Thursday, December 14, 2017

Was it wrong?

Dana Seetahal logo46

Mark Fraser

 Questions have been raised as to whether there have been breaches of the law in the purchase and subsequent sale of the bulk of 659,588 First Citizens shares by the bank’s chief risk officer. The shares were first offered for sale from July 15, 2013 until August 9, 2013. Trading in the shares was to commence on September 16.

An advertisement on First Citizens’ website headed “Basis of Allotment” claims that over 48 million ordinary shares were offered for sale at $22 per share at its Initial Public Offering. 

Of these 26.5 per cent were bought by individual investors (nationals) and 7.8 per cent by employees with the balance going to registered pension and other trust funds (25 per cent); registered mutual funds and UTC (20.7 per cent); NIB (ten per cent) and companies and the like (ten per cent). There was an over-subscription of over three times the shares offered for sale.

Interestingly, the ad further claimed any surplus of shares available from any of the investor categories (named above) were reallocated to individual investors who are nationals of T&T. 

This would suggest that, for instance, if there was a surplus in the shares initially allocated for employees those would be reallocated to individual investors.

The issue at hand is why was an employee of the bank (albeit a high-level employee) able to acquire as many as 659,588 shares in a heavily over-subscribed scenario? This is on my reckoning 1.3 per cent of the total number of shares offered.

I have heard from individual investors that they had to apply for as many as five times the number of shares—putting out funds to do so beforehand—than they were eventually allocated. Most persons knew from experience and hearsay that they would not be allocated the number of shares they applied for because of the anticipated over-subscription. In the case of Mr Rahaman he evidently did not have to go through such a process.

I have heard suggestions that there might be offences committed under the Securities Act in the transaction by Mr Rahaman and some concerns have also been expressed as to the role of Bourse Securities who brokered the transaction.

The Securities Act (2012) is said to be designed to provide protection to investors from unfair, improper or fraudulent practices and foster fair and efficient securities markets and confidence in the securities industry in Trinidad and Tobago. 

From my cursory reading of the act there appears to be very little in its provisions to meet the current situation. 

Certainly this was not a case of what may be termed “insider trading” or as specified in the act trading with knowledge of material non-public information. 

The shares were offered on the open market with a set price (although First Citizens employees benefited by a ten per cent-discount). 

It was not a situation, say, where an employee knew of some confidential beneficial transaction which would hike the price of the shares and then went out and bought a large volume of shares before they went up.

The shares were purchased, it appears, at a cost of some $14 million. Both the purchaser and the broker had to disclose the source of those funds, in compliance with our anti-money laundering regulations. 

Assuming this was done and Mr Rahaman had obtained the money from family members to purchase the shares on their behalf (since he sold them weeks after to family concerns, this is a reasonable assumption) then there was little to raise a red flag in terms of these laws.

I return therefore to my original concern. First Citizens declared in its ad (undated in its website but which logically would be around August 2013) that any surplus of shares available from any of the investor-type category were reallocated to individual investors. 

Yet newspaper reports suggest there was an under-subscription by First Citizens employees of the shares allocated to them. 

The reports also state that employees were allowed to purchase up to 5,000 shares at the employees’ discount. It is further reported that there was no limit to the number of shares an employee could purchase. Mr Rahaman, an employee, purchased over 659,000 shares.

Now there may be nothing wrong with that on first glance— once he did not go over the limit of the shares allocated for employees. But questions clearly emerge.

Was Mr Rahaman fronting for members of his family? Did he use his position to secure these shares secure in the knowledge that there was no employee limit but with full intention at all times to dispose of them in the near future? Whether he actually made a killing or not is not even so much the issue since it was effectively to family members to whom he sold. 

What is relevant is that through his position he was able to obtain for family members—or family- run firms—huge blocks of shares which they could not have obtained in the open market given the huge over-subscription by individual investors in particular.

One must ask therefore why so many shares were allocated to employees in the first place so that even with the 659,000 plus bought by Rahaman, only 50 per cent were taken up—if reports are correct. 

In my mind it all smacks of a conflict of interest particularly in a case where we are dealing with a State-owned bank.

Finally I ask, did First Citizens consider that the procedures it had in place which permitted one employee to purchase 1.3 per cent of the total number of shares offered, in a heavily oversubscribed market, ensured a fair distribution of shares to the national community?

• Dana S Seetahal is a former 

independent senator.