Many of the investors in the Sri Lankan stockmarket trade in shares based on inside information which is a violation of the law but regulators are scared to take these offenders to task, according to some stockbrokers. They were reacting to the stunning announcement this week where Sri Lankan-born billionaire fund manager, Raj Rajaratnam, was found guilty by a US court on insider trading and faces a prison term of upto 15 years. His lawyers have said they would appeal the verdict.
“Directors deal in shares of their own listed firms. This is a crime, because at the end of the day they are playing with the poor retailers’ money. The CSE is being driven by a handful of such players. Many offenders are not prosecuted and jailed. The Securities & Exchange Commission (SEC) law needs more teeth,” a stockbroker noted. He said that if the regulator has more teeth, the offenders can be jailed.
Mr Rajaratnam, who built his weath in the US through his Galleon Fund, was first drawn to the Colombo stockmarket in 2002 where he invested in John Keells Holdings stock in his personal capacity. Subsequently he bought shares in many listed firms through the Galleon Fund. He exited in late 2009 to early 2010, selling out all his investments here after US authorities filed charges against insider trading.
Channa de Silva, Managing Director and CEO of LR Global Lanka Asset Management Co and a former Director-General of the SEC, suggested the need for an institutional framework to allow whistle-blowing to deter ‘white’ crimes. “The law needs to be strong and be a deterrent to this kind of activity,” he said adding that Mr Rajaratnam’s conviction is a lesson for regulatory and exchange authorities, and the investor.
This, he said, also brings to focus governance and transparency and whether enough is being done in these areas.
J.C. Weliamuna, former Transparency International Sri Lanka Executive Director, said in most cases there is a pattern in insider trading where such people indulge in this activity in all markets and in this case, Sri Lanka.
He said the US has been plagued by insider trading and in recent times there has been political determination to crack down on this kind of activity.
“In the US, the regulator means business while in Sri Lanka all officials or appointees to regulatory bodies are directly or indirectly related to business. In such a situation they don’t want to stop insider trading as they are dealing with friends, colleagues and politicians,” he said, adding that the US Justice Department would be having a lot of information on the convicted Sri Lankan’s dealings in Colombo and the local authorities should act on it.
A stock analyst pointed out that if the regulator implements the law and ‘sends at least one offender to jail’, it’ll send a positive signal to foreign investors while keeping other potential offenders at bay. “What happened in Raj’s case is a lesson because it showed that irrespective of how rich, powerful or ‘connected’ the particular offender is, he was convicted and that nobody is above the law,” he said. He added that the SEC needs to be ‘empowered’ to go into stringent action. “Compounding is a waste of time. They’ll be scared if they are sent to jail.”
The SEC Act provides for offenders to be charged in courts and either fined or jailed on conviction. However no one has been jailed with the SEC compounding the offence where the accused pays a fine and is not ‘declared guilty’. The SEC has explained in the past that this was to avoid a protracted legal process and hoped that a hefty fine would be a strong deterrent to such activity.
The SEC plans to bring in civil sanctions (as opposed to the criminal sanctions in force now) to ensure ‘restitution’ of investors. “When offenders are identified there will be certain provisions to charge thrice the profit or the loss by the act of market manipulation from the offenders and pay one third of it to the investors who made a loss through this. This is called ‘disgorgement’,” an SEC source explained.
He said that in some countries, those who breach the (SEC) regulations are typically required to pay both civil money penalties and disgorgement. Civil money penalties are punitive, while disgorgement is about paying back profits made from those deals that violated the SEC's regulations.
The SEC says this is a better deterrent than the criminal sanctions which are now practiced. “This is also practiced in Malaysia and the burden of proof is lesser than in criminal sanctions. The proof is on the balance of probability,” the source added.