We could separate the leaders from the herd: Malik Cader

The stock exchange mafia’s first victim, former securities regulator Malik Cader discusses the events that led to his resignation

By devan daniel.

Published on July 20, 2015 with 1 Comment

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Stock markets baffle ordinary savers. As a result, the alleged insider trading, pump-and-dump, and stock front running crisis in the years up to 2012 didn’t figure importantly in their minds. Its banality however doesn’t limit the impact on an investing elite. The stock market is a barometer for economic health and the top-funding source for the country’s largest private businesses.

When the credibility of capital market infrastructure is compromised– as it was in the couple of years to 2012 – it imposes higher cost on private companies and the economy over the long term. So, for ordinary citizens, what seems a parochial affair of manipulating the prices of listed securities, assumes national significance.

This scandal also corroded trust in the capital market regulatory setup despite the best efforts of those who ran the SEC. The stock market mafia types’ first victim was Malik Cader who says the regulator had clearly identified some insider traders and price manipulators. He says there was an organised and concerted effort by several people and that the SEC had evidence to separate the leaders from the herd. Cader resigned as SEC director general in November 2011 when the SEC was under pressure over introducing price corridors for share price movements and restrictions on stock broker extended credit. Weeks later, Indrani Sugathadasa, the first of two SEC Chairpersons the scandal claimed, resigned. In an interview Malik Cader discussed the events that led to his resignation as SEC’s Director General. Excerpts…

What are you up to now?
I’m a legal consultant with a practice focusing on capital markets and insurance. I advise listed companies and market intermediaries on any regulatory issues. I also advise local and foreign investors, both individual and institutional, about prospects here.

What happened after you left the SEC?
I was summoned to the ministry by PB Jayasundera (then Treasury Secretary) in November 2011. Before he could start, I told him ‘let’s not beat about the bush, I will resign by the 31st of December 2011, give me one month to finalise matters’. He said, ‘no we can’t and we don’t want you to resign. We want to keep you’. He wanted me to join the ministry and said a special Cabinet memorandum was being prepared to make me a senior advisor to the Ministry of Finance enjoying all the perks and facilities I had at the SEC. True to his word he did that.

What was your role at the Finance ministry?
I wasn’t happy with the work at the ministry as it did not satisfy my taste and appetite.

I was given a couple of files here and there on investments. I was not making good use of my time, so I moved out. I didn’t want anyone to know at the time. I took some time out before starting my legal consultancy practice.

At that time it was speculated that you were asked to leave immediately?
No. There were forces at work to see me ousted from the SEC. But I think Dr Jayasundera did not like that. In fact, he told me that he did not like to see professionals treated this way. Dr Jayasundera, SEC Chairperson Indrani Sugathadasa, and the members of the commission were all on my side. But their support was not enough.

Who was behind your ouster?
It was the people accused of market irregularities and those who wanted to control the market. One stockbroker at a forum had stated that ‘we not only move markets we can also move officials”. It wasn’t just my removal, but also the way the SEC was treated by the authorities that led to a collapse in market credibility. In fact, two weeks after I left, SEC Chairperson Indrani Sugathadasa resigned on a matter of
principle.

mc3So it was President Mahinda Rajapaksa , who was also the finance minister, who removed you?
I think the then president’s mind was poisoned and several politicians also got on board the anti-regulator bandwagon. Half the people who made those decisions against the SEC aren’t well versed on capital markets or its regulation.

Was it not the finance minister who appointed you Director General of the SEC?
I was Deputy DG and Officer in Charge and for one year functioned as the acting Director General. Six months after Ms Sugathadasa took over as Chairperson, the commission called for applications to fill the DGs’ post. Since I was already performing this role, and since I had the credentials and qualifications, I applied. I went through the whole selection process despite my 15 years at the SEC. The then Minister of Finance and President, appointed me on the recommendation of the commission towards end 2010

When did you realise that all was not right at the Colombo Stock Exchange?
There was a surge with the All Share Price Index moving from 1,500 points to 7,800 points. Up to a certain level, maybe 5,000 or 6,000 points, I saw the rise as a realisation of underlying listed company valuations following a 30-year war. But when fundamentally unsound companies were driving the market rise-some were trading at 1000 times their earning levels – we felt the market was showing an artificial boom. We were then also of the strong belief that stock prices were being manipulated. This was an unhealthy situation.

