Those Who Mislead Investors


There is a serious problem in our financial system that has caused pain to many and is still with us today. Unfortunately not enough pain to lead to a change in behaviour of the various parties involved who have collectively created this “big bad gorilla” called the end justifies the means. The end being money. The target is the investing public, the medium our financial markets; the majority of whom have plenty of “little” money but not the savviness to make investment decisions without third party assistance.

The various parties that have played a part in misleading investors and creating a “bubble” in our market through their actions or lack of it over the years are:

Investment Banks (Profession in focus: Sell-side investment analysts)

Brokerage Houses (Profession in focus: Stock brokers)

Auditors (Profession in focus: Accountants – entry level to partners)

Media (Profession in focus: Journalists)

Regulators (For many a time appointing companies and people to resolve financial market issues that the appointees played a role in creating and for not yearning to the cry of the commonman that lost money through deceitful advice or affirmations of wrong doing.)

Commercial Banks (Entry-level Business Development staff all the way to the top for lending money to investors double the amount contributed by the borrower at double-digit interest rates and short tenors for stock market investments with reckless abandon.)

Corrupt individuals who used the stock market to integrate their stolen funds into the financial system to eliminate the paper trail and further heat up our fragile market.

Local and foreign fund managers for investing too much money too quickly into a fragile market over a day and trying to exit overnight literally. This breeds chaos and the sheep investors bear the brunt of it.

The investment banks and their analysts are still mass producing research reports riddled with inconsistencies, intertwined conflicts of interest and without proper full disclosure while feeding off a commission system that is one of the most generous in the world. Everyone looks the other way. Why not? Investment banking fees are at stake, generous brokerage commissions are at stake and you do not count in our system unless you are rich which breeds influence. In our opinion, sell-side research reports should disclose if the company written on is held in their portfolio and/or that of their clients or is being actively sought by the company on behalf of itself or its clients. Investment banks and brokerage firms should be made to desist from writing on companies in which a member of management or director of the investment bank/brokerage firm is on the board of the company in question. Issuing houses and members of the selling group of an equity offer should be barred from preparing an equity research report on the company doing the offer. All listed companies and other public companies not yet listed should be required by the regulators to contribute to a fund that will be used to pay for independent research reports that will accompany every equity offer to be transacted in Nigeria. We need to start looking out for the commonman who has more to lose relative to overall worth. The system is currently structured in a way that benefits the privileged who have less to lose relative to overall worth and who are in the know already. Public offers are priced exorbitantly with the full connivance of the lead member(s) of the selling group. They get paid their fees and investors get roped into a stock that is only heading in one direction and not the desired one. More than enough stocks are trading below one naira today and they were listed in the teens or high singles two – five years ago.

Stock brokers should only be allowed formally to execute trades and not proffer investment advice. There is an inherent conflict of interest that cannot be done away with. If you walk on the street naked in full view of the public, people will deem you insane. You might actually be far from insane but most people will not bother to find out. Offering advice on investments in which a commission is gong to be made through the same individual is inherently flawed. A dark cloud envelops stock brokers who proffer advice in which they derive commissions that increase as the amount invested increases.

Auditors should no longer be allowed to write “nothing was brought to our attention.” Auditors’ fees should be capped by industry and auditors should be banned from auditing companies in an industry after a company it audited is suddenly revealed to have falsified figures after being certified as a true reflection of the financial state of the company at the point in time by the erring auditor. Oceanic Bank had two extremely different FY 2008 results certified by the same auditor. The auditor remains and is still getting paid lucrative fees. One thing we can learn from this is the importance of regulatory requirements. Companies must be audited; this makes it easier to commit transgressions like this and still be on cruise control. An auditor’s fees doubled in the last year of its relationship with a particular bank. Now that is what we call: Payoff Time.

