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Published On: Mon, Jul 17th, 2017

SEC and its Renegades

Few feel comfortable with big brother (or perhaps big sister?) breathing down the neckline of their Curtis & Hawke shirts or Versace skirt suites. The experience could be disorienting. Apart from the considerable discomfort and palpable awkwardness of the contact, the nagging possibility of mischief makes such behavior reprehensible; or so it seems. Unless, of course, the peeping Tom happens to be the Nigerian Securities and Exchange Commission (SEC) that makes it its business to peep down the orifices of other people’s wardrobes. In the last few weeks shareholders have had the stock markets chief regulatory agency in their cross hairs as they vent their anger on issues ranging from the shadowy operations of the Nigerian Investors Protection Fund (NIPF) to the decision of the SEC to bump off 20 companies listed on the Nigerian Stock Exchange (NSE).”SEC and the NSE seem to have tipped over the deep end of hubris. They are stomping over shareholders rights like two gorillas high on narcotics”, said one aggrieved investor in Lagos recently.
Not many analysts would agree. To be sure, big sister SEC seems to have woken up from a deep, self-induced slumber and come to the startling realization that she had side stepped her statutory responsibilities. Indeed if SEC was not such a beautiful regulator she would have been cashiered and court martialed for criminal negligenceand her brother, the Nigerian Stock Exchange, would have been arraigned for complicity. Both institutions staffed with some of the finest professionals in the business, somehow, dropped the ball by allowing listed companies to continue to enjoy the benefits of quotation without the attendant responsibility of financial accountability to their shareholders. Analysts believe that both SEC and NSE should have stripped-searched the books of companies they recently threatened to delist as far back as 2008 when the market went into a tail spin (of course one can empathize with the two bodies, searching the sagging bodies of aging or, in some cases pre-terminal, corporations is not exactly a thrilling exercise). A company like DAAR Communication was always prone to financial opaqueness. Founded by a man created in the mold of America’s darling corporate spin doctor, Donald Trump (remember Trump Towers?), Raymond Dokpesi, a once –upon-a-time shipping magnate, had grand ideas but dodgy capacity for execution. His sprawling electronic media organization has stumbled, wobbled and slipped quite a few times, both before and after its Initial Public Offer (IPO)in the first quarter of 2008. The major problem with DAAR is its poor corporate governance standards, its relatively high operating expenses and an advertising market that has become bitingly stingy. The company is choke-full of relatives of the Chairman who see themselves as co-inheritors of a broadcast media patrimony. The lack of family independence and transparency in the administration of the organization and its pallid accounting practices makes it an investor’s nightmare. Its quoted price of 50k (down from N5.00 in 2005 and 71kobo in 2009) is an investor’s cry basin. Predictably the company has posted negative after tax earnings in the last half decade and declared zero dividends. Investors in the company are worse than dead, they are in transition to that place only the devil is proud to call home.
As with DAAR so with Starcomms (recent share price 50kobo), a once gutsy CDMA-telecommunications ‘David’ took on the muscular and ripped GSM giants; MTN, Airtel, Globacom, and Etisalat, and got squashed like a bug. Starcomms problems ranged from naïve over trading (the company lived its whole life on unsustainable negative operating cash flow), to poor asset control. Starcomms has severally been accused of corporate and managerial arrogance. Little wonder then that most of its customer, especially those in its niche digital data business, voted with their feet by leaving the company in a pool of red ink. There are speculations that creditors have already encircled the company’s assets awaiting full bankruptcy resolution. As is usual with these cases, equity holders are likely to be sent home with a nice pat on the back, a fresh box of Kleenex tissue (to dry their tears)and some silly consolation speech; but as for money? They are likely to get a lovely cheque with the handsome sum of zero naira and zero kobo. Bankruptcy is a dud and so also is the fate of shareholders locked into bankrupt firms. In the long queue of those that recover money from failed companies equity holders trail a distant last.
A twist to the awkward tale of stock market renegades is Mass Telecomms Innovation Plc (MTI). The company was started in 2002 to provide co-location services to larger telecommunication companies such as MTN, Bharti-Airtel, Etisalat and Globacom. The revised corporate business model was simple but brilliant; to provide masts and other shared technical infrastructure support for an annual rental fee. Unfortunately incompetent management and barefaced thievery brought the company to its knees faster than a bullet. The Frank Karkite-led board of directors on raising tons of money(aboutN6b) from the stock market went allegedly rogue. The situation was so bad the shareholders had to petition the regulatory authorities (SEC and NSE) to investigate the company’s operations.
Equity holders, therefore, can ill afford school yard tantrums; there is an urgent need for irritated investors in these 20 basket-case companies to sit soberly with officials of the SEC and the NSE to work out best case disaster recovery plans. The SEC’s Investors Protection Fund is a rather bizarre creation of the market. Stock markets are not deposit money banks and equity holdings are not the same creatures as bank deposits, therefore, investor protection through a special fund (thinly disguised as a cousin to the deposit protection responsibility of the Nigerian Deposit Insurance Corporation (NDIC)) is at best lame and at worst a painful intrusion into the workings of free market economics. The stock market is neither a social welfare scheme nor an instrument for popular redistribution of wealth, it is a platform for competing investment decisions based on available market and non-market information, and it is a bloody battlefield where the clever rip assets off the stupid and the supremely intelligent take profit from the decidedly dumb. The stock market, rightly, makes no pretensions to being democratic; its primary responsibility is to be efficient.
The SEC and NSE’s primary concerns should not be how to compensate investors for poor investment decisions (and/or poor stock broker selection) through a quirky investor protection fund but, on the contrary, they should be more concerned with how to ensure that the market disseminates price-sensitive information in a manner that does not give one group of investors some market advantage over others. In more technical literature this is usually referred to as ‘asymmetric information’ which leads to rigged markets where people with privileged information within different time frames can profit from buying or selling stocks before competing rivals.
”If you are going to go bust it should be because you took a right turn instead of a left and not because the driver in the next car got his cousin to pour oil on the highway just to ensure that you took the wrong bend. It is always better to go down through your own stupidity than someone else’s criminality, even though the outcome is generally the same,” notes, Anthony Madojemu, Chief Executive Officer of Lagos-based investment firm, Maven Associates.
Madojemu’s observations point to the fact that the roads to both heaven and hell were paved with good intentions, but which to follow should be left to the canny will of individuals. The attempt by the capital markets regulatory agencies to protect clients from the errant actions of stock brokers is commendable but misguided. Financial renegades should be arrested, prosecuted and made to pay up and go to jail. Clients should also be made to bear the cost of due diligence before choosing a broker. Good clients would seek good brokers and sloppy clients would, well, find out the hard way that it pays to be careful.
Brokers with poor transaction histories cannot remain too long in the business and should be allowed to die a quiet and perhaps painful, death. Will this be costly? Certainly, but it would be a lot cheaper than allowing the market create a door stop for incompetent operators and lax investors.

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