Broker in biggest PSE scandal gets 14-year prison term

MANILA, Philippines — Twenty-two years after the Philippine Stock Exchange (PSE) was rocked by the biggest scandal in its history, a local stockbroker was convicted for illegal trades linked to the 1999 stock price manipulation scam involving BW Resources Corp.

The Pasig City Regional Trial Court (RTC) has sentenced Johnny Yap, then president, sales manager, and director of Solar Securities Inc., to 14 years in prison for trades that led to a dizzying 1,462-percent surge in the stock price of the loss-making gaming stock BW within a single year. Yap was also ordered to pay a fine of P1 million.

The decision marked the very first conviction won in court by the Securities and Exchange Commission (SEC) in relation to the BW scandal that had since catalyzed a string of governance reforms.

In over two decades, the corporate regulator has run after a number of stockbrokers and investors linked to the BW scandal, including businessman Dante Tan, who had close ties to then-President Joseph Estrada and figured prominently in a number of corporate deals during the latter’s short-lived administration.

Estrada was impeached over charges of corruption in November 2000. He was ousted in a People Power uprising in January the following year and was convicted of plunder in 2007. He was pardoned by his successor President Gloria Macapagal-Arroyo and was able to revive his political career, serving as city mayor of Manila for two terms until 2019.

Primarily driven by speculation about the entry of Macau casino tycoon Stanley Ho as an investor, shares of BW skyrocketed to as much as P12.50 per share by October 1999 from only 80 centavos at the beginning of the same year.

‘Wash sales’

In a 19-page decision dated May 7, Judge Ira Fritzie Cruz-Rojo of Pasig RTC Branch 67 found Yap “guilty beyond reasonable doubt” of violation of Section 26(a)(I)(1) of the Revised Securities Act, now Section 24.1(a)(i) of the Securities Regulation Code (SRC), which prohibits fraud, manipulation and insider trading of any listed company traded in an exchange.

The court ruled that Solar had undertaken 142 counts of “wash sales,” or transactions wherein the buyer and seller of the stock share an owner, for the purpose of creating “false and artificial appearance of stock market activity in the volume and price” of BW. These consisted of buy and sell orders for BW stocks during the months of June and October 1999.

The court gave weight to the findings of a Special Operations Group formed by the SEC in August 2000, which showed that Solar’s transactions were wash sales not only because the brokerage was both the buyer and the seller in all the 71 buy order and 71 sell order transactions, but also because the offers and bids had been made at very close intervals.

“[N]o other conclusion may be reached but that these series of trade transactions were executed with the intention of creating a false or misleading appearance of active trading or misleading appearance with respect to the market of BW shares,” the decision read.

‘To manipulate market’

“Indubitably, the subject transactions were knowingly executed by Solar with no other purpose but to manipulate the market.”

The RTC ruled that Yap, as Solar’s compliance officer, had the duty to ensure that the company was compliant with the regulations and legal requirements for its trading transactions. Yap was thus deemed to have directly or indirectly executed the illegal transactions.

The court also concluded that the transactions involved no change in the beneficial ownership, citing evidence that Solar had paid itself at the price it offered to sell the BW shares. If Solar Securities and Yap were selling shares for clients different from the bidding or buying clients, the court noted that no allegation or evidence was ever presented to show that.

“In fact, no commission was paid and/or earned in all these transactions, which totally negates any appearance that Solar was transacting for its clients,” the ruling pointed out.In his defense, Yap had said that Solar had a total of 5,000 trading transactions involving BW shares at that time, reflective of the active trading of this stock. Only about 1.47 percent had been “erroneously identified” as wash sales.

He argued before the court that since the prevailing trading system MakTrade was the one determining the best bid or offer among orders in queue, it’s “highly impossible” for him or Solar to physically manipulate the matching of these bids and offers.

Given the daily average of 50,000 trade transactions in the stock market which were happening at a fast pace, Yap also argued that it was “improbable” to manipulate the BW trading, citing the 71 transactions as “merely coincidental.”

Live cases

For its part, the SEC is still pursuing other cases handled by different branches of the Pasig RTC in relation to the BW scandal. The other pending court cases include the charges against Dante Tan. One court case that linked Tan to BW insider trading and stock price manipulation, however, had been dismissed by the Pasig RTC. The RTC’s ruling was initially upheld by the Court of Appeals in 2005 but the appellate court overturned its ruling in 2009. Criminal charges had been reinstated against Tan and four other respondents.

While this is the first conviction in relation to the BW scam, the case marks the fifth conviction under the SRC since its enactment in 2000. Previous convictions mostly involved fraudulent investment scams, including a 2015 decision against Rosario and Saturnino Baladjay, who were sentenced to a total of 455 years in prison and ordered to pay a total of P8 million to complainants.

The BW scandal itself triggered a number of structural reforms at the capital market and the amendment of the securities law.

Questions raised about an alleged “old boys’ club” at the stock market led to the demutualization or conversion of the PSE from a nonstock membership club into a stock corporation.