A proud Trading tradition

Last month EXECUTIVE reported on the unusual performance of Solidere shares, which surged in value after three months. How ready is the BSE to deal with a culture of insider trading?

I taught you value of information and how to get it,” yelled Gordon Gecco (Michael Douglas) to Bud Fox (Charlie Sheen) in the iconic 1980s movie Wall Street. Those few words constitute the whole vortex around which the movie is predicated. And while insider trading is a major felony in developed securities markets, it is an open practice in Lebanon.

In fact, insider trading is not illegal Lebanon. No law exists to prohibit people benefiting from privileged information – good or bad – before it hits the markets, only one which prohibits price manipulation (a practice not necessarily based on leaked information but on an artificial shake-up of any given market, usually by a sudden buy-up of stock).

The American financier Ivan Boesky, and our very own Samir Trabulsi (involved in the Pechiney Affair in which the French government was found guilty of insider trading and which led to the suicide of the then French finance minister Pierre Bérégovoy), have all fallen foul of the laws that control insider trading and spent time in jail for their crimes. Corporations have also been guilty. One only has to look at Enron, Parmalat and Martha Stewart’s empire to see the impact of greed and its consequences.

However, in Lebanon the absence of a law has made insider trading something of a gentleman’s sport, with those in the know seeking to outdo rivals with the quality of their ill-gotten intelligence (it was not unknown for highly-placed traders on the BSE to work with the CEO’s and chairmen of corporate Lebanon to create market movement by the dissemination of false information). Today many of these advisors (well-known personalities, still working in the financial markets and who have been exposed in the pages of Executive) serve as the country’s leading corporate chiefs, and continue working to corrupt the markets. Insider trading has become a de-facto profession.

In 2002, Freddy Baz, advisor to the chairman at Banque Audi, announced to the press that one of the major factors behind the failure of merger talks between Banque Audi and Banque Libano-Francaise at the time was that news of the merger was leaked to the market, and the resulting movement in the stock price complicated valuation issues for the merger, and ultimately contributed to its failure.

This year, mutterings about the performance of Solidere stock suggest that the insider trading genie might have been let out of its lamp once again. No illegal activity has so far been proven, but what was unusual was that the extraordinary price hike went uninvestigated by most local media and did not, publicly at least, raise any eyebrows from the various watchdogs at the central bank and BSE.

These two institutions, along with their counterparts at the Association of Banks in Lebanon, have been trying for years to monitor market activity and enforce securities regulations. A significant effort was made in 2001 and 2002, whereby certain guidelines to deter insider trading were established. One stipulated that any trading in listed stocks of Lebanese banks by all parties related to a bank (employees and their relatives), required getting prior approval of the bank itself. However, this a token gesture of regulation and there today exists no strong, real regulatory body that enjoys the necessary judicial or legal authority to investigate possible cases of insider trading. And while there was no evidence of financial hanky panky with the Solidere shares (although the almost 100% rise in the company’s stock price in a period of less than three months would have raised red flags on major exchanges in Europe or the US), the incident should act as a wake up call, especially if the BSE wants to present a cleaner image to investors and generate higher volumes.

So what did happen? Solidere stocks “A” and “B” are the most commonly traded securities on the Beirut Stock Exchange, and are most likely to fall prey to foul play. It is common knowledge that Solidere, although arguably the most active on the Beirut Stock Exchange, has seen minimal price movements and trivial volumes both by regional and international standards. Solidere “A,” the most active stock of the company, traded in the range of $4 to $5.25 from mid-April 2002 all the way to mid-April 2004. During that time, the average weekly volume on the Solidere “A” stock was nearly 135,000 shares. Excluding two block trades in early 2003, the average weekly volume did not exceed 87,000 shares.

The first sign of a breakout in the stock price occurred in the week of March 12, 2004, when the volume on the Solidere “A” stock leapt to more than 268,000 shares for the week. Volumes rose to more than 443,000 per week two weeks later, and managed to sustain high levels throughout April, May and June. During that time, average weekly volumes on the stock rose to 239,406 shares. In tandem, the price of the Solidere “A” stock jumped from under $5 in March 2004, to top the $8.25 mark during the first week of June, and to subsequently stabilize just under the $8 level.

By all accounts it was the GDR market in London that picked up first, and then came the orders out of the Gulf, 50,000 at a time, via US investment banks. Liquidity was low and so the orders had to be “worked.” This wasn’t difficult. As much as there were investors, flush from having made money in 2003, there were holders of Solidere stock willing to sell.

