Stock market at the crossroads - My Viewpoint

There are no two ways about this. The Securities and Exchange Commission and the Philippine Stock Exchange must come clean with a full, unedited, unembellished report about what really happened in those BW Resource Corporation transactions. If either the SEC or the PSE is seen as being an accomplice to a cover-up or a whitewash, the stock market in this country will be written off internationally as a den of thieves, insider traders and manipulators. It is already the region's laggard at a time when other bourses are flying high. It is in grave danger of a structural collapse, from which recovery will, at best, be uncertain.

The rumors flying about are damaging to the stock exchange. Some newspapers have reported that the gods of the exchange have been having protracted, stormy meetings over the issue of just how comprehensive and "explosive" the report should be. The impression one gets is that these traders either do not grasp, or have no respect for, the fundamental philosophy of the anti-fraud provisions of the Securities laws of this country which is full disclosure. Thus, what the public expects is not some half-assed, namby-pamby, wishy-washy, "rationing" of the results of the investigation but, I repeat, full disclosure.

The reason for the PSE leadership's evidently limp-wristed attitude about this BW investigation is painfully, excruciatingly obvious. At least seven ostensibly de kalidad stock brokers were heavily involved in BW transactions. There are interlocking relationships all over the place, among buyers, sellers, brokers and, most distressingly, even some governors of the exchange. Early leaks have it that anywhere from six to eight stock brokerage firms were found to have participated in the manipulation of BW stock. The stock flew from about P2 to P107 in less than ten months last year, and then plummeted precipitously all the way to about P7 last week.

In the process, some pretty novel tactics were adopted by persons associated with BW Resources who traded in their own stock. The PSE investigation reportedly uncovered practices such as "private placements" and "buy-back" arrangements which were, in effect, sophisticated kiting schemes. Through these schemes, sellers would be able to get cash immediately based on an agreed price which was generally lower than the market price. The same shares would then be sold to another broker to obtain the funds to pay off the first broker, but the second broker's arrangement would essentially be the same as the first broker except for the agreed price which would reflect market movements of the stock. The more brokers you add to the chain, the longer final settlement is up in the air, like a kite. Hence, the "kiting."

This type of activity also misrepresents the real market value of the share since the emphasis is on the movement back and forth of the shares between buyers and sellers and, of course, the increasing prices at which the transactions are occurring. It's a species of "churning" the market, engaged in not so much by legitimate buyers and sellers -- i.e., institutional and ordinary investors but by stockbrokers and dealers who profit from a high level of activity in the marketplace. This churning is aggravated by "wash sales," where no real changes in ownership take place but where a market player acts both as buyer or seller either personally or through nominees. The PSE apparently saw substantial evidence of such wash sales.

The PSE is allegedly concerned about unfairly tainting innocent brokers whose names have been dragged into the controversy. This makes no sense. If those brokers' participation was innocent and above board, then the PSE investigation report should say so. If the evidence is inconclusive, say so. If the practices utilized in the transactions, such as private placements and buy-back arrangements, were legitimate business tactics, then say so. But the PSE must be prepared to defend its positions against knowledgeable critics who won't just swallow the PSE's explanations hook, line and sinker. The only thing the PSE has done by its procrastination is to validate the perception that this is an old boys' club trying to protect some of its own.

The stock market is clearly at the crossroads. Whether it will survive this test will depend on which path it travels on -- the path of full disclosure or the path of stonewalling.