The Securities and Exchange Commission (SEC) is pushing Capital Markets Integrity Corp. (CMIC)—the independent audit, surveillance and compliance arm of the Philippine Stock Exchange (PSE)—to shed more light on rouge trades at beleaguered local stockbrokerage R&L Investments Inc..
This came on the heels of a P700-million stock theft pulled off by a settlement clerk, Marlo Moron, in an internal scam that reportedly started in 2011. This is the first major scandal to hit the local stock brokerage industry since 2017, when DW Capital Inc. was shuttered by P2.6 billion worth of unauthorized trades sanctioned by the firm’s own nominee, Derwin Wong.
The SEC said it expected 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.”
As a self-regulatory organization, CMIC is tasked to enforce the Securities Regulation Code (SRC). It is mandated to investigate and resolve violations by trading participants of the securities law as well as trading-related irregularities and unusual trading activities involving issuers.
“The investigation should also provide clarity as to how such transactions could have slipped past multiple control measures,” the SEC said.
For one, the SEC noted that the 2015 SRC rules required broker-dealers to conduct monthly securities examination, count and verification to account for discrepancies.
The SEC said it expected the full rollout of the Name on Central Depository (NoCD) facility of Philippine Depository and 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. At present, most securities are recorded in “omnibus accounts” that combine the holdings of all investors.
“The creation of subaccounts 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 SEC is also in discussion with PDTC for the creation of a mechanism that will allow the latter to provide monthly reports on a stockbrokerage’s position directly to the board of directors.
Other trading participants said the scam perpetrated by Moron would have been very difficult to detect, even by the most seasoned auditors. At the same time, the principal owners of the brokerage were quite busy with other businesses.
R&L Investments nominee Lucy Linda Lee has committed to “abide, and borrow from other brokers, if need be, or buy it back in order to deliver” legitimate trades and to “do everything in our power to mitigate this situation.” The brokerage has gone on voluntary suspension of operations starting Nov. 4.
Lee reported to the PSE how Moron had illegally transferred shares from the company’s holdings in the Philippine Central Depository system to another broker and forged reports in order to cover his tracks. “He has admitted to stealing small amounts at the start, but eventually moved on to bigger amounts in his desperation to recover all the shares he has already taken. He claims to have acted alone, and insists that he has no cash or securities left to return,” Lee said in a Nov. 4 letter to PSE director Alejandro Yu.