T-bill transactions with Bancommerce and experienced a turnaround, posting a net income of P118,433.91 from revenues of P1.56 million.

Curiously, the SEC withheld the immediate release of Bancap’s audited statements for 1988 to 1990 and for 1992 to 1993 at the height of the scam. A source said as early as mid-April last year, he already sought out Bancap’s records at the SEC and failed to find even a duplicate copy. He later learned from mediamen covering the SEC that Commissioner Rosario N. Lopez was in possession of the records and released them only after the scandal hit the headlines.

A source who had dealings with Ms. Nite’s group at Asiatrust as early as 1985 said BSG, the forerunner of Bancap, may already have been engaged in T-bills trading when it was put up in 1982 by Messrs. San Luis and Bruno, in partnership with Edison Gabuna, Rodolfo Bambao and Patricio Cabalo.

Mr. San Luis used to be assistant vice-president of Asiatrust, in charge of the money market operations group composed of Ms. Nite and Ms. Bradley, Ramon Reyes, Mila Laurente Bohol, and Mila Balagtas Mananquil. Mr. San Luis was still with the bank when he put up BSG, the source said. He reportedly resigned from the bank sometime in the mid ’80s and was joined at BSG by his entire Asiatrust group in 1988.

A former trader at Asiatrust who succeeded Ms. Nite’s group said the bank’s Makati Corporate Center at the ground floor of the King’s Court building along Pasong Tamo, Makati City was put up in 1984 to cater to consumer lending. However, T-bills trading usually takes place “with management’s blessings inside a small room they call the backroom,” she said. Although she never met the group, she got to know about them because of rumors circulating in the bank that they were suspected of engaging in “underthe-table deals, and so Asiatrust president Dionisio Ong had to ask them to resign.” Rumors also lingered that Asiatrust’s management had to fire the group en masse after finding out they formed a shell company which acted as conduit for transactions coursed through Asiatrust. This made sense since bank traders are usually salaried and cannot collect commissions or rebates on interest rate differentials regardless of how huge their securities transactions were.

During that time, the Bancap employee told BusinessWorld Bancap messengers would often run from Pasong Tamo to the Bancap office in Pasay Road for deliveries of T-bills even when Ms. Nite was no longer with the development bank. She said Ms. Nite personally handled Bancap’s transactions with Asiatrust and had maintained close contacts with those who succeeded her group at the bank, including treasury head Eugene Yang, who later transferred to Bancommerce. However, she said this had to be discontinued when the bank’s money market operations were transferred to its head office in Quezon City.

Even at Asiatrust, Ms. Nite’s group already gained access to government agencies and corporations which usually keep millions of long-term Treasury bills idle in their vaults, the source said. The trading relationship with these government agencies apparently continued when Bancap was formed.

While mandated to course their transactions only with state-owned banks such as the Land Bank of the Philippines, Philippine National Bank, and the Development Bank of the Philippines, government agencies and corporations go around the prohibition by directing their depository state-owned banks to source their Tbills from even unlicensed brokers like Bancap. Bancap would then find a seller and direct it to sell the T-bills to the state-owned bank, which would then pass it on to the government agency. How long the chain goes depends on how much margins the players want to make.

Technically speaking, the government agency did not violate the law; on paper, it dealt only with the government bank which, on paper, also transacted with an accredited dealer. The “extra gains” from the deals and the physical absence of the bills from the government agency’s vault over a short period would be left unnoticed by the Commission on Audit, which merely verifies the physical inventory of the bills. Among the state agencies which had dealings with Bancap were the Philippine Ports Authority, the Local Water Utilities Administration, the Overseas Workers Welfare Authority, and the National Power Corp., sources said.

It was also in Asiatrust where Ms. Nite mastered the little-understood practice of lending and borrowing T- bills through so-called “repurchase or buyback agreements.” In the most elementary of buyback maneuvers, a trader borrows short-term money by selling securities, simultaneously agreeing to buy them back in a few days. The trader then makes money out of the interest differential derived when it sells the securities with fairly long maturities (i.e., 364 days) on a week, 30-day or 60-day-term with the agreement to buy them back. Clients would normally welcome the opportunity of earning extra cash instead of merely waiting for the date the bills can be redeemed with the central bank.

