PSE to AR shareholders: get a lawyer and explore your legal options

Yesterday, I wrote about the SEC’s finding that Abra Mining [AR suspended] and its directors and officers defrauded the public when ghost shares were sold to certain shareholders by way of private placements and then flipped to unwitting public buyers. This update is about the PSE’s statement [link], released yesterday, which advised the victims of the fraud, the AR stockholders, to “consult their counsel and seek legal advice on available remedies under existing laws”. The PSE noted that AR’s minority stockholders might do this legal exploration “individually, or as a group”, and that the SEC has “authority to adjudicate complaints under the Financial Products and Services Consumer Protection Act such as damages not exceeding Php 10 million.” The PSE said that it will “proceed with the initiation of delisting proceedings pursuant to its Involuntary Delisting Rules.”

MB bottom-line: Before we all get pissed off at the PSE for this statement, I think it’s important to remember that the PSE is not in charge of policing the market for this type of behavior, nor is it the PSE’s role to investigate or prosecute violations like what we saw with AR. Broadly speaking, that’s the SEC’s job. So to expect the PSE to somehow be more involved is a little bit like expecting a mall security guard to audit the receivables of the stores in the mall and bring perpetrators to justice. That said, given what’s happened, it doesn’t appear as though the current distribution of roles between the SEC, the PSE, and the Capital Markets Integrity Corporation is sufficient to prevent this particular thing from happening and this particular damage from being done. The massive fines levied by the SEC will be paid to the SEC as a penalty, not to the minority shareholders who are the actual victims of the fraud. From that perspective, at least investors can look at a fine of that size and think of it as a reasonable deterrent for this type of bad behavior, but has this process actually been that effective? The amount of the fine is 27% smaller than the market value of the ghost shares that were sold to the public on the day that AR was suspended. So, from a really high level, what happened here was a transfer of half a billion pesos in value from minority shareholders to the SEC, with the fraudulent scheme as a middleman. Minority shareholders are left to fend for themselves and attempt to recover against the violators on their own. Again, I don’t think the PSE had a greater role to play here given my understanding of its mandate within the SEC’s framework. From my memory, the PSE acted fairly quickly. Did it say weird things about finding a “white knight” to help shareholders? Sure. Were those comments appropriate? Probably not. But I think the fact that the PSE felt obliged to say something like that underlines the good intent of the PSE and the need for there to be a more effective system for monitoring and policing the markets, and handling the violators in a way that doesn’t just feel like a “gg” to minority shareholders who are left holding the worthless bag. 

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