SEC Directive on NSE – Before We Jubilate


Thursday, August 05, 2010 11:56am


“Our Market must not run like a medieval Kingship where all around it, you find intrigues and courtiers seeking to advance self interest disguised as market enabling intentions. Under such a perception, the principle of level playing field, fairness and integrity based leadership; which build confidence is compromised.” – Proshare Confidential Briefing theme on Monday, August 3, 2009 at Sofitel Hotel, Moorehouse, Ikoyi, Lagos State


All that needs to be said has been said by this platform on the recent developments in the market. Indeed before the current development we had written that there are issues at the NSE that needs to be addressed beyond the succession and the squabbles.


Further to the press release issued by the SEC at 10.00pm yesterday night, a new interim administrator for the NSE has been appointed in the name of Mr. Emmanuel IKAZABOH, a forensic auditor by profession, an ex-Country Manager of Akintola Williams & Delloite who retired about two years ago from the firm (the current auditors of the NSE).


We expect that a new President of Council in the person of BALAMA MANU (former Chairman of FBIR, ex-ED of Union Bank and ex-ED of NDIC) will be announced along with the interim council today.


We also understand the firm of KPMG has moved in to commence audit of the exchange’s affairs. This will be a direct indictment on the firm of Messrs Akintola Williams & Delloite, the current external auditors of the NSE; should any contrary position be reached.


A detachment of members of the Nigerian Police Force and the EFCC are equally on ground.


The SEC DG, Ms Arumah OTEH just finished a briefing in the council of the exchange and will be addressing the media at 1400hours. She addressed brokers and dealer members where made a case and justification for why it had to act to brokers and dealer members.


Not a single soul in the market will dispute there are problems but the investing public is quick to raise concerns about the means, scope and approach to addressing the long-festering problems. There are a few questions that must be asked they insist.


The Cull de Sac Scenario

One dominant question relates to the consideration given by SEC in its press release where it said that:


“In following the developments, the Commission has at all times carefully deliberated on the implications and ramifications of a direct intervention in the affairs of the Exchange. In this deliberation, the Commission weighed the consequences on the market of a direct intervention set against the broader goal of safeguarding the interest of the public and protecting the investor. The Commission has decided that it is in the interest of the public and necessary to protect the investor to issue the following directives.”


The steps taken were thus mere directives which do not constitute an order, instruction or a law-enabled decision.


Simply put, the Investment and Securities Act 2007 which vests the unalloyed responsibility for safeguarding the interest of the public and protecting the investor on the Securities and Exchange Commission; does not grant it powers to ‘remove’ the chief executive of the NSE, a company limited by guaranty.


SEC recognised this and hence wrote a directive, as a responsible regulator, to the Council of the Nigerian Stock Exchange to effect the removal of the DG/CEO of the NSE.


The questions that are yet to be answered include:

*       Which Council effected the directive to remove the DG/CEO of the NSE?

*       When did the council seat to take that decision?

*       If the council did not meet, on what orders is the SEC taking over the affairs of the NSE?

*       Is the SEC empowered to run the affairs of the NSE or simply regulate it?

*       If the court decides that the council should be re-instated; what happens to the actions taken by SEC, its reputation and integrity?


The ramifications of getting into a legal minefield

There are those who believe that the non-resolution of the latest petition against the DG before taking an action is prejudicial and suggest of a very well oiled plan to execute the current plan unfolding.


This has been in the works for sometime

Those in the know of the inner workings of the exchange would not be surprised about this current development.


The clamour to effect a change at the NSE has been on-going and at times fought out openly before the ‘reform minded’ team went into its trenches and capitalised on the lacuna created by the succession gap created by the non-appointment of Musa Lance Elakamah and the AP Plc shareholder case against the council elections of August 6, 2010 – a direct fall out of the lingering and often times, sadistic fight between messrs Mr. Femi Otedola and Alhaji Aliko Dangote.


This fight got to a stage where all forms of decorum and civility that should have guided the conduct of market leaders were thrown overboard.


The key signpost of this ill wind is best captured by the Aviomoh Papers and the petition from Aliko Dangote which created a scenario that left the NSE powerless to protect itself and allowed the SEC to exercise a fine print in the ISA.


The fine print, a point alluded to by the Editor Thisday on Saturday, Ms. Ijeoma NWOGWUGWU in her seminal piece published on Saturday, July 31, 2010 – that made the case under which the SEC could act. Here is an excerpt from the publication that should shed some light on the issues at hand:


“Options before SEC”

The argument has been made repeatedly that the SEC is hamstring by the fact that the NSE is a private company and cannot therefore remove its management or council member. An attempt by the former DG of SEC Suleiman Ndanusa to remove the Okereke-Onyuike in 2001 for blocking the launch of Abuja Stock Exchange proved unsuccessful.


Moreover, analysts are of the opinion that the ISA gives the SEC sufficient leeway to wield the big hammer if it has to do so. “The SEC already has in its possession the damning report compiled by the US SEC which was invited to review the operations of the capital market. It also has the ISA that is very clear on what punitive action to take against capital market operators that have committed infractions, by direct or indirect association with companies and proxies involved in the market. That should give it the loophole it requires to move against anyone found wanting on the Stock Exchange” volunteered one operator.


Under the worst case scenario, the SEC can also seek for the resignation of anyone found wanting on the NSE, failing which it shall withdraw the licence of the NSE to operate for just one or two working days. But that is seen by operators as an extreme measure that could cost the market not only the loss of investor confidence but hundreds of billions of naira that will take years to plough back.


“That is an extreme measure if the SEC has to do that. Yes, it has the power to withdraw NSE’s license but this will completely destroy any shred of credibility it still has. It should not be contemplated at all. What is recommended is for SEC to thoroughly sieve through the ISA and use it to its advantage without hurting the market. The goal is to save the market and restore credibility, not destroy it,” one operator cautioned.”


Understanding the SEC Action

Given the wider implications of the actions taken and the necessary/natural recourse to a legal response from those affected, especially the DG/CEO who would feel aggrieved that her sacrifices and contributions to build the market has been stained by an ill informed action – a view shared by so many people who may have issues with her – requires that we present an insight into the logic that enabled such an action.


The circumstances can be documented thus:

1.      The expiration of the term of the last council meant that under any circumstance, recourse to the board was considered untenable. The have completed a cycle and