Was there evidence to suggest the market was being manipulated?
Everyone was talking about it. A 10-rupee stock would rise to 150 rupees in two weeks without any fundamental reason. There were many such instances.

The companies – when we asked them – were clueless. How can the price rise when fundamentals were weak, unless someone was deliberately taking the price up?

But was there enough evidence to suggest this was the case when you examined trading records?
We were getting ready for that. On the face of it there was enough evidence. We were getting ready to move to the next level; unfortunately others felt that this was not the time.

Some thought the SEC was spooking the market by trying to investigate irregularities then. Could you not have been discreet?
The market would eventually find out when we summon people for an inquiry.

How widespread was market manipulation, pump-and-dump and insider trading?
It was like a cancer. Everyone was in the bandwagon but there were leaders of the herd. At first small investors were making money without effort, not realising the risks. In fact Ms Sugathadsa told a public forum of market intermediaries ‘don’t kill the goose that lays the Golden Egg by grabbing all the eggs. Let’s be patient and nurture the goose so that we will have the produce every day ’.

Was the SEC ill-equipped to deal with widespread market manipulation?
We were prepared to take on anyone. We had an honourable commission and a secretariat that wanted to do the right thing irrespective of who was manipulating the market and their political affiliations.

But could the SEC have prevented this from happening in the first place?
We introduced a price band and placed restrictions on credit, which worked. Those on the other side of the fence were against these restrictions, naturally, because these were impeding their ability to manipulate share prices and other investors.

They were claiming the SEC was overregulating the market?
Of course they would claim this because their easy moneymaking was blocked. The basic function of a capital market is to foster value creation and this is why the SEC Act mandates the regulator to create and maintain a capital market that is transparent, fair and efficient.

Who came up with the price band idea?
It was a collective decision of the CSE and SEC because companies could not explain why a 10-rupee share had gone up to 150 rupees, or a 20-rupee share had ballooned to 270 rupees. How can a company valued at 3 billion be then worth 15 billion two weeks later when nothing has changed in-between. Was this an efficient market? It was not. Everyone agreed on the price band. Under the circumstances it was the
best possible thing we could have done.

Critics claimed the price bands and other measures were ad hoc and that the SEC under your watch was inconsistent, changing rules from time to time?
There was consistency. First came the price band and then the credit rules. Brokers must go to margin providers and creditors must prove their credit worthiness. These measures worked.

mc2When did the pressures start and where did it come from?
When we started summoning the accused for questioning. We got signals asking us to go slow, postpone the investigation or questioning of so-and-so. It came from the top, from outside the commission. It was mostly phone calls. Also, there were newspaper articles and forums aimed at destabilizing the SEC.

When did the SEC break?
When I was removed and when the SEC Chairperson resigned. The commission never interfered with the secretariat, all they wanted was justice.

There was a meeting at Temple Trees?
Yes, organised by the so-called market intermediaries, violating basic protocol, not inviting anyone at the SEC. This is why I said the top was misled.

This meeting took place during your tenure?
Yes, this was the first meeting. The second was after I left where another meeting took place at Temple Trees against the next SEC head, Dr.Tilak Karunaratne.

What was discussed at these meetings?
They made various presentations and pulled out charts and graphs to suggest the SEC was causing the market slump. It started the gradual process to destabilising the SEC.

Weren’t the stock trading records analysed by the SEC? Wasn’t there hard evidence to prove them wrong?
These are criminal matters that have to be proved beyond any reasonable doubt and we were in the process of gathering evidence. Unfortunately, we couldn’t proceed.

