How Stock Market Collapsed, by Oteh

Director-General of the Securities and Exchange Commission (SEC), Ms Arunma Oteh

Director-General of the Securities and Exchange Commission (SEC), Ms Arunma Oteh, Monday revealed that poor corporate governance and multiple fraudulent practices prevalent  in  the Nigeria Stock Exchange (NSE) were largely responsible for the near collapse of the stock market.

This came just as SEC unveiled plans to build a strong stock exchange which would operate at the highest levels of integrity, offer depth and breadth in terms of product offerings and enable the realisation of a USD 1 trillion market capitalisation for the Nigerian stock market.

Oteh who made the disclosures when she appeared before the House of Representatives Ad hoc Committee investigating the near collapse of the stock market, said the problems in the management of the NSE had a lot of negative ripple effects on the stock market.

She said a report of an inspection of the Nigeria Stock Exchange (NSE) undertaken in September 2009 showed that the NSE was bedevilled by weak corporate governance, poor  risk management and internal controls, insufficient oversight of brokerage firms and listed companies as well as  inability of the NSE  to enforce its own  rules.

The inspection team, she said, also found that more than 2,700 investor complaints lodged with the NSE were not treated.

These complaints, Oteh explained, ranged from unauthorised sale of shares, to withholding of proceeds of sale of shares.
“The team also found that the NSE investor protection fund was not being properly administered. The report also highlighted a number of financial mismanagement issues including huge amounts spent on a construction project that was yet to be completed many years after inception as well as the inability to perfect the title of a key asset, the Stock Exchange Headquarters building. Also, assets grew by 9 times between 2006 and 2008 while expenses rose by more than 150 per cent from 2007 to 2008.

“It was also brought to our attention, that there were incidences of financial skimming, misappropriation, false accounting, misrepresentation, and questionable transactions. For instance, the NSE bought a yacht for N37million and wrote down the book value within one year by recognising it in the books as a gift presented during its 2008 Long Service Award (LSA), yet there are no records of the beneficiary. The Exchange also spent N186million on 165 Rolex wrist watches as gifts for awardees out of which only 73 were actually presented to the awardees.

The outstanding 92 Rolex watches valued at N99.5 million remain unaccounted for.

“These were the kinds of financial imprudence that were perpetrated at the NSE. These transactions were routed through companies owned by some senior officers of the Exchange. In 2009, N1.7billion of the 2008 operational surplus was distributed to Council members and employees in violation of Companies and Allied Matters Act (CAMA) and SEC rules which preclude the NSE from such given that the NSE is a company limited by guarantee,” Oteh said.

The SEC boss said there were also other fraudulent transactions including the reclassification of the sum of N1.3billion originally expended on business travels and the subsequent reclassification  of  the  sum of  N953million under  'Software Upgrade' and subsequently expended same  as against being capitalised.

“There were other cases of such unethical accounting practices. The SEC inspection report also observed serious oversight lapses with respect to the Council of the Exchange. For example, important Committees such as the Risk and Compliance Committee last met in 2007 while the Disciplinary and Rules Committee last met in 2005. There were also multiple litigations regarding purported elections held on 6th August 2009, which election was subsequently declared a nullity by a court of law on 12th March 2010.

“The Exchange failed to submit its 2009 audited financial statements by 30th June 2010, six months after the end of the period as required by the Investment and Securities Act (ISA) 2007,” she said.

Oteh explained that these violations of the ISA, undermined the integrity of the market  and  eroded  confidence of investors. This situation, she said, culminated in SEC's intervention in the market and the sacking of the then management of the NSE.

In addition, SEC launched a forensic investigation to examine the allegations of financial irregularity and mismanagement.
Oteh said while these investigations have been concluded, the results are unavailable because the former Director General of NSE, Mrs. Ndi Okereke-Onyiuke, and three other former staff have  an injunction against releasing the report.