Justice delayed is justice denied: A review of 1996 stock market scam
Sunday, 31 October 2010
A.F.M. Mainul Ahsan
Samuel D. Waksal, founder and former CEO of the biopharmaceutical company ImClone Systems, which developed the drug Erbitux, was arrested on June 12, 2002 on insider trading charges. On October 15, he pleaded guilty to charges of securities fraud, bank fraud, obstruction of justice, and perjury. On June 10, 2003, Waksal was sentenced to seven years and three months in prison. Even South-Asian and other emerging markets also notably first in dealing with stock market irregularities. Now lets see how long does it take to get justice in the financial markets fraud victims in Bangladesh?
The DSE all share price index, which was introduced on September 16th, 1986, hovered at around 1,000 in June, 1996, and reached 3,627 on November 16th of the same year; and then moved further down to 484.44 in January 2000. At the market's peak, shares were trading at an average of over 80 times of relevant earnings. One popular stock, Confidence Cement, sold for 1,060 times of 1996's earnings, after a 1,400 percent increase in its price. Trading data shows that during this period, market capitalisation went up by 265 percent and the average daily turnover increased by over 1000 percent. As all bull runs eventually end in tears, the bubble eventually came to an end: the stock market prices dropped by close to 70 percent in end-April 1997 from the peaks in November 16th, 1996. Investors lost their lifetime savings in the blink of an eye.
However, on December 26, 1996, the SEC constituted an Enquiry Committee to investigate into the irregularities of stock market activities during July 1996 to November 1996. On March 27, 1997, the Enquiry Committee, headed by the vice chancellor of Jahangirnagar University, submitted the report identifying a number of companies and some of the country's biggest brokers who were apparently involved in market rigging. Based on the report, on April 2, 1997, the chief metropolitan magistrate court issued arrest warrants against 32 people in 7 brokerage firms and 8 listed companies. The SEC also filed 15 share-scam cases in the High Court Division of the Supreme Court of Bangladesh. The High Court, however, granted anticipatory bails to the accused along with nine others on April 6, 1997. Since then the government officials at SEC were unable to say anything about the status of the cases. Critics say that the government is reluctant to pursue the cases.
Surprisingly, in 2002, the Securities and Exchange Commission (SEC) has formed two separate committees comprising the officers of the regulatory body to carry out detailed investigation about the "unfinished task" of the previous committee on 1996 share scam. SEC member K. Iftikhar Ahmed has been made convener of the two committees. However, as anticipated, these newly formed committees also failed to complete the "unfinished task". However, financial market authorities should finish their "unfinished task" by all means within the shortest possible time. Why?
The irrational exuberance and its demise in 1996 happened at the cost of thousands of investors who came to participate in the market for the first time having little or no knowledge about the market fundamentals. Frustratingly, no one held responsible for the scam and justice was denied to the victims. Fourteen years have passed and still there is no sign that victims could get justice even in near future. Delayed justice raises severe questions against SEC's objective of saving interest of investors in the marketplace. Why do the financial markets need special attention from the relevant parties, e.g., legal system, government agencies, or even by other market participants? Presence of a market-oriented legal system determines the quantity and reliability of publicly available information. Researcher Rafael La Porta argues that strong legal protection would enable investors to act on disclosure, whereas weak protection hinders investors to rely on disclosure and future prospects, which makes disclosure less effective.
In a study on corporate governance, investor protection, and performance in the emerging markets, Leora Klapper and Inessa Love showed that firms in countries with weak legal systems disclose less information, which might be, as Rafael La Porta argued, due to the assumption that weak legal systems makes disclosure practices less effective. Besides, a well-developed legal framework enhances financial market liquidity. This is significant because lower liquidity costs have been shown to reduce a firm's cost of capital and thus increases its market value.
A sophisticated financial market produces higher rates of economic growth. The extent of legal protection of investors in a country is an important determinant of the development and growth of its financial markets. When laws are inadequate to protect investors' rights, the development of financial markets is stunted. It is by now well accepted that weak investor protection increases the cost of external funds and the cost of equity in particular. Hence, in countries where investors are poorly protected firms issue less equity and stock markets are underdeveloped. In other words, poor investor protection affects the supply of equity negatively. For instance, there are total 125,929 firms listed with the office of the Register of Joint Stock Companies and Firms in Bangladesh. Among 125,929 firms, 81,888 are private companies, 1,417 are public companies, 125 are foreign companies, and 32,295 are partnership firms.
However, only about 266 firms are listed on the Dhaka Stock Exchange (DSE). So, even to achieve a thriving and stable financial market, authorities need to put scammers behind the bar.
