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Who will watch the watchdogs?

"And how shall we protect the investing public?"

 

There’s a saying: “Who guards the guards?” or “Who watches the watchmen?” Such a question often comes to light when one thinks about the corruption brought by those who wield absolute, unquestionable authority over all. Thus, to curb such authority from getting out of hand, we create structures and systems in our society that serve as the watchdogs of those in authority, Santa Banana!

We rely on these watchdogs every day. Their presence brings at least some comfort and confidence in our minds. But, what good is a dog that is not trained well? Indeed, my gulay, it is not only the presence of such a watchdog that matters, but also the competence of said watchdog that makes it truly effective!

Such a system is extremely important especially in cases where people’s hard-earned money is involved. The primary foundation of any financial system is trust. You trust that your money will be safe. You trust your investments will be safe. And you trust that those whose job is to keep those companies in check, will also keep your money safe.

Last June 11, 2021, a decision was issued by a Special Hearing Panel of the Markets and Securities Regulation Department of the Securities and Exchange Commission (SEC), revoking the broker’s license of Venture Securities, Inc., a stock brokerage owned by Eusebio H. Tanco, and imposing steep fines against Venture and its officers for alleged fraudulent transfer of client shares for R&L Investments, Inc., a stock brokerage owned by the Lee’s through what is known as EQ Trades.

What are EQ Trades? They’re essentially transfers of shares by the same account in one brokerage company to another. In this way, there’s no actual transfer of beneficial ownership. It’s still the same person who owns the shares at the end of the transaction. R&L allegedly lost P700 million worth of client shares.

This fraudulent scheme within R&L took place over a period of eight years, or from 2012 to 2019. Over these years R&L was audited by its external auditors, KL Siy & Associates by the Capital Markets Integrity Corporation (CMIC) of the Philippine Stock Exchange (PSE).

How could such an act be left unchecked and uncaught for so long? The case actually stemmed from the failure of CMIC to fulfill its mandate as the independent autor, surveillance, and compliance arms of the PSE. IT failed to detect and discover the unauthorized and fraudulent transfers of shares of the clients of R&L purportedly committed by one of its employees. Investigation showed that this employee acted as a trader, settlement clerk, and was in charge of keeping the books. Normally, under the SEC’s rules for a brokerage firm, such jobs would be handled by different persons.

Thus, with the apparent consent of the owners of R&L, this employee executed the alleged EQ trades. This means he or she had all the access codes of R&L to execute and approve the trades. This employee had access to the accounting system of R&L, my gulay!

With those access codes, this employee was able to transfer clients’ shares to another. Since this employee had all the control, a broker dealing with R&L would have no idea that the shares of one person are not actually his or hers.

If there were any anomalies with internal control of R&L, one could expect that CMIC would have detected it right away in order to protect the integrity of transactions among different brokers. Unfortunately for R&L’s clients, for over seven years the CMIC and its external auditors did not find any fraudulent activity insofar as the shareholdings of a client in his account with R&L is involved. The CMIC and the external auditors of R&L could have easily detected the theft inside the brokerage using basic auditing procedures of third-party confirmation with PDTC (or with the clients of R&L) of the stock positions of R&L and its clients.

The CMIC in its statement claimed that its role was not to discover fraud but to monitor compliance. Even if CMIC’s mandate was not only the trader of the shares, but also the approver of the transactions, and bookkeeper that submits reports to the auditors, which could have been enough reason to question the compliance of the company.

Needless to say, CMIC’s goal to “maintain the integrity of the market” and minimize the risk of the investing public by ensuring that the training participant adheres to all pertinent rules, regulations and codes of conduct of CMIC and the Exchange, as well as all related legislative and regulatory requirements was not accomplished in this case.

Santa Banana, if brokers could not rely on the complete monitoring and protection from the CMIC, how could the investing public rely on it either?

**

In his almost three hours SONA (State of the nation Address), which is the last in his six-year term, President Duterte actually said nothing new which observers like me would like to list down as perhaps his legacy after he steps down.

While Duterte listed his bills, he wanted Congress to enact as priority measures to my mind, what I consider really important is the creation of a Disease Control, Virology and Vaccine Institute; amendments on the Foreign Investments Act; the creation of the Departments of Migrant Workers and Overseas Filipinos, which is long overdue; the creation of the Department of Disaster Resilience, which has become necessary considering the fact that the Philippines is prone to disasters and calamities; and the setting up of evacuation centers in the sake of disasters and calamities.

In connection with Duterte’s war on illegal drugs, while he admitted that he did actually end as promised when he assumed office in 2017, made remarks which actually challenged the International Criminal Court to do its worst when he ordered the continued killings of those involved in illegal drugs with his kill, kill, kill mantra.

Insofar as his other war on graft and corruption, Duterte finally admitted that it is that the system that allows it. Well, at least he is being honest because I believe graft and corruption in government will continue so long as human discretion and human intervention are present in government transactions.

What I had wanted Duterte to say was how his administration can solve the main problem of the country during his last year. These are poverty, hunger and joblessness which were worsened by the COVID-19 pandemic and health protocol restrictions. I would like him to solve the problem of lack of a transport system to enable workers to go to work in relative ease. Unfortunately, the President failed to discuss how to solve problems that matter to most Filipinos.

Topics: Emil Jurado , Special Hearing Panel , Markets and Securities Regulation Department , Securities and Exchange Commission , SEC , Venture Securities Inc.
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