FSCA investigates cases of prohibited trading on the JSE

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FIFI PETERS: It would seem that the crooks on the JSE still keep crooking as though no one is watching. It seems that that’s how they feel because the Financial Sector Conduct Authority, the FSCA, says that it has received more and more tip-offs from international regulators [about] insider trading, price manipulation and misleading financial reports that are happening on the Johannesburg Stock Exchange (JSE).

If you don’t know, insider trading is when you essentially buy or sell a share on the stock exchange with information that isn’t public knowledge, meaning that you have an unfair advantage over other shareholders who are in the dark, to make money potentially because of what is happening in that particular company.

We’ve got Alex Pascoe, the head of market abuse at the FSCA, for more on this. Alex, thanks so much for joining the show. You would have thought that, with the blowout of the Steinhoff scandal and the repercussions that have been widely reported, [and] a similar blowout at Tongaat Hulett where there’s also been alleged fraud – [fingers would] be pointed at their former managements as well as at EOH and quite a few companies that have been publicly named and shamed for such practices, which would have scared individuals from continuing such behaviour. Yet that doesn’t seem to be the case. So you’re saying that things are getting worse.

ALEX PASCOE: Good evening, Fifi, and good evening to your listeners. Look, recently we’ve had what I call the South African Enron in Steinhoff, etc. These have had a lot of exposure internationally. But we have always seen market abuse globally, just as we’ve seen it on the JSE.

So in terms of insider trading and market abuse on the JSE, of our cases – I’ve 75 registered at the moment – between 50% and 55% of those are about insider trading. In 40% you’d be looking at price manipulation and 10% are [about publishing statements that are] false and misleading.

However, the JSE has a very experienced market-abuse surveillance team with very sophisticated market-abuse surveillance [systems], so they are identifying [cases] and, just as in any other period, there is always going to be market abuse.

We do meet with the JSE on a monthly basis where they hand cases over to us. So it is prevalent but, just as it is here in the financial markets, it’s the same in global markets.

FIFI PETERS: What do you reckon the motivations are right now? Is it greed, thinking that you’re above the law? What do you reckon it is?

ALEX PASCOE: Well, I think from what you mentioned earlier – those cases like Steinhoff and Tongaat – we’ve lack of corporate governance.

I think we’ve got certain individuals, executives, that have so much power and influence over their subordinates.

We also might have a lack of proper auditing standards when auditing these companies.

FIFI PETERS: This is very frightening to hear, because essentially it means that five years on from our version of Enron in the form of Steinhoff – the biggest corporate scandal in modern South African history – very few lessons have been learned.

ALEX PASCOE: Yes, that is true. Soon after that there was Tongaat, a very similar case but at a much lower level and influence. But yes, it’s very difficult to say because faulty and misleading statements are sporadic. And we might not get another Steinhoff for quite a while. So hopefully the Steinhoff and the Tongaat [cases] and the enforcement action that will be taken in the future will scare off [miscreants] and those who want to do similar acts. They will have to then face the FSCA but also criminal prosecution.

FIFI PETERS: Maybe it’s because it could appear to some – clearly these individuals that are contributing to the 75 cases you’re looking at right now – that actually there’s no accountability.

Markus Jooste is still out there doing his thing. The German court is waiting for him to arrive. It’s like ‘I’m not there’. No accountability has been seen to be taken.

No one is behind bars; fines have been issued that have been reduced. So do you reckon that perhaps the deterrent here is not strong enough in the form of the action, the penalties that are levied on such individuals when they’re caught for doing these things?

ALEX PASCOE: Well, in FSCA’s investigation into Steinhoff we have finalised our ‘false and misleading’ big case.

It was a massive case, very complex, very extensive. It was worldwide so it took quite a while to investigate. But we have finalised that investigation.

We are at the moment busy with the enforcement process of our first report. So I’m hoping in the next three or four months we would have some better news for the markets as far as deterrents and the administrative penalties that have been levied, hopefully, on some individuals, which are going to be significant and are going to deter others from doing the same as we have seen in Steinhoff and Tongaat.

FIFI PETERS: Sure. Well, we hope that you’ll be able to come and speak to us when the report and all the enforcement action has been finalised. We’d love to speak to you when that happens.

But I’d also like to pick up on the point that is interesting, that a lot of the tip-offs that you are receiving right now are coming from international institutions as opposed to the JSE itself. I’d like you to tell us how we should interpret that. Is it that the JSE doesn’t have strong enough vigilance on this kind of behaviour, to monitor this kind of behaviour and detect it? Our international counterparts – is it that they are more alert and aware of such practices going on? How should we square this?

ALEX PASCOE: Look, in the last five years about 45% of our cases have been referred by foreign regulators. Predominantly it has been the FCA [Financial Conduct Authority] in London. I think it’s twofold. They have their own surveillance team and systems in place at the FCA. But the other thing is we’ve seen a lot of international institutions and banks which have the obligation to actually report suspicious trading to the FCA. So that has increased.

And then, of course, a lot of the foreign trading comes through London and is channelled into South Africa.

Most of it is coming through London, and so I think that’s the reason. They’re picking up a lot more of these trading activities that are suspicious and being referred to us.

But getting back to South Africa, as I said earlier, the JSE has a very experienced market-abuse surveillance team and systems – one of the best in the world. So I don’t think they’re missing something. It’s just [whether] insider training, market abuse, has gone to a different level, a more sophisticated underground level. We still need to determine that, but every month we are receiving cases from the JSE.

FIFI PETERS: This is just a horrific, the 75 cases that you currently have on your books. Are you able to tell us who some of these alleged perpetrators are in terms of company names?

ALEX PASCOE: No. Look, as for insider trading and price manipulation it’s more the security – and that’s what we investigate and not the company. Our investigations are very confidential while they are still under investigation.

FIFI PETERS: [If] people know that you’re investigating them they’ll probably try to clean up their stuff and run. But that, I suppose, goes without saying.

Alex, thanks so much for your time, and we certainly do look forward to speaking to you when the FSCA drops its report on the enforcement action around Steinhoff. Alex Pascoe is the head of market abuse at the FSCA.

Correction

Speaking about Steinhoff, if you were listening yesterday you would have heard that we had Tahir Maepa on the Market Update to talk to us about the claims process that was supposed to start in terms of payments from Steinhoff, or the recovery fund that was spearheading that process.

We unfortunately incorrectly said that Tahir was representing the Stichting Steinhoff Recovery Foundation. The more accurate representation is that he was talking to us with the hat of being part of the Stichting Steinhoff International Compensation Claims Fund. So essentially the International Compensation Claims Fund represents those making claims for payments from Steinhoff. As Tahir said, he was representing quite a number of claimants in the retail sector.

The Stichting Recovery Fund, on the other hand, is responsible for facilitating those payments.

We did reach out to the Stichting Steinhoff Recovery Foundation, but unfortunately we were told that the board had decided not to be engaging media at this stage. As soon as they change their stance we will let you know about that.

But we do apologise for the confusion.