MAS, SGX reviewing penny stock saga

[SINGAPORE] Singapore's financial market regulators, the Monetary Authority of Singapore (MAS) and the Singapore Exchange (SGX), are conducting an "extensive review" of the activities around the now-infamous trio of stocks that crashed dramatically earlier this month after spectacular spikes over the past year.

The MAS has also been tracking the exposure of brokers to the three stocks - Blumont Group, Asiasons Capital and LionGold Corp - though it said their operations and financials remain sound. There had been talk that some brokers and remisiers may be saddled with bad debts after billions were wiped out from the market value of the three stocks.

MAS' remarks, made in response to queries from the media, were the first confirmation that authorities are investigating the circumstances surrounding the incredible rise of the three over the past year, way beyond their fundamentals, before their spectacular crash.

When the dust has settled, more than $8 billion had been wiped out from their collective market value. The fiasco had led to criticisms of whether SGX could have acted earlier to protect the interests of retail investors caught up in the bubble, and calls for a probe by authorities.

MAS said last night: "MAS and SGX are conducting an extensive review of the activities around these stocks.

"We cannot divulge more information at this point so as not to undermine potential investigations. This episode has also surfaced broader issues regarding the market structure and practices which MAS and SGX intend to review thoroughly." A public consultation could take place if changes are required after the review is completed, MAS said.

Investor Mano Sabnani said: "It's about time. If nothing is done, the credibility of the market would have been affected."

"It is necessary to do the investigation but at the same time, we can't pre-judge what caused the bubble or whether there had been any wrongdoing."

Asked about what areas could be reviewed, UOB Kay Hian's Jimmy Ho, president of the Society of Remisiers, told The Business Times that one issue is how to detect manipulation early enough. "To do so requires resources. Given the current structure, I believe SGX might not be able to do so in a proactive manner," Mr Ho said.

On the micro level, he said that the procedures followed - when SGX "designated" the stocks for nine days before lifting them - could also be questioned.

"When you come in with the designation, people expect an investigation. But before you can give them an answer, you open it up and allow opportunists to make money," he said, referring to how people carted cash to brokers to buy the stocks during the designated period, and how the stocks almost doubled in price when the restrictions were lifted.

But no matter how the review pans out, the "buyer beware rule" should still apply, said Mr Sabnani. "There's no way in which SGX and MAS can protect greedy, naive investors who want to plonk their money into... companies at high prices, but at the same time, there are laws to prevent manipulation and cornering of stocks that regulators will be looking into for violations."

The crash on Oct 4 led to SGX labelling Blumont, Asiasons and LionGold designated stocks, meaning a ban on short-selling and contra positions. This meant people had to bring cash to their brokers to settle their trades. When trading resumed on Oct 7, the three stocks fell further.

The restrictions were lifted on Monday, and prices almost doubled. Nevertheless, as of yesterday, Blumont and Asiasons were trading at 10 per cent of pre-crash levels, and LionGold at about 20 per cent.

The other area MAS said it was monitoring was the exposure of broking firms to the three stocks. It said it had been collecting reports on losses and major counterparty exposure arising from the brokers' exposures to the three counters.

"The operations and financial positions of the broking firms remain sound. We will continue to monitor the situation closely," it said.

Major brokerages DBS Vickers Securities, OCBC Securities and Maybank Kim Eng had said they suffered insignificant losses because risk controls were put in place. UOB Kay Hian, the largest retail brokerage here, had also put their own curbs on various penny stocks.

US online discount brokerage Interactive Brokers Group, however, said it has accounts in the deficit of US$68 million. This was revealed by Thomas Peterffy, the firm's chairman and CEO, in the firm's third-quarter earnings call on Oct 15. "The accounts were margined and we were able to liquidate only a small part of the position," he said.

Without naming the stocks, Mr Peterffy said there were four of them that lost over 90 per cent of their value in a short timeframe in early October. The customers, however, were about seven individuals who were "well-known industrialists" with positions in other companies.

"We believe that the customers have substantial assets independent of the companies involved and we are currently organising our legal team to collect on these debts. We are currently also in the process of modifying our margin lending methodology to limit the chances of similar events happening in the future," he said.