In 2007, according to Motley Fool Global Gains research report, in terms of stock return, Bangladesh stands first in the list with 134 percent return. China, Ukraine, Cote d'Ivorie and Nigeria comes next in the list with 132 percent, 125 percent, 110 percent and 106 percent return respectively. Our bourses are making "record transactions" almost every week. Still many investors are avoiding investing in the stock market because of the memory of 1996. To some, still investing in the stock market is synonymous with gambling. Hardly any major international investor committed any significant fund in any of our bourses. The stock market scam in 1996 is still a stain to domestic and international investors. Thus even for the sack of attracting quality investment from home and abroad, we need to ensure justice in the market place.
Manipulation took place before; it will happen also in the future. Thus to impede mugger from exploiting markets, authorities also need to adjust legal and judicial affairs rapidly. For instance, all financial market fraud should be considered as non-bailable crime. Capital market frauds should also be sentenced in prison for years. In addition, all financial market related crimes must be trialed under Speedy Trail Act, 2002. The more quick the authorities react to the situation, and deliver justice to sufferers, the more efficient a market becomes. Investors are exposed to low risk in a more efficient market than in a frontier or emerging market.
The whole catastrophe took place during Sheikh Hasina's regime in 1996.
Awami League leadership also can't deny its responsibility that it also has played a significant role as a catalyst in inflating the market. Exaggeration by the Awami League leaders about the stock market installed confidence in small investors who became the ultimate victims of stock market debacle in 1996. For instance, former finance minister Shah ASM Kibria and Prime minister Sheikh Hasina herself claimed credit for the "outstanding" stock market performance. So, Awami League has additional responsibility to bestow justice to those victims who have lost their fortune in 1996 stock market scam.
Under Sheikh Hasina's leadership, Bangladesh government is trying to establish good governance as promised in the election manifesto. They finished Sheikh Mujib's murder trial and started BDR mutiny trial, and historical war criminal trail. Now it's also time to bring those manipulators of 1996's stock market scam to book. If Awami League failed to punish those manipulators, voters might get the wrong impression that Awami League leaders had hand in market rigging. And our policymakers shouldn't forget that financial market is the vehicle of development; and failure to deliver a stable market system will halt the fight against poverty.
The writer is a PhD Student, Department of Economics Texas Tech University.
He can be reached at mainul.ahsan@ttu.edu
Samuel D. Waksal, founder and former CEO of the biopharmaceutical company ImClone Systems, which developed the drug Erbitux, was arrested on June 12, 2002 on insider trading charges. On October 15, he pleaded guilty to charges of securities fraud, bank fraud, obstruction of justice, and perjury. On June 10, 2003, Waksal was sentenced to seven years and three months in prison. Even South-Asian and other emerging markets also notably first in dealing with stock market irregularities. Now lets see how long does it take to get justice in the financial markets fraud victims in Bangladesh?
The DSE all share price index, which was introduced on September 16th, 1986, hovered at around 1,000 in June, 1996, and reached 3,627 on November 16th of the same year; and then moved further down to 484.44 in January 2000. At the market's peak, shares were trading at an average of over 80 times of relevant earnings. One popular stock, Confidence Cement, sold for 1,060 times of 1996's earnings, after a 1,400 percent increase in its price. Trading data shows that during this period, market capitalisation went up by 265 percent and the average daily turnover increased by over 1000 percent. As all bull runs eventually end in tears, the bubble eventually came to an end: the stock market prices dropped by close to 70 percent in end-April 1997 from the peaks in November 16th, 1996. Investors lost their lifetime savings in the blink of an eye.
However, on December 26, 1996, the SEC constituted an Enquiry Committee to investigate into the irregularities of stock market activities during July 1996 to November 1996. On March 27, 1997, the Enquiry Committee, headed by the vice chancellor of Jahangirnagar University, submitted the report identifying a number of companies and some of the country's biggest brokers who were apparently involved in market rigging. Based on the report, on April 2, 1997, the chief metropolitan magistrate court issued arrest warrants against 32 people in 7 brokerage firms and 8 listed companies. The SEC also filed 15 share-scam cases in the High Court Division of the Supreme Court of Bangladesh. The High Court, however, granted anticipatory bails to the accused along with nine others on April 6, 1997. Since then the government officials at SEC were unable to say anything about the status of the cases. Critics say that the government is reluctant to pursue the cases.
