The decision of the Securities and Exchange Commission (SEC) to reverse its earlier decision that revoked the license and registration of Venture Securities Inc. as broker dealer is viewed by most stockbrokers as a vindication of their profession.
In a chat over lunch, Eagle Securities President Joey Roxas and company consultant Den Somera told BusinessWise that the decision exonerates the industry from malfeasance committed by investors who are in cahoots with some industry employees. These lawbreaking investors engage in creative tactics that deceitfully go under the radar, and often go off the hook, while laughing all the way to the bank. They vanish into thin air, far from the reach of the media and the long arm of the law.
The scam, which the Philippine Stock Exchange (PSE) describes as the “worst-ever to hit a brokerage house,” is about two companies: the 50-year-old R&L Investments Inc. and Venture Securities Inc. They were heaved into the duplicitous schemes implemented by R&L employee Marlo Moron, and Venture client Julieto Sulapas. The two contrived to make money out of EQ trades, a platform used for transferring shares between brokerage houses.
This platform allows clients to transfer their shares between brokerage houses where they have existing accounts, provided that the shares to be transferred from one brokerage house to another are under the same name. Moron stole the shares of R&L clients, transferred them to Sulapas who in turn instructed Venture to sell them. This went on for seven years, without anyone from both the regulatory arms of the SEC and PSE noticing. This resulted in P1.13 billion worth of client shares in R&L being transferred to Sulapas’s Venture account, using EQ trades stashed by Moron between 2012 and 2019.
The scam was uncovered in November 2019, when at the end of one trading day, R&L failed to account for P3 million worth of its client stocks. A thorough pencil-pushing shocked the company. Its entire inventory was wiped out, resulting in the loss of P700-million worth of client shares. The enormous loss weakened R&L’s cash position so much so that it was not able meet the demands of its clients for the delivery of securities and payment of sales proceeds.
On June 11, the SEC revoked R&L’s license. The firm and its key officers were slapped with P25 million in penalties. The SEC’s special hearing panel (SHP) found R&L President Joseph Lee, nominee and treasurer Lucy Linda Lee, and associated person Jonathan Lee liable. It also found Moron and Sulapas answerable for engaging in fraudulent transactions and violating the Securities Regulation Code (SRC).
Venture, on the other hand, was stripped of its broker-dealer license and slapped with penalties totaling P32 million by the SHP for its role in the fraud that led to R&L’s collapse. In its June 11 decision, the panel cited acts and omissions on the part of Venture and its officers that “indispensably contributed to, if they had not been the proximate cause of, the losses incurred by the clients of R&L.”
In a March 29, 2022 Resolution, the SHP overturned the decision to revoke Venture’s license and registration as broker dealer. The SHP found that Venture did not act in bad faith. The ruling is consistent with the finding of the SEC’s Investigation and Review Committee (IRC), which filed the charges against Venture. In its August 17, 2020 Final Investigation Report, the IRC determined, among others, that it did not find sufficient evidence that Venture committed acts tantamount to fraud under Section 26 of the SRC, noting the adequate supervisory control procedures the company had in place to enforce all applicable SEC rules and securities regulations.
BusinessWise tried but failed to get an update on the case of R&L.
All efforts must now be focused on the immediate arrest of Moron and Sulapas to answer for the massive fraud, Roxas and Somera said. The government should show its teeth, while the PSE and the SEC should sharpen their fraud monitoring—no matter how difficult the task is—to avoid copycats from sprouting.
Personally, I believe that greed drives wily people to engage in get-rich-quick-schemes that must be nipped in the bud. It is unfortunate that financial frauds keep rocking the equities market. In 2016, Jose Peñaflor, a PSE employee and veteran trader, managed to steal P100 million from clients he duped into thinking they would be investing in legitimate stocks.
In August last year, 22 years after the stock market was stunned by the biggest scandal in its history, Johnny Yap of Solar Securities was convicted for illegal trades linked to the 1999 stock price manipulation scam involving BW Resources Corp. For causing a mind-boggling 1,462-percent surge in the share price of BW in just one year, Yap was sent to prison for 14 years by the Pasig City Regional Trial Court (RTC) and ordered to pay a fine of P1 million.
The challenge lies in exploring the best ways for regulators to cope with, if not totally halt in its track, the rapid mutation of illegal money-making schemes.
Moron, who started out as an R&L clerk, gained the trust of Lucy Lee who taught him the ropes. Soon, he obtained viewing access to R&L’s back-office system, and eventually all the shareholdings and business partner portfolio reports of the company’s clients.
The penalties slapped on R&L and Venture are harsh and cruel. R&L had to make huge financial amends by selling real estate and other personal assets to cover the stolen shares of its clients. Worse, the scandal proved too much for Lucy Lee to bear. She died, her family said, heartbroken from the stress of witnessing how the scandal caused the collapse of their half-a-century-old family business founded by patriarch Rene Lee who died in December 2017.
Venture has always maintained that it was also a victim of the scam. Among its arguments—which I believe the SEC found credible—is that Venture had no prior knowledge of and active participation in the fraud. The company alleged that the scam was committed exclusively within R&L and that the penalties and fines were “disproportionate and not commensurate to the infractions and lapses committed, if any, by Venture.” Venture added that the SHP ignored the Consolidated Scale of Fines as indicated in SEC Memorandum Circular 6, Series of 2005, under which the highest penalty is P100,000 and reprimand/warning for each of the cited violations.
For comments, suggestions, e-mail me at mvala.v@gmail.com