Vindication at last

The Securities and Exchange Commission (SEC) special hearing panel has cleared securities broker/dealer Venture Securities Inc. of any role in the anomalous transactions of R&L Investments a few years back after finding that the former did not act in bad faith, overturning its earlier decision to revoke Venture’s license and registration as a broker dealer.

The decision has been hailed by most stockbrokers as a vindication of their profession, as described by one report.

The scam, which according to the Philippine Stock Exchange (PSE) is the worst ever to hit a brokerage house, involved R&L employee Marlo Moron and Venture client Julieto Sulapas who contrived to make money out of EQ trades, a platform used for transferring shares between brokerage houses.

Moron stole the shares of R&L clients then transferred them to Sulapas who, in turn, instructed Ventures to sell them. This went on for seven years, without being noticed by the regulatory arms of the PSE and the SEC, resulting in P1.13 billion worth of shares being transferred and stolen.

In June last year, the SEC revoked R&L’s license and slapped the firm and its key officers with P25 million in penalties while Venture was stripped of its broker-dealer license and meted P32 million in penalties, an amount which Venture said was disproportionate and not commensurate to the infractions and lapses committed, if any, and ignored the consolidated scale of fines which set the highest penalty at P100,000.

The SEC special hearing panel back then said Venture’s acts and omissions indispensably contributed to, if not the proximate cause, the losses incurred by R&L’s clients.

But in a March 29, 2022 resolution, the panel overturned its decision against Venture and cleared it of any wrongdoing.

This now begs the question: Are the regulatory and fraud monitoring bodies doing enough to protect the public? Would sorry be enough to make up for the damage it has inflicted on Venture and its reputation which is very important in this business?

The Capital Markets Integrity Corp., which acts as the independent audit, surveillance and compliance arm of the SEC, was established for the primary purpose of reinforcing the confidence of the investing public in capital market institutions and promoting a more active and vibrant market participation. Since 2012, it is the primary regulator of the PSE trading participants.

As a self-regulatory organization, CMIC’s primary mandate is to maintain the integrity of the capital market and minimize the risk of the investing public by ensuring that the trading participants adhere to all pertinent rules, regulations, and codes of conduct of the CMIC and the PSE, as well as all related legislative and regulatory requirements.

CMIC enforces the rules, guidelines and provisions of the Securities Regulation Code, and other securities laws applicable to the operations and dealings of trading participants, including issuers whose securities are listed on the stock exchange.

CMIC used to be the market regulation division of the PSE until it was spun-off in 2010 into a separate and independent corporation.

According to the SEC, it all started when in 2019, CMIC received information from R&L that most of its shares were wiped out by its settlement officer Moron, who allegedly was transferring shares of R&L and its clients to other trading participants without the knowledge and consent of management. CMIC then claimed that its correspondences with R&L showed that Moron admitted having transferred shares to a certain account in Ventures under the name of Sulapas, which was used as a gateway to facilitate the said transfers, resulting in the loss of millions worth of clients’ shares.

According to reports, the alleged fraudulent scheme within R&L had taken place over a period of eight years, or from 2012 to 2019, after Moron reportedly stole over P700 million worth of client shares from R&L. The stolen stocks were transferred to a Venture account under the name of Sulapas.

Records show that Moron, acting as both R&L trader and settlement clerk, which is in violation of the SEC rules for a brokerage firm, executed the EQ trades which meant he had the access codes of R&L to utilize the PCD system. With the access codes, Moron transferred clients’ shares to Sulapas.

According to the hearing panel, this fraudulent scheme took place exclusively within R&L and the complainants were not able to prove that Ventures as a company was in bad faith as there was no proof that it had participated in or tolerated the questionable handling of the account of Sulapas.

Venture earlier contested the findings of an SEC special hearing panel which recommended the revocation of its license in connection with its alleged role in R&L Investments’ anomalous transaction.

Last year, in a letter to PSE chairman Jose Pardo, Ventures’ Eusebio Tanco said that the investigation into the anomalous conduct of R&L Investments’ Moron has unnecessarily dragged Venture Securities.

Tanco noted not only did Moron had the access code of R&L Investments to utilize the PCD system, but he was also in charge of keeping the books of accounts, and thus a virtual one-man show fully in control of the various aspects of brokerage operations.

He said that this could not have happened except with the obvious knowledge and consent of the owners of R&L, adding that the fraudulent transfer to Sulapas took place exclusively within R&L and that no broker dealing with the shares of Sulapas would know that the shares do not belong to him.

Tanco emphasized that Venture was never involved in the fraudulent scheme of Moron and R&L and is therefore as much a victim as the clients of R&L.

Tanco, who last year declined his nomination as PSEC director out of delicadeza amid the issues being unjustifiably raised against his firm, noted that these machinations of Moron have been going on for over seven years and have apparently escaped the attention of the CMIC which is supposed to be the guardian of the morals of the brokerage community.

He stressed that had the CMIC bothered to look at R&L and its activities, the CMIC would have easily noticed what was happening since it was better equipped to detect this kind of transactions violative of the rules of the exchange, adding that the fact alone that Moron was both trader, settlement clerk, and keeper of the books of accounts should have been discovered by CMIC.

In the same letter, Tanco said that it is incomprehensible that CMIC for seven years was not able to discover the discrepancies/anomalies in R&L’s clients’ position vis-à-vis the balances in the PCD system, something which is standard auditing procedure called confirmation would have easily shown.

The CMIC itself has said that a simple comparison of the BP Portfolio Report obtained from the Philippine Depository & Trust Corp. and the BP Portfolio Report submitted by R&L readily reveals that there was tampering with the reports.

But why has this criminal scheme escaped the watchful eye of CMIC for so long?