Surprisingly, in 2002, the Securities and Exchange Commission (SEC) has formed two separate committees comprising the officers of the regulatory body to carry out detailed investigation about the "unfinished task" of the previous committee on 1996 share scam. SEC member K. Iftikhar Ahmed has been made convener of the two committees. However, as anticipated, these newly formed committees also failed to complete the "unfinished task". However, financial market authorities should finish their "unfinished task" by all means within the shortest possible time. Why?
The irrational exuberance and its demise in 1996 happened at the cost of thousands of investors who came to participate in the market for the first time having little or no knowledge about the market fundamentals. Frustratingly, no one held responsible for the scam and justice was denied to the victims. Fourteen years have passed and still there is no sign that victims could get justice even in near future. Delayed justice raises severe questions against SEC's objective of saving interest of investors in the marketplace. Why do the financial markets need special attention from the relevant parties, e.g., legal system, government agencies, or even by other market participants? Presence of a market-oriented legal system determines the quantity and reliability of publicly available information. Researcher Rafael La Porta argues that strong legal protection would enable investors to act on disclosure, whereas weak protection hinders investors to rely on disclosure and future prospects, which makes disclosure less effective.
In a study on corporate governance, investor protection, and performance in the emerging markets, Leora Klapper and Inessa Love showed that firms in countries with weak legal systems disclose less information, which might be, as Rafael La Porta argued, due to the assumption that weak legal systems makes disclosure practices less effective. Besides, a well-developed legal framework enhances financial market liquidity. This is significant because lower liquidity costs have been shown to reduce a firm's cost of capital and thus increases its market value.
A sophisticated financial market produces higher rates of economic growth. The extent of legal protection of investors in a country is an important determinant of the development and growth of its financial markets. When laws are inadequate to protect investors' rights, the development of financial markets is stunted. It is by now well accepted that weak investor protection increases the cost of external funds and the cost of equity in particular. Hence, in countries where investors are poorly protected firms issue less equity and stock markets are underdeveloped. In other words, poor investor protection affects the supply of equity negatively. For instance, there are total 125,929 firms listed with the office of the Register of Joint Stock Companies and Firms in Bangladesh. Among 125,929 firms, 81,888 are private companies, 1,417 are public companies, 125 are foreign companies, and 32,295 are partnership firms.
However, only about 266 firms are listed on the Dhaka Stock Exchange (DSE). So, even to achieve a thriving and stable financial market, authorities need to put scammers behind the bar.
In 2007, according to Motley Fool Global Gains research report, in terms of stock return, Bangladesh stands first in the list with 134 percent return. China, Ukraine, Cote d'Ivorie and Nigeria comes next in the list with 132 percent, 125 percent, 110 percent and 106 percent return respectively. Our bourses are making "record transactions" almost every week. Still many investors are avoiding investing in the stock market because of the memory of 1996. To some, still investing in the stock market is synonymous with gambling. Hardly any major international investor committed any significant fund in any of our bourses. The stock market scam in 1996 is still a stain to domestic and international investors. Thus even for the sack of attracting quality investment from home and abroad, we need to ensure justice in the market place.
Manipulation took place before; it will happen also in the future. Thus to impede mugger from exploiting markets, authorities also need to adjust legal and judicial affairs rapidly. For instance, all financial market fraud should be considered as non-bailable crime. Capital market frauds should also be sentenced in prison for years. In addition, all financial market related crimes must be trialed under Speedy Trail Act, 2002. The more quick the authorities react to the situation, and deliver justice to sufferers, the more efficient a market becomes. Investors are exposed to low risk in a more efficient market than in a frontier or emerging market.
The whole catastrophe took place during Sheikh Hasina's regime in 1996.
Awami League leadership also can't deny its responsibility that it also has played a significant role as a catalyst in inflating the market. Exaggeration by the Awami League leaders about the stock market installed confidence in small investors who became the ultimate victims of stock market debacle in 1996. For instance, former finance minister Shah ASM Kibria and Prime minister Sheikh Hasina herself claimed credit for the "outstanding" stock market performance. So, Awami League has additional responsibility to bestow justice to those victims who have lost their fortune in 1996 stock market scam.
Under Sheikh Hasina's leadership, Bangladesh government is trying to establish good governance as promised in the election manifesto. They finished Sheikh Mujib's murder trial and started BDR mutiny trial, and historical war criminal trail. Now it's also time to bring those manipulators of 1996's stock market scam to book. If Awami League failed to punish those manipulators, voters might get the wrong impression that Awami League leaders had hand in market rigging. And our policymakers shouldn't forget that financial market is the vehicle of development; and failure to deliver a stable market system will halt the fight against poverty.
The writer is a PhD Student, Department of Economics Texas Tech University.
He can be reached at mainul.ahsan@ttu.edu