The $2 billion wipe-out

Two local brokerage firms are under investigation after a massive attempt to illegally influence the value of shares on Dubai’s stock market. David Robinson, Richard Agnew and Rhys Jones report.

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By  Richard Agnew, Rhys Jones, David Robinson Published  September 4, 2005

The $2 billion wipe-out|~|30-34-Feature-Pic-Cover-200.jpg|~|TARGETED: Two investors attempted to illegally influence share prices. |~|Dubai’s bullish financial markets were shaken to the core last week after it was discovered that US$2 billion worth of trading had to be wiped out because of a fake deal scandal. The shock move was revealed after an entire month’s worth of share dealing was ploughed into one company in a single day. Financial regulators have launched a high-level inquiry to investigate the actions of two well-known local investors, who are alleged to be behind the manipulation of the Dubai Islamic Bank shares. They rose 7.4% on Sunday, August 28, with the trades accounting for 84% of the day’s total turnover on the Dubai Financial Market (DFM). Authorities from DFM and the Emirates Securities and Commodities Authority (ESCA), the UAE’s financial regulator, said it would name those suspected of directing the audacious raid on the market after completing their inquiry this week. The offenders — reportedly from large institutional brokers, and one already named as Al Sharhan Stock Centre — allegedly placed huge orders, triggering smaller investors to start buying the stock. “The two investors hiked up the prices,” said one Dubai-based analyst. “They colluded by buying early and then they sold late. Everyone in the industry knows who the two brokerage firms involved are.” When approached by Arabian Business, the two brokerage houses at the centre of the controversy refused to comment. Analysts also acknowledged the market’s swift reaction on Sunday evening and welcomed the official probe as evidence of a tough regulatory approach. “It was an excellent decision taken by the exchange,” said another Dubai-based investor. “It proves there’s a watchdog in the market that’s protecting the exchange,” he added. Financial market chiefs were alerted to the plot after examining trading records and finding that US$2.6 billion had been traded in the bank’s stock in just three hours. It was immediately clear that an attempt had been made to manipulate the shares’ value. Their suspicions were confirmed when it emerged that unfounded rumours had been spread that the bank was planning another rights issue. The regulators found that two investors seeking to create a run on the bank’s share price had conducted most of the trades. “Necessary measures are underway against the violating parties and brokerage companies concerned,” DFM said in a statement. “The DFM management studied the unusual trading movement on Dubai Islamic Bank’s shares on August 28, 2005 and came to the conclusion that the majority of trades on the shares of the said bank were made by two investors, who concluded corresponding and fake deals in huge quantities to affect the bank’s share price upward and downward in a bid to make fast profits. This, however, caused utmost harm to the other dealers in the market, who had no role to play in those trades.” Another local analyst, who did not wish to be named, said he was “shocked” at the plot’s planning and scale. “People try to do these things all the time, but they don’t have the volume to impact the market. You need a lot of liquidity. You saw what the trades were worth — not anybody could do this. This was clearly planned for months — it was like a military operation.” Dubai Islamic Bank is one of the jewels in the crown of the emirate’s financial community. It has managed the funding for huge developmental projects in the UAE, including a world record US$1 billion Islamic bond to support the expansion of Dubai International Airport. It also managed US$350 million of financing for property developer, Nakheel to be used for blue-chip construction projects such as the emirate’s Palm islands. Last year, it recorded profits of US$277 million compared to US$204 million for 2003. On August 28, an incredible 268.23 million DIB shares were traded in 7844 deals, which recorded a record turnover of US$2.6 billion and drove the stock to a record high of AED34.85 (US$9.50). The previous day, 143.7 million DIB shares were sold in 6292 deals, fetching US$1.27 billion — however, these share trades have so far been allowed to stand. David Webb, a former investment banker, said the trades on August 28 represented a huge figure and were equivalent to one day’s turnover on the entire Hong Kong stock market — one of the biggest and most important exchanges in the world. He said: “Market manipulation remains a problem all over the world, including Hong Kong, where there are still fairly frequent convictions for manipulating stock prices. Any established market should have supervision systems in place whereby its regulator can obtain brokerage records fairly quickly and identify all buyers and sellers of stocks.” Ahmed Al Sirkal, a senior manager at Dubai Islamic Bank, said he was certain no one connected with the bank was responsible for the share manipulation, adding: “We’re confident that the incident will not affect the bank”. He declined to be drawn on why the two people under investigation had chosen to ramp up its shares. “Again, I don’t want to speculate. You understand that an investigation has commenced that is looking into the matter. As a result we cannot comment further.” However, an official statement from the bank said it is evaluating the “moral and financial damage that might be caused to the bank as a result of certain trades that took place in its stock