In several cases, said the Bancap employee, Bancap would only course a transaction through a bank because it does not have a trading line with another client. She said Ms. Nite would usually be heard pleading over the phone, “padaan lang ( just let it pass).”

Since Bancap always made good on its promise to deliver the bills physically, it was able to associate with moneyed institutions. Among the firm’s earlier clients were Pilipinas Bank, the defunct Associated Bank, Security Bank, Traders Royal Bank and its officers on a personal basis, and individual investors of the Philippine Communications Satellite (Philcomsat), the source said.

Within a few years, said the source who also brokered for the group during their Asiatrust days, “Ms. Nite became the secondary market’s leading trader in government securities with a portfolio running into billions of pesos of investible funds. Most of her clients are government agencies and instrumentalities which are mandated by an existing Presidential Decree to invest their investible funds only in government securities.”

At that point, Bancap was still carrying out legitimate deals of physically delivering T-bills. Trouble may have erupted in 1990 when its gains from the sale of T-bills plunged by 130%, as its audited statements show.

A confidential memorandum sent by a Palace informant to President Ramos dated May 26, 1994, a copy of which was obtained by BusinessWorld, reveals Bancap almost went under sometime in the late ’80s because of a huge transaction with the Napocor which carried a buyback agreement. With Bancap acting as broker, Napocor’s investment officers allegedly invested P1.8 billion of Napocor’s funds in T-bills with a maturity of 364 days; as a matter of policy, the state-run power firm kept itself liquid by investing only in T- bills with short maturities of 30 days to 60 days, the memo stated.

When the July 1990 earthquake struck and damaged most of Napocor’s facilities in Northern Luzon, the firm felt the need to draw from its resources. Its investment officers allegedly decided to pre-terminate the agreement and demanded that Bancap buy back its P1.8-billion T-bills.

“There was still nothing wrong at this point,” said the informant, except that Napocor may be forced to book a loss in interest differential when the T-bill rates on the buyback date ended up higher than when the bills were acquired. The cost of the interest differential was roughly estimated at P200 million.

Since the placements were reportedly unauthorized, booking the losses posed a problem to the investment officers, particularly since Napocor is audited by the Commission on Audit. The source close to Ms. Nite said Bancap agreed to absorb Napocor’s loss when it was promised it would recover its investments later. But Cecile Llarena, who was at that time Napocor’s corporate funds management division manager, allegedly did not make good on the promise. Her former assistant, Evelyn Solomon Llanes, who is now working at the Office of the Administrator at the OWWA, said in a phone interview Ms. Llarena went on an absence without leave (AWOL) that year and is reportedly now living in the United States. Asked about the transaction with Bancap, Ms. Llanes said: “We dealt only with accredited dealers.”

To remedy the situation, Bancap passed on the said P1.8-billion T-bills to two commercial banks, Associated Bank and Security Bank, at the prevailing market rate — and absorbed the loss by re-capitalizing this by creating imaginary T-bills with the use of the so-called Letter of Undertaking (LoU),” the memo to Malacanañg states.

In effect, to pay back the P200-million loss, Ms. Nite practically invented out of thin air documents called LoU, each with a P100-million denomination, and issued these to the two banks with the promise of a buyback. Why Associated Bank and Security Bank immediately put their faith on this concoction remains a mystery to date. It may thus be significant to know those involved in the transactions; in hindsight, they invited the future disaster that was the Bancap scam.

Ms. Nite’s invention was eventually transformed into a market practice. The original LoUs were in turn passed on to other banks and/ or investment houses. Since it normally takes the central bank four to five weeks to issue the T-bills, the LoUs which promised T-bills on a “delayed-delivery basis” augured well for the banks. As the LoU neared its maturity date, Bancap would execute a buyback and sell it to another, replacing the original LoU with a new one.

