Anatomy of greed: Equity fraud threatens to erode investors’ confidence in the stock market
They say that money is the root of all evil. its intoxicating allure drives wily people to engage in get-rich-quick-schemes. Some are caught, while many continue to do underhanded work that to this day could have remained undetected by regulatory radar.
Through the years, the equities market has been rocked by financial frauds. In 2016, Jose Peñaflor, a former Philippine Stock Exchange (PSE) employee and veteran trader, managed to steal P100 million from clients he duped into thinking they would be investing in legitimate stocks.
Just this month, 22 years after the stock market was stunned by the biggest scandal in its history, Johnny Yap of Solar Securities was convicted for illegal trades linked to the 1999 stock price manipulation scam involving BW Resources Corp. The Pasig City Regional Trial Court (RTC) sent him to prison for 14 years for the act, which led to a mind-boggling 1,462-percent surge in the share price of BW in just a year. Yap was also ordered to pay a fine of P1 million.
These are only a few of the identified frauds in the country’s equities market perpetrated by “wolves” whose illegal money-making schemes mutate faster than the measures put in place by regulators to stop them in their tracks.
Another scam, which was recently uncovered—and which PSE described as the “worst-ever to hit a brokerage house”—involves two companies: the 50-year-old R&L Investments Inc. and Venture Securities Inc. They were dragged down by the fraudulent schemes executed by R&L employee Marlo Moron, and Venture client Julieto Sulapas. The two conspired to make money out of EQ trades, a platform used for transferring shares between brokerage houses.
Under EQ trades, it is perfectly legal for clients to transfer their shares between brokerage houses where they have existing accounts. Such is permitted if the shares to be transferred from one brokerage house to another are under the same name. But what Moron did was to steal the shares of R&L clients, transferred them to Sulapas who in turn instructed Venture to sell them. For seven years, the two went on their merry scamming way unnoticed. A total of P1.13 billion worth of client shares in R&L were transferred to Sulapas’ Venture account through EQ trades executed by Moron from 2012 to 2019.
But for their inability to moderate their greed, their scheme was uncovered in November 2019. At the end of trading day, R&L failed to account for P3 million worth of its client stocks. After a more thorough audit, the firm realized that almost all its inventory was wiped out, resulting in the loss of P700-million worth of client shares. The loss was so massive that R&L could not readily meet the demands of its clients for the delivery of securities and payment of sales proceeds.
On June 11 of this year, R&L’S license was revoked by the Securities and Exchange Commission (SEC). The firm and its key officers were slapped with P25 million in penalties. The SEC’S special hearing panel (SHP) found R&L President Joseph Lee, nominee and treasurer Lucy Linda Lee, and associated person Jonathan Lee liable. It also found Moron and Sulapas answerable for engaging in fraudulent transactions and violating the Securities Regulation Code.
Moron, who started out as R&L clerk, gained the trust of Lucy Lee who taught him the ropes. Soon, he obtained viewing access to R&L’S backoffice system, giving him the keys to information of all clients’ shareholdings and business partner portfolio reports.
Venture, on the other hand, was stripped of its broker-dealer license and slapped with penalties totaling P32 million by the SHP for its role in the fraud that led to the collapse of R&L. In its June 11 decision, the panel cited acts and omissions on the part of Venture and its officers that “indispensably contributed to, if they had
not been the proximate cause of, the losses incurred by the clients of R&L.”
Stock analysts believe that, while both stockbrokerage houses’ respective control systems failed to prevent fraud and protect their clients’ interest, the penalties levied on the two firms are harsh.
To some, however, the penalties were not only harsh, but also cruel, because R&L had to make huge financial amends by selling real estate and other personal assets to cover the stolen shares of its clients. Worse, the scandal proved too much for Lucy Lee to bear. She died, her family said, heartbroken from the stress of witnessing how the scandal caused the collapse of their 50-year-old family business that was founded by Lee patriarch Rene Lee who died in December 2017.
Venture now fights to clear its name, asserting that it too was a victim of the scam. The company, however, is enjoying some reprieve. It could still trade in the market, while its appeal before the SEC is being heard. Among its arguments is having no knowledge of and participation in the fraud, which it alleged was committed exclusively within R&L. It claimed that the penalties and fines were “disproportionate and not commensurate to the infractions and lapses committed, if any, by Venture.” Venture added that the SHP ignored the Consolidated Scale of Fines as indicated in SEC Memorandum Circular 6, Series of 2005, under which the highest penalty is P100,000 and reprimand/warning for each of the cited violations.
In the past, the banking sector has also been rocked by financial frauds. The Bangko Sentral ng Pilipinas and the SEC may differ in the appreciation and manner of implementing penalty rules in addressing frauds. In the banking-sector scandals, no banks’ licenses were revoked, and only the personalities involved were made to account for their devious deeds.
I vividly remember what my friend, the late former BSP governor Nestor Espenilla Jr., told me when I asked him why the revocation of the banks licenses embroiled in the scandals was not an option: “You don’t destroy the burning house to diffuse the fire. If you do that, you’d bring the whole house down along with all the valuables that could still be saved.”