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More can be done to stamp out cross-border fraud
Publication Date : 09-09-2013
The resounding success enjoyed by regulators in the world's two largest economies, the United States and China, in stamping out securities fraud is well and good, and a cause for celebration.
But one crucial question remains: What action do they plan against wrongdoers from their respective countries perpetuating fraud outside their borders?
Of course, the main focus of their efforts is to police their home markets well and protect these from any wrongdoing.
But surely they should also make more of an effort to make sure that cross-border white-collar crime does not pay.
This has been a sore point among Singapore investors.
They have been frustrated at the inability of the authorities to mete out justice to the errant bosses of S-chips - as China-listed plays are known here - if they have fallen foul of our securities laws, simply because they reside overseas.
It is also galling that unlicensed, unregulated foreign short-sellers are able to sidestep our tough defamation and securities laws and issue malicious reports. The veracity of such reports cannot be verified easily so the authors operate safe in the knowledge they are unlikely to be nailed even though their actions border on share manipulation.
But on the domestic front, the US and China are very tough.
Just weeks ago, US white-collar crime busters charged the US$14 billion hedge fund SAC Capital - once billed as one of the most successful money-making organisations ever created - with insider trading.
This is part of the US government's ongoing efforts to weed out illicit trades on Wall Street that rely on tips obtained illegally to make a profit. More than 70 culprits have been convicted or have pleaded guilty.
It may come as a surprise that China is getting tough on securities fraud as well, considering the laissez-faire attitude it has long adopted towards the errant bosses accused of misappropriating assets in firms which they listed overseas.
In a move that received scant attention outside China, Chinese regulators recently fined top broking house Everbright Securities a record 523 million yuan ($85 million) for trading improprieties.
They also banned four of its employees, including Xu Haoming, the firm's president since 2005, from China's securities market for life and barred Everbright from proprietary trading in the stock and futures markets.
Everbright had made a massive trading error by erroneously placing a buy order for three billion shares, instead of 30 million shares, and the sudden surge in demand had fuelled the biggest one-day jump in the Shanghai Composite Index in years.
Instead of relaying the error to the market, its traders decided to profit from it by "shorting" stock index funds and the underlying futures contracts linked to them, betting that the market would fall, which it did, when the mistake was announced.
The punishment meted out by the Chinese regulators was so draconian that it led the Financial Times to say it was the equivalent of banning a banking titan like JPMorgan boss Jamie Dimon from the market for life for the multibillion-dollar "London whale" trading losses made by the US banking giant last year.
Still, unless the US Securities and Exchange Commission and its Chinese counterpart, the China Securities Regulatory Commission (CSRC), can get their act together and take more action to fight cross-border securities fraud, the victories they enjoy on the home front may sound a tad hollow.
Indeed, there may be signs of a breakthrough. In July, Chinese media reported that the CSRC said it was ready to turn over the audit papers of a US-listed Chinese firm, under investigation for accounting fraud, to US regulators. This was after stonewalling their request for two years.
The tentative efforts made by the two regulators to share information raise hopes that these efforts will snowball into something more concrete benefiting other markets as well.
A CSRC spokesman was quoted as urging overseas regulators to punish ill-intentioned short-sellers and protect the interests of overseas-listed Chinese companies and their shareholders.
This seems like tacit acknowledgement of the woes suffered by well-run Chinese companies, listed outside China, which become the victims of marauding short-sellers after finding themselves tarred with the sins of those actually committing fraud.
Take Fujian vegetable seller China Minzhong, the S-chip which fell victim to vicious short-selling two weeks ago. Any reasonable investor should have realised that major shareholder Indofood would have done its due diligence before buying a big chunk of the firm six months ago.
However, the mistrust in S-chips is so profound that US short-seller Glaucus Global Research was able to engineer a crash in its share price with a scurrilous report. As if to show Glaucus how wrong it was, Indofood offered to buy up China Minzhong at a price higher than the level at which it was trading when it was attacked.
In some ways, it resembles the sort of rough justice meted out in a cowboy movie - a far from satisfactory arrangement. Surely, there is more that regulators can do to cooperate across borders to bring wrongdoers to justice.