“Nanganak at inalagaan nila ’yung LoUs,” said the source. These may have eventually landed in the laps of six institutions, namely: Bancommerce, Planters Development Bank, BA Savings Bank, Capital One Equities Corp., Insular Investment and Trust Corp., and PNBRepublic Bank.

Incidentally, at that time, the Central Bank under Governor Jose L. Cuisia instituted the “book-entry system,” which was intended to safeguard the T-bills market from malefactors. The system virtually eliminated the need for physical delivery and allowed accredited securities dealers to merely dictate to their clients over the phone the serial numbers of the bills which the clients will then verify with the Bangko Sentral.

Bancap would carry out with its other “legitimate” trades at the same time that it was engaged in rolling over the maturities of the two P200-million nonexistent T-bills backed up by the LoUs. The source close to Ms. Nite said the Bancap officer also found a loophole in the Bangko Sentral’s system called “re-denomination” or “denominational exchange.” Since T-bills are practically paper currencies, almost anybody can request the central bank to change the Tbills into larger or smaller denominations. For example, a T-bill with a par value of P100 million can be broken down into 10 T-bills with par value of P10 million. Consequently, the central bank replaces them with new certificates bearing new serial numbers.

Using this process, Bancap will buy a T-bill with an XYZ serial number from a client with the promise to sell it back, then have this broken down into smaller denominations with the Bangko Sentral so that several bills with new serial numbers will be issued. When the time comes that it has to sell back the T-bill with an XYZ serial number, Bancap will merely issue an LoU, knowing that the T-bill no longer exists. As the T- bill certificates multiply through the redenomination, more and more institutions get into the picture.

“However, inasmuch as these transactions are consummated on a delayed-delivery basis, banks and/or investment houses to which this LoU was being passed on asked for rates higher than prevailing market prices for T- bills,” the memo to the Palace said. Bancap then reportedly resorted to borrowing directly from institutions on a short-term basis — but not without cost. It also resorted to the so-called “add-on” scheme by which Bancap offered a premium on its borrowings against its LoU. The source said this was how the original loss of P200 million, which existed only on paper, eventually ballooned.

The Bancap employee who requested anonymity said the nightmare worsened when the overnight rates surged. The rates’ upward trek started in November of 1993, went as high as 45% in February, and further to 68% toward end-April last year. Maturities of the bills Bancap was supposed to buy back were bunching up at the same time that losses were accumulating due to the rates spiral. “There were days when there were several maturities in a day. We had problems buying them all back,” she said.

It was about this time that the management of Bancommerce noticed the “unusual movements” in Bancap’s deposit account with the bank. Bancommerce executive vice-president and chief operating officer Raul de Mesa said withdrawals will be made against Bancap’s account and will be followed later by the corresponding deposit cover. Delayed manager’s cheques drawn against several institutions were funding Bancap’s account, he said. They then started to closely monitor Bancap’s account when the bank was penalized twice by the Philippine Clearing House Corp. for delays in clearing. On April 22, 1994, the bank bounced Bancap’s checks drawn against two institutions amounting to about P500 million.

By February, Ms. Nite instituted measures to address the delay in the T- bills’ deliveries and get the checks cleared, the Bancap employee said. She said Bancap employees were instructed to pre-sign the checks and all documents related to trading, which came in booklets of 100. She said all they had to do was to type out the particulars of a transaction.

Bancap had two IBM typewriters, one inside the trading room for the preparation of trading documents, and the other located outside for the checks to be issued. Ms. Nite would also “borrow” a messenger from her husband’s Concorp Philippines, Inc. office to address the shortage of manpower for deliveries.

She said Bancap would usually ask an institution to make its check payable to another institution even if these were unrelated transactions just to meet the clearing time for checks. As deliveries and check payments were suffering delays, Bancap was losing its credit lines with the institutions one by one. This explains why there were transactions that went the roundabout way; Bancap was desperately trying to find alternative lines for those that were already cut off.

Ms. Nite would feverishly run the whole show and plead with the banks, the Bancap source said. But eventually, the practice had to collapse.