Fri | Dec 8, 2023

SSL branded 'problem institution' by FSC five years ago

Flagged for culture of non-compliance and mismanagement

Published:Tuesday | January 17, 2023 | 1:43 AMJovan Johnson/Senior Staff Reporter
Stocks and Securities Limited offices on Hope Road. The company was renamed from Paul Chen Young & Company in 2006.

Stocks & Securities Limited (SSL) was flagged in 2017 by staff of the Financial Services Commission (FSC) for a “culture of non-compliance and mismanagement of client funds”, a systemic concern that may alarm investors as the company now grapples with billion-dollar fraud.

The opinion is contained in an explosive eight-page report prepared by the FSC in February 2017 ahead of a meeting with SSL representatives who were trying to convince the regulators not to suspend its licence.

“A suspension of the company's dealer licence, even for a day, would inevitably lead to a total destruction of the company and destabilisation of the financial [sector],” SSL reportedly noted in the document obtained by The Gleaner.

It added that SSL has been “a problem institution”, especially concerning its financial position.

The FSC noted that for the five years and six months leading up to February 2017, the company had been operating under its directions and “has remained a problem institution” for failing to file its annual report for the period up June 30, 2016; failing to file audited accounts within 90 days of the close of a financial year; and granting credit to related parties in violation of orders issued in 2013.

The revelations are sure to raise serious questions about the FSC's oversight and efforts it took to both inform and protect the public, including sports legend Usain Bolt, from the questionable actions of the 50-year-old company.

There are also questions on whether SSL had satisfied seven conditions imposed by the FSC for the company to avert suspension in 2017.

Bolt, 36, is among more than 20 clients who are facing the loss of millions of dollars in local and United States currencies arising from the alleged fraud that the Financial Investigations Division (FID) said has stretched back at least a decade during which “questionable actions” were taken against affected accounts.

Bolt, who retired in 2017, has been doing business with SSL for 10 years.

As one of the clients with the biggest portfolios, Bolt may not have known that in November 2016, the FSC had served a notice of intention on SSL that its licence would be suspended for a litany of failures.

The FSC regulates non-deposit-taking institutions such as insurance companies, pension funds, and brokerage firms. Along with its brokerage mandate, SSL says it provides investment advisory services on private wealth management and financial planning services, with an emphasis on US-dollar exposure.

According to the FSC document, the regulators could not confirm whether many of those activities were being carried out properly, and in accordance with the law.

Part of the FSC's opinion was built on an on-site examination of SSL between June 6 and September 14, 2016, “which revealed several violations”.

Among the allegations were: unsafe and sound practices, offering unregistered securities, and incomplete requests for proposal highlighted by seven of 30 client agreement forms inspected which did not indicate risk appetite of the client.

Regarding a report on global assets under SSL's management, the FSC examiners found there were overstatements of funds reported to the FSC; inconsistencies in amounts reported for some assets; instances where assets reported on broker statements were not found on internal SSL records.

FSC staff were also unable to confirm the value of funds in clients' bank accounts as at April 30, 2016, due to “inconsistencies” between SSL internal records and reconciliation documents provided by banks.

Not all forms with clients opening SSL accounts indicated source of funds. Regulators also said they observed that SSL was engaged in a loan business contrary to the law. There was no segregation of global bonds being held for brokerage clients and SSL's internal records did not show that the securities were being held in segregation.

Statements SSL sent to clients were “deficient” as they did not clearly indicate which securities were being held in safe keeping, noted the document, which added that “several concerns arose as it pertains to the internal control environment which may [be] due to inadequate oversight or due regard to required internal procedures and controls”.

Securities refers to tradable financial instruments used to raise capital in public and private markets.

After long-awaited audited statements for the financial year ending June 30, 2016, were presented in January 2017, auditors KPMG said it did not get enough information to assess the $135m SSL declared as fees it earned from managing clients' portfolios and that deficits of $1.5 billion and other issues “indicate material uncertainty” and “may cast significant doubt” about the company's ability to continue as going concerns”.

Following the February 17, 2017, meeting between the SSL representatives and the FSC, the regulator wrote to SSL 11 days later outlining the seven conditions to be satisfied to avoid a suspension.

Three things were due by March 17, 2017: evidence on completeness, existence and accuracy of the net margins from foreign currency trades by Dolla Financial Services amounting to $12.5m as indicated in SSL's audited financial statement; evidence of the management fees earned by SSL for the year ended June 30, 2016; and evidence of the repayment of a $7.5m loan provided to a related party.

SSL was given until May 30, 2017, to provide the FSC with evidence that it rectified a shortfall between assets not accounted for on SSL's balance sheet and its liabilities.

SSL was also ordered to “immediately” cease accepting new client funds or additional funds from existing clients unless it had sufficient assets to cover the corresponding liabilities; file all financial reports within applicable timeframes and immediately refrain from granting loans to related parties.

The letter, which was signed by Laurence Crossley, the senior director for securities at FSC, said SSL's signing of the terms would supersede directions issued October 22, 2013, after SSL sold its repo business to JN Fund Managers (JNFM) that July.

“If SSL fails to provide an undertaking to carry out the agreed corrective actions and comply with its terms by Friday, August 25, 2017, the FSC will take necessary steps to suspend SSL's securities dealer's licence,” Crossley said.

What happened next is not clear, as the FSC typically does not publish its directions issued to companies.

It was forced to do so on January 12, 2023, however, after the massive fraud was reported.

An FSC official said questions submitted late Monday on what happened after the February 2017 directions were not likely to be answered by press time. SSL Chairman Jeffrey Cobham has directed queries to the FSC, citing the regulator's “enhanced oversight” now in effect.

A wealth adviser who was fired last week is yet to be questioned in the matter being investigated by the police Fraud Squad, the Financial Investigations Division, and the FSC.

But an investigator said the complexity of the scheme included the bypassing of controls through forgery, manipulation of SSL's IT systems and email addresses, and interception of disbursements for accounts in commercial banks.

The FSC announced on Monday that it has appointed a special auditor for Stocks & Securities Limited.

SSL was renamed from Paul Chen-Young & Company in 2006.