PPC fungibility: Are there grounds for market rigging suspicion?

MARKET integrity is very important to any stock exchange. Investors want to be assured that they are transacting an informed and transparent market where prices reflect the relevant available information.

If a market lacks fairness, innocent investors can lose their money while rogue elements make fortunes by corrupt trading practices. This could permanently damage investor confidence.

No one would want to invest in a “rigged” market where certain people abuse their influence for self-enrichment at the expense of everybody else. Lack of participation by many potential investors in the end makes the market inefficient.

It is that need to uphold the integrity of markets that governments across the world, through statutory bodies, set strict professional and ethical conduct regulations that have to be followed by participants in the securities markets. In developed countries this has helped in making the markets reliable but in emerging economies malpractices still loom.

 

The success of developed markets in dealing with unprofessional conduct in the investment field is because they have robust regulatory institutions and clear regulations. They also have explicit procedures for investigating misconduct and punishing offenders.

The Institute of Chartered Financial Analysts recognises the importance of market integrity under item 2 of its Standards of Professional Conduct. In summary, the standard prohibits insider trading and manipulation of security prices and volumes. These actions are outlawed because they tilt the investing platform in favour of those with access to “material non-public information” and those participants who can influence prices and trading volumes to their advantage. Both such actions of deceit have at some time occurred on the Zimbabwe Stock Exchange and little, if anything has been done to curb them. People who are supposed to investigate these issues are hardly doing so partly because of incompetence but also because they themselves have been involved.

Take the recent announcement by the ZSE that full fungibility had been granted on PPC, as an example. There is growing suspicion that people who knew about the impending announcement could have front-run the share.

 

The successive price movements observed between February 15 – 22, when the notice was finally publicised, bolsters that suspicion. PPC rallied by 15.7% against the industrial index’s -4,62%. The accumulation of PPC during this period is also evident in the volume increases from only 486 shares from a starting price of US$2,60 on Februatry 15 to 2 310, 7 411 and 16 860 on the three successive days. On the date of the announcement volumes peaked at 21 500 while the price, at US$2,95, was more than 40% discounted compared to the JSE equivalent price of US$4,23. By Wednesday February 24, the share price had jumped to US$3,79.

In other markets the regulator of exchanges would have moved quickly to investigate the circumstances which had given rise to this sudden increase in the share trading. Surely that should be an easy task because the people who were involved in the discussions are known and so are the brokers who bought the shares around that time. This should be a good opportunity for the Securities & Exchange Commission to announce its entry as the regulator. Equally, the ZSE demutualisation should be accelerated to correct the current anomaly where a committee of stockbrokers runs the exchange together with a pliable secretariat. It is inevitable that some committee members would seek to take advantage of the situation to advance their firms’ interests first ahead of everybody else’s.

Besides the PPC story, there have been other instances of suspected insider trading and market manipulation by stockbrokers, influential shareholders and company directors. For instance the TN listing was blighted by alleged manipulation when the price was bid high up to US6c before crashing to US3, 5c on the next trading day. Also recently, ABC sold its stake in Starafrica for US12, 5c.

Hardly a month later Starafrica conducted a rights issue at a price of US10, 8c which implied a gross profit of at least 15% on the shares sold by ABC.

In what could pass as another questionable act, an influential shareholder in Zimplow supposedly influenced the company to pay out a dividend in December. As of today that same shareholder is now allegedly offering his shares in Zimplow for sale yet the company is in a closed period pending results announcement on March 5.

In June 2009 the price of African Sun was pushed up by 82% to US20c a week before the announcement of its financial results.

 

The price crashed by 50% a week later after the disappointing financial results came out. It turned out that the  company had been planning a capital raise whose valuations were going to be based on weighted share prices. The company went as far as claiming in a circular to shareholders later in October that the peak price of US20c was “buoyed by the announcement of impressive first year financial results”. Was that true? Price tampering with African Sun shares was also evident towards the end of 2009 when they pushed up by 71% in two days to US12c on December 31.

Another curious trend has been occurring in the National Foods’ share price. In the past two months the price was ramped up on the last day of each month. Could it be mere coincidence or is it a sign of price supporting?

It is evident that the SEC needs swiftly to put regulations in place and be able to enforce them if the integrity of the market is to be restored. In the PPC case, the trading of shares should have been suspended once it became apparent that the discussions on fungibilty were nearing a successful completion.

 

Regulations should also have compelled the prompt disclosure of trades by insiders such as directors and management. In addition, trades involving at least 5% of the issued shares have to be disclosed to the public. Once the rules of the game are clearly stated and abided by, perhaps the suspicions of “rigging” could be reduced.

 

Ranga Makwata

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