Nairametrics| Last week, the Nigerian capital markets was rocked with yet another scandal. A stockbroker, Mr Victor Ogiemwonyi was arraigned before a Federal High Court sitting in Lagos and remanded in Ikoyi prison.
Mr Ogiemwonyi is the founder and MD of Partnership Securities Limited, a stockbroking firm on the Nigerian Stock Exchange. His firm has been accused of allegedly fraudulently selling shares belonging to his clients and misappropriating the proceeds. The amount involved in the alleged fraud is about N 1,237,245,000 and US$80,000.00
Prominent victims of the alleged scheme include Mr Godwin Anono Chairman Standard Shareholders Association of Nigeria and Mr Arnold Ekpe former Managing Director of Ecobank Transnational Incorporated (ETI).
Some of the defrauded investors yesterday revealed that over 300 investors of Partnership Investment Company Plc (PIC) were swindled of over N4.8 billion.
In an email statement sent to Nairametrics, the Nigerian Stock Exchange (NSE) attempted to absolve itself from any lack of oversight, explaining that it had performed its role as regulator in the matter. You can find the statement by the NSE below;
Considering that the case is already in court, it might be prejudice to start to comment or speculate about what might or may not have happened. However, it is riveting to know that Mr Ogiemwonyi was a former council member of the NSE, revealing just how rotten things in Nigeria’s capital market. Just how do we end up having people who break the rules make the rules.
Anyway, there are a few lessons to be learnt from this case and what the NSE can do to reduce or even avoid the frequent occurrence of such a case.
Not the first time
This is not the first time and perhaps not the last that we will hear reported cases of misappropriation of funds by stockbrokers. Some of them have often been accused of selling shares of their clients without authorization only to claim that an investigation will be launched or in some clear cases where they are caught red-handed, attempt to settle out of the public limelight with their victims. We have also heard cases where dividend payments do not hit the account of investors only to be discovered to have been diverted by stockbrokers. Some of these allegations are not proven but they exist. The Nigerian Stock Exchange is well aware of some of these issues but hasn’t done enough to rein in on suspected market operators.
What should the NSE do?
The Nigerian stock exchange has introduced several measures over the years geared towards curbing market infractions. A notable one is the separation of client accounts from brokerage accounts. This approach has been very effective on the average but there isn’t enough transparency about how it is being operated by market operators.
For example, who are the signatories to the so-called clients account and brokerage accounts? Are they the same signatories? How are retail investors sure that dealing members do not occasionally use the funds in the client accounts for the company’s use especially when it faces liquidity challenges? To address these issues, we propose the following;
Introduce a custodian
Just like it is being operated in the Pension industry, the Nigerian Stock Exchange should introduce a Fund Custodian. The fund custodian will have the responsibility of accepting deposit for purchase on behalf of investors. Investors will then appoint their preferred stockbrokers who will then be matched to the Fund Custodians. This will provide the much-needed separation of responsibilities between the dealing members (stockbrokers) and the custodians. While the stockbrokers will be charged with buying and selling stocks on behalf of clients, the custodians will be responsible for accepting deposits on behalf of clients or brokers (in the event that stocks are sold). They will also disburse to brokers upon receipt of instruction from clients and also ensure withdrawal of funds by investors from their accounts. This will ensure that there is transparency in the entire client-dealer-market value chain.
The Nigerian Stock Exchange also needs to introduce a rating scheme for stockbrokers. Rating agencies can be brought in to help rate stockbrokers based on criteria such as their service delivery, volume and value of deals being executed, speed at which deals are being executed, and the usability of their online dealing platforms. This will give retail investors a level comfort and visibility on dealing members helping separate the wheat from chaff. There is currently no recognizable independent rating arrangement for dealing members in Nigeria.
Publish results of dealing members
It is quite surprising that dealing members are not subjected to the same level of scrutiny that quoted companies are subjected to. We believe that by now the regulators should at least demand that dealing members are audited at least twice a year. They should also insist that dealing members send their quarterly results to the Nigerian stock exchange while making public their audited accounts at the end of the financial year. This will at least help provide some transparency into how some of these firms operate and will quickly show retail investors which ones have liquidity crisis. It is more likely that retail investors will avoid dealing members who do not keep proper financial records.
Improve level of research service
Dealing members should also be encouraged to perform more research of quoted companies and share with their clients. Whilst some of the leading stockbrokers perform this function, it cannot be said of smaller dealing firms. Currently, most retail investors do not get enough research or financial information about the stocks that they are buying leaving them to only resort to personal research or rely on blogs like Nairametrics and Proshare. Stockbrokers cannot only enjoy fees earned when investors buy and sell. They should be made to justify these fees by giving their investors regular research updates.