Probe under way on troubled brokerage

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By Victor V. Saulon, Sub-Editor

THE CAPITAL MARKETS Integrity Corp. (CMIC) has placed R&L Investments, Inc. under involuntary suspension as it continues its probe on the stock brokerage that was forced to stop operating after an employee allegedly stole stocks from the firm worth more than P700 million.

“CMIC continues its investigation of the issues extant in this case, and has initiated the conduct of special audits of the pertinent books and records of the involved parties and/or trading participants,” CIMC President Daisy P. Arce said in a memorandum addressed to investors and trading participants on Friday.

The suspension order, which is in accordance with Article X, Section 7 of the CIMC Rules, means a ban on the party under probe from exercising its trading right as well as deactivation of its access to the trading system of the Philippine Stock Exchange (PSE).

R&L is also denied access to its account with the Philippine Depository and Trust Corp. and cannot avail of clearing services from the Securities Clearing Corporation of the Philippines.

“Further, all trading participants are requested to promptly inform CMIC of all pending transactions and contracts with R&L, if any. All relevant information and/or inquiries may be sent to,” said the compliance arm of the PSE.

Separately, the Securities and Exchange Commission (SEC) said it would “closely monitor” the issue as CMIC continues its investigation.

In a statement, the SEC said it was aware of the issue while leaving CMIC to investigate the alleged theft that nearly wiped out the position of R&L.

“The SEC expects CMIC to conduct a thorough investigation to unearth the truth behind the transactions in question, identify all parties involved, and uncover the extent of the damage to the stock brokerage, its clients and the overall market,” the corporate watchdog said in a statement.

It said CMIC acts as the independent audit, surveillance and compliance arm of the stock exchange in line with its mandate to reinforce the confidence of the investing public in capital market institutions.

“The investigation should also provide clarity as to how such transactions could have slipped past multiple control measures. For one, the 2015 SRC Rules requires broker dealers to conduct monthly security examination, count and verification to account for discrepancies,” the SEC said.

As a self-regulatory organization, CMIC enforces Republic Act No. 8799, or the Securities Regulation Code (SRC), and the pertinent rules and regulations. Its powers and functions include the investigation and resolution of violations by trading participants of the securities law as well as trading-related irregularities and unusual trading activities involving issuers.

The SEC said it expects the full rollout of the Name on Central Depository (NoCD) facility of the Philippine Depository & Trust Corp. (PDTC) by the first quarter of 2020 to reinforce the controls and deter similar incidents from occurring in the future.

The NoCD facility allows for the recording of securities at PDTC in the name of individual investors. Most securities at present are recorded in “omnibus accounts” that aggregate the holdings of all investors.

“The creation of sub-accounts under the NoCD arrangement will increase transparency in the trading of securities. It will also give investors a means to monitor movements in their accounts through SMS or email notifications,” the SEC said.

The commission said it was also in talks with PDTC for the creation of a mechanism that will allow the latter to provide monthly reports on a stock brokerage’s position directly to the board of directors.

Ma. Vivian Yuchengco, a director of the bourse and chairman of the Philippine Association of Securities Brokers and Dealers, Inc., said current investigations are trying to determine the extent of the problem.

“The volume is now about P2 billion-plus selling and this is only P750 million that we’re looking at, so there must be some other people involved,” Ms. Yuchengco said in an interview with ABS-CBN News Channel.

“In R&L, there’s only one employee that’s rogue, but there can be other houses where the same thing is also happening. So we’re checking because they used another broker to sell the shares. So we’re checking all the transactions of that broker to see if it’s only R&L or if there are other brokers involved. That’s why we’re asking all the other brokers to check their books,” she explained.

“The reason for this problem of R&L is they entrusted everything to one person,” she noted.

“You cannot do that in a brokerage.”

Sought for comment, Summit Securities, Inc. President Harry G. Liu said it is the responsibility of those with a stock brokerage to have “organization and control” of their business.

“You need audit — internal, external — you need two signatories. Hindi naman pwedeng isang tao lang (You cannot have just one person) who has all the power,” Mr. Liu said. “Everybody has to follow certain standards.”

He said all aspects of the business should be controlled, while check and balance should be in place, including accounting, internal audit, information technology, backroom operations.

“Then we report to the PSE every month. That should be counter-checked,” he said, adding the report should not be “one and the same — that is standard.”

“Trust is important, but if you start to become lenient, pinapabayaan mo ‘yung kompanya mo, of course, may mangyayari n’yan (you become lax in your company, of course, something will happen). Parang bahay — alam mo naman may magnanakaw, pinapabayaan mong bukas ang pintuan (It’s like your home — when you know there are thieves yet you leave the door open). Of course you are open to mistakes,” he added.

“Something like that is a mistake on the part of the organization of that corporation. That is how I look at it.”

PNB Securities, Inc. President Manuel Antonio G. Lisbona said his firm has “robust safeguards in terms of policies and procedures in place to ensure that our clients are protected.”

“The R&L case is unfortunate, but is not reflective of the PSE nor its trading participants,” Mr. Lisbona said.

“At the very least, in our back office system, we have a ‘maker/checker’ control in place to ensure that no individual can encode, check and approve a transaction. Therefore, there will be several pairs of eyes that will process a transaction. This goes for our parent bank as well.” — with Vincent Mariel P. Galang