On international markets, or even the less liquid regional ones, price spikes accompanied with increased trading volumes is not that uncommon, and do not necessarily indicate any foul play. In many cases, such market developments are due to certain announcements or news hitting the market and becoming public knowledge, and it is this that draws a fine line between efficiency in the market and illegal market behavior.

Prior knowledge of Solidere’s new sales strategy, announced in June, undoubtedly triggered the sudden shopping spree. The offer invited share holders to use their stock as down payment for land for which they would receive a 15% discount. For its part, Solidere would cancel all bought back stock, reducing the number of shares on the market in an attempt to boost the market price.

No one at Solidere was available for comment, but chairman Nasser Chamaa told Executive in a July interview that, despite Beirut’s reputation for being a city where insider trading and conflicts of interest between ownership and management are common, Solidere ran a tight ship.

“I believe our internal procedures are working as far as confidentiality and transparency are concerned,” Chamaa said. “We have shareholders all over the world. We have to ensure that we are not only playing by the rules in this country but by global standards.”

In spite of these assurances, it is hard to imagine that key information was not leaked. BSE chairman, Fadi Khalaf was not available for comment. His secretary confirmed that he would not be talking to the press on any issue until further notice.

Was it an inside leak? Anyone wanting to ignite a buying spree could do so knowing that it could be easily explained, despite the fact that Solidere had made no dramatic announcements. The share price was low, arguably a good buy for speculators hoping for increased confidence in Lebanese real estate during the summer. Information could have been leaked to investors in the Gulf and it could have started from there.

According to Walid Hayeck, Investment Banking Manager at the Beirut-based Arab Finance Corporation (AFC): “some people had this information” prior to the official announcement. To Hayeck, while “insider trading” may not have been involved, some people were aware of the upcoming revelations, and managed to profit from that. Jean Riachi, from Financial Funds Advisors, concurs, stating that the developments were most likely due to inefficiencies in the market, where only some people held the information before it became public.

A senior executive at one major investment bank in Lebanon prefers to call a spade a spade, stating that however you dress it up, people acted on information that was not yet public and broke the rules. “The movement in the share price was quite strange, and there appears to have been insider trading, which is not surprising.”

Nassib Ghobril, head of research at Saradar Investment House put it bluntly: “We need a body like the SEC (Securities Exchange Commission) to raise confidence and transparency in the market,” he said, adding that such a strong regulatory body does not only help avoid, detect and investigate irregularities in stock trades, but it would be able to accomplish significant improvements in the market’s activities, just as it has in developed markets.

Another analyst at a major local financial institution reiterated Ghobril’s comments, but did not hold out much hope for such a body being created in the near future. Just as the developments in the Solidere share price and volumes went virtually unnoticed over the past few months, obvious reforms are being held up because “some people don’t want [the BSE] or others to succeed, because success would look good on the resume of a political opponent,” he said obviously referring to the upcoming elections that will dominate Lebanon during the next year.

Riachi agrees on the necessity of creating a strong regulatory body, but does not think that this would be enough. He pointed to the need to educate the market to better understand market dynamics, the dissemination of public information, and the circumstances under which one is allowed to trade on such information.

Hayeck, from AFC, also cast light on a whole new aspect to the problem, calling for the urgent division between different entities within or between corporations, so that information that is privileged is not shared or disseminated haphazardly and discriminately. “There needs to be a Chinese wall between corporate finance and capital markets, for example,” he said.

The Solidere “incident” reflected the structural problems that are embedded in the Lebanese capital markets in general and the BSE in particular. The irregularities in trading can affect any stock on the exchange. “There is a general problem in the marketplace that is not specific just to Solidere,” said Hayeck.

If nothing is done the virus will spread. Insider trading is against the very philosophy of economic prosperity and the development of the BSE as a credible financial hub. But what is to be done? “Who will protect the market in the absence of a strong law,” asked one trader, adding, “I am sure that [President] Lahoud does not want this and I am certain that [Prime Minister] Hariri, who travels the world selling the financial strengths of Lebanon and who has a stake in Solidere, cannot be happy with these allegations.”

We may never know precisely what drove the Solidere stock between March and June. If there was a leak or leaks, we will never know who was behind them. What is known is that at least $20 million in cumulative profit was made and that questions are being asked. In the presence of any doubt, the buck stops with the boss, whether anything shady did or didn’t happen and whether he did or didn’t know about it. He could do the honorable thing, but then again, honor and conscience are in short supply these days.