on 28 August 2005 on the Dubai Financial Market”. “The bank’s legal department is studying the prospect of taking legal action against the investors or any other party that were involved in the trades,” said Mohamed Khalfan Bin Khirbash, chairman of Dubai Islamic Bank and the UAE minister of state for finance and industry. “The DFM was constantly notifying DIB’s management of the trades that took place on August 28, 2005 on the Dubai Financial Market. We denounce such practices made by traders and endorse the resolution taken by DFM and Emirates Securities and Commodities Authority. We also thank DFM’s management for its immediate and fair intervention,” he added. One analyst said DFM’s decision to cancel the day’s trades showed a “more humane” approach than other financial centres. “It would not have been cancelled in the United States — the two investors would have been heavily fined, probably imprisoned and the brokerage firms would have been suspended. Those investors who lost out would not be refunded in the US, they would have to take civil action against the people involved. Here in the UAE, the situation is far more humane and the market is likely to refund cash to those who were harmed — it is more humane because the market is not as advanced as somewhere such as the US,” he said. Other market experts described the reaction of DFM regulators as exemplary, but said that swift action was needed to prevent investor confidence being undermined. “If these types of practices are allowed to go unchecked, they can certainly undermine confidence in the market,” said Shailesh Dash, an analyst at Global Investment House in Kuwait. “The authorities appear to have acted quickly and that is a good thing, especially at a time when a lot of international investors are taking an interest in the Dubai market and in markets across the Gulf.” The case comes at a time of huge trading in shares on the Dubai stock market, which attracted US$55.2 billion in the first seven months of 2005, compared with US$13.8 billion for the whole of last year. It also comes at a crucial time for the emirate’s financial community, with Dubai’s new International Financial Exchange (DIFX) set to open on September 22. The market, which will be overseen by Dubai’s Financial Services Authority (DFSA), sought to reassure investors that its systems would spot and act upon suspicious trading. “If you have a situation where there is an unusual pattern of trading in a particular security, or an unusual body of trading, then we have surveillance systems that are designed to notice that,” Mark Fisher, head of corporate communications at DIFX, told Arabian Business. “Through them we can order suspension of trading and these systems are designed to catch things rapidly — not the next day. I would hesitate to say that it would be immediate. There things are called threshold circuit breakers, so that if a price of a share goes up by a certain percentage because of one trade, there can be a cooling off period when trading is banned and it enables us to investigate what is going on.” He added: “Our regulation is extremely robust and in line with international standards. We have listing rules which govern the behaviour of listers and rules that govern the behaviour of brokers. Our regulation ensures that trading is fair and the market is informed. Examples of where the market is not informed are insider trading and false and misleading trading, and in those cases the system will identify abnormal movements in trading.” However, one analyst said that Dubai may have been seen as a target because it is still in its infancy. “These sort of things are always based on rumours,” said Antoine-Audion Maggiar, a corporate lawyer at UK firm, Slaughter and May. “It still occasionally happens in sophisticated markets, but it’s less because of the regulations in place at all levels. There is nothing you can do except have specific regulations to stop people from manipulating the share price by having people make some compulsory declarations, when you get over certain thresholds which can be anything from 5% or less than that in certain companies.” Maggiar said other measures that could be introduced include clarifying what the intentions of the companies are. For example, when they reach a certain percentage of ownership firms would be forced to make bids public. Over the last 10 years, markets like London or Paris have introduced more and more stringent regulations in order to avoid share price manipulation at both national and European levels. Severe penalties for share manipulation have also been introduced — such as the lifetime bans handed out in 1999 to ‘The Flaming Ferraris’, a group including the son of UK politician Jeffrey Archer, following allegations of illegal trading to manipulate the Swedish stock market. “The concern is to try and protect the public rather than sophisticated investors who should be better informed,” Maggiar said. “When you are placing shares with sophisticated investors you don’t have to declare as much because they’re supposed to have sufficient knowledge. The regulations are there to protect the public.” Abdullah Al Turafi, executive director of ESCA, said those behind the raid on DFM would receive a similar sentence. “We will investigate the DIB case and a few other cases of alleged insider trading and price rigging which have been brought to our notice. Any violation of market regulations and trading practices will be dealt with strictly and the perpetrators will be punished according to the provisions of the law. People who took part in the manipulation or took advantage of the manipulations in the market will be completely stopped from trading in the financial markets.” ||**||

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