Saturday, February 24, 2018

Get it right and go, Ms Alfonso


Mark Fraser

 Two wrongs do not make a right. With Philip Rahaman gone from First Citizens, several issues remain. From the outset, First Citizens’s board chairperson Nyree Alfonso should have known that the Rahaman share purchase and sale exposed some undesirable consequences of the bank’s Initial Public Offering (IPO). Without the safeguards of an Employee Share Ownership Plan (ESOP), and customary limits on the quantity an employee could acquire and restrictions on resale, the opportunity for fronting and profiteering were created. It is likely that the bank had evidence of that possibility as early as mid-January 2014. It did nothing. Instead, Ms Alfonso offered two premature, uninformed, and incorrect opinions in defence of the purchase. She was so wrong on both occasions that her continued leadership of the First Citizens board cannot be right.

With no safeguards, an undersubscribed employee allocation, and a heavily oversubscribed public allocation the First Citizens IPO provided the perfect conditions for fronting and profiteering. The purchase by one employee of more than 260 times the First Citizens employee average, the 91 per cent rise in the share price, and the sale of 96 per cent of the shares at a tax-free profit, ran counter to the underlying philosophy and public policy considerations of employee share allocations, even those at market prices when share offerings are over-subscribed in multiples like the First Citizens offering. This little bit of data, said to be available to First Citizens in mid-January should have grabbed Ms Alfonso’s attention and conditioned her statements, but it did not.  

In her first statement in mid-February, weeks after Rahaman’s sale of 634,588 of the 659,588 shares purchased, Ms Alfonso declared the purchase of the shares as perfectly legitimate, breaching no part of the allocation policy, no regulations of the Securities and Exchange Commission, no Stock Exchange regulations, and no internal policies or procedure of the bank. Ms Alfonso was not addressing the sale of the shares, but at that stage First Citizens’s CEO had already developed concerns about the compliance with the internal requirements for the purchase and he likely knew about the sale. Ms Alfonso’s statement suggests a complete lack of appreciation of the minefields set by the purchase and sale.  

One month before Minister Howai announced the full review of the transaction, First Citizens had sufficient reason for discomfort. Asha Javeed’s Sunday Express article detailing Rahaman’s purchase and sale of the shares raises the prospect that by mid-January, an e-mail exchange involving First Citizens’s CEO and Rahaman lay the foundation for a possible finding that Rahaman did not meet the internal rules for the purchase. With the bank sufficiently concerned about the purchase at that time, the knowledge of the sale of 96 per cent of the shares should have led to an urgent and immediate review of the entire transaction. If Ms Javeed’s timeline is correct the fundamental failure of the bank in mid-January to have the sale disclosed to the regulator and a full investigation launched points to a wider problem that, without denials, may ensnare the bank’s executive and its board. 

It is ironic that Javeed’s article quotes Ms Alfonso as saying she, “preferred to wait until the PWC report was completed and presented”, before further comment on the matter. Howai’s announcement of the full review should have been the bank’s cue to remain silent in deference to the process. But, Ms Alfonso had other ideas. She was confident there were no breaches of regulations, policies or procedures: “I am so confident that I am willing to take a deep dive into the process. The bank has nothing to hide in terms of how this process was run. I will stake my confidence in the way the bank ran the process, which was transparent, fair and unassailable”. How, without a full examination of the transaction, could Ms Alfonso, a senior lawyer, pronounce on the matter? Was Ms Alfonso even aware of Mr Rahman’s sale to his relatives of 634,588 of the shares purchased, at a paper profit of about $12.78 million, to go along with a tax-free dividend of $780,000? On the face of it Mr Rahaman’s purchase of the shares was in line with the prospectus issued by First Citizens, but that was not the end of the story if you took the time to review the facts and circumstances, except that the bank’s chairperson was not prepared to wait that long.   

If Rahaman’s share purchase and sale was known to the bank since mid-January 2014, questions arise. If the bank’s executive and its board of directors were examining the information then available to recognise that in the sequence a series of red flags were present and the dealings likely breached bank policy and the law, Minister Howai’s intervention could have been unnecessary. At a minimum, the moment the bank became aware of the purchase and sale, the prospect that Rahaman fronted for other purchasers should have been at the forefront of the bank’s mind, and nothing could then be said in defence of the purchase without being fully apprised of the facts and circumstances. The failure to be fully apprised before offering two defences stands in the way of Ms Alfonso.  

Rahaman’s purchase, sale, and possible profit caught the eye, but this was within the rules of the share offering once the process and rules were fully complied with. There were policy gaps in the prospectus issued by First Citizens and these created the opportunity for the controversy. Before another IPO is issued for State-owned companies those holes should be plugged, including the unrestricted ability of employee shareholders to freely trade stock gained through a preferential employee-purchase arrangement. 

In the interim, First Citizens needs a reset and with two terribly wrong pronouncements on the now maligned Rahaman share purchase and sale, the bank’s chairperson needs to get it right by resigning.  

• Clarence Rambharat is a lawyer and a university lecturer