Media: Newspapers used to be carriers of the message of the masses. The commonman’s microphone. Now newspapers are the mouth of the highest bidder. Every page in a newspaper has a price directly or indirectly. The days of writing without fear or favour are gone. The investment banks and brokerage houses have found the newspapers a useful ally to carry out their irrational, exuberant and hyperbolic statements especially as both parties speak the same language of money talks. Everything else takes a walk including the voice of the masses which is proverbially said to be the voice of God. Journalists should know that they share in the misleading of investors through their reports provided by a paying customer with selfish motives. Will a newspaper prevent an investment bank/brokerage firm from using its pages to mislead investors when money is involved?

Regulators: They should immediately request all managing directors and owners of investment banks, stock brokerage firms and commercial banks to leave the boards of listed companies; Stop trading (full suspension) on stocks of companies that have executive management on their audit committees; Stop trading on stocks that have the same person as Managing Director and Chairman. Banks should no longer be allowed to manage their own shareholder register through creation of their own registrar company. This has been mentioned ten times over; a full page ad will come out in the news paper against it the next day and everyone goes to bed once again. In addition, no banks should own registrar companies even under the guise of a holding company model. Do not adjust the prices of stocks that have split until the additional shares are credited to the accounts of shareholders. Minimum volume to move stock prices in any direction should be on an industry by industry basis. A one size fits all approach benefits stock price manipulators.

Commercial Banks: It is sad that commercial banks did not know how margin loans work; they knew how to dish out the cash and forgot where the trigger was when the stock market went south. The privilege of a 5% daily price movement floor could be of no help. A moral hazard has been created with the emergence of AMCON inadvertently. Despite these banks being their own worst enemy, a saviour has come to their rescue. Included in the largesse are margin loans given by banks to investors to buy their shares at the inflated prices they were. They were happily aided by the “BUY”drunk sell-side analysts. Banks should leave stockbrokers alone! It is amazing how the system is allowing the banks to put the brokerage firms into double jeopardy. Lost the equity in their margin accounts, lost the stocks they bought and still being pursued for the difference between the equity value and the original loan. The commercial banks are holding everybody else fully accountable while largely excusing their own role in the mess we have today while playing the role of solver and active participant. Our stock market is looking to the banks and Dangote Cement for upward trajectory, the real sector is looking to the banks to keep them in business and the list goes on. When a pivotal role is given to one who takes a lot and returns a little, the system is bound to falter badly. Given recent developments, the pivotal role is acknowledged, the taking a lot and giving back a little (instead of multiplying) is not.

Corrupt individuals: There is so much to say; therefore, we will not say much. Corrupt money can only be integrated successfully into a corrupt system. Corrupt companies (business practises, accounting shenanigans, fleecing of accounts) can only flourish under corrupt structures and systems. Doing nothing is as bad as doing the wrong thing sometimes. Until people at the top (in every sphere of life) start looking out for people they do not know and do not care to know, we will continue as a system to flatter to deceive.

Africa needs foreign direct investment a lot more than it needs foreign portfolio investment. Kudos to China and India for taking the lead here. More people are singing the praises of Africa presently to benefit from the continent portfolio wise (this would have been almost impossible without the foreign direct investment which benefits the companies the fund managers invest in) and not to invest in its resources. Make sure you understand the people, the systems in play and the intangibles of African financial markets. Just understanding the companies is far from enough backed by fancy models that can only give as good as they get. One for the road: never bring hot money into a hot market. Hot markets are selfish; they take a lot and give back little when all is said and done. Let African stock markets feel your impact beyond the funds you have at your disposal. Leaving behind best practices will be great. Making money is good; making your presence felt (beyond the lure of business) in the development of African financial markets is great.

This is dedicated to the little guy out there whose voice is being drowned out by the vociferous few. Your voice is being heard (even if faintly) and it will get to the top. When it finally gets there, it will not leave until a new dawn is borne and it seizes the daylight.

We have to stop here for now. We will continue to strive to grow wealth with integrity as our watchword. Until next time…

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•Jude felokwu is a Principal Analyst, Thaddeus Investment Advisors & Research Ltd.