How many people were under the microscope?
There were many. We were gathering information and the net could have been cast wider. There were the silent operators, and fronts too.

How clear was this to the SEC?
We had clearly identified some of them. There was an organised concerted effort by several people. We had good evidence to separate the leaders from the herd.

Would you have taken a different approach or adopted a different strategy?
I don’t think there was anything we could have done very differently. Maybe we should have adopted price bands and credit restrictions earlier. In fact, had we resorted to taking people to courts nothing would have happened for several years and share price manipulation would have continued.

But the damage was already done?
The damage was extensive. There is a subjective analysis done that Sri Lanka lost approximately two trillion rupees in value as a result of irregularities during this period. In 2011 if the market was at 6,000 points and the CSE realised a 20% growth each year, today the market indices should have been at 10,000 points and not 7,000 points, with a market capitalization of more than five trillion rupees. This value is equivalent to the cost of building 65 Katunayake Expressways or 65 Mattala airports.

What should the SEC now do?
The market has stabilized, and investor confidence has returned. To take it to the next level I feel we need more foreign investors here. A 50% foreign holding will be good. I don’t know how this could be done, but it must be looked at seriously.

Should the SEC open the old cases?
I think the SEC should and they have no option but to move forward, it is the right thing to do.

Do you think the SEC can ensure this does not happen again? If not, what should the SEC do?
There is enough in the SEC Act to keep the agency independent, but unfortunately executive powers were used to undermine the credibility of the SEC. Ultimately, this was detrimental to capital market and also to the executive presidency. Politicians should leave regulatory bodies alone. They must realize this.

Were all the SEC’s then commissioners on board. Were there commissioners who were pulling in a different direction?
People had differences of opinion. We had debates and arguments but on general consensus commissioners were behind us.

Was there anyone among your colleagues who tried to pull the carpet from under your feet?
No. Even if they wanted to they could not because the commission was with me.

mcAfter you left, some SEC officials were suggesting there were no grounds to continue investigating anyone?
Not in my time. We worked together although we had our differences. Some argued that we must be merit-based, but we suggested that the market should be disclosure-based. We debated on whether certain people should be investigated or not, but ultimately there was consensus.

So no one tried to stifle the investigations?
When I was there, it did not happen.

Your critics accused you of favouritism. Why?
Being in the SEC for 15 years you get to know people. So when I am seen in their company they assume they are my favourites. Some of these guys were investigated by the SEC. There is also a process. First there is a surveillance report, that goes to a surveillance committee before ending up with commission. There is nothing I could do on my own, there is a system and a process.

Should the regulator be aloof?
We had to attend formal events. Some market intermediaries attend overseas events with market participants. That’s formal.

Must this culture change?
Maybe.It is difficult to avoid interactions with the market. This is after all a small country, so maybe this needs to be looked at.

Did you do anything to make it easy for those attacking you?
I live in a good house, drive a good car, so all this must have been looked at with suspicion. They were out to get me. But I had these things even before I joined the SEC.

There were accusations that you were close to the Brown’s group and separately, involved in a hotel project in Passikudah?
I had nothing to do with either of these. My father-in-law is an architect and undertakes work of which I have no control. That is his Job. He is a respected senior architect who designed several high rises in Colombo. He designed and built a property in Passikudah. After I left government I accompanied him on his visits. It was just an excuse used to attack me. All this appeared in websites.

What was it like working with Ms Sugathadsa?
Well it was a first time I worked with a chairperson who was a senior bureaucrat. Ours was a cordial and professional relationship. She always wanted nothing short of the right thing done. Her integrity, commitment, dedication and patriotism is unsurpassed. If we have a couple of people like this in strategic positions in the bureaucracy this country would be a better place than it is now.

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  1. D.J. was the guy who carried tales to the Ex-President and got all the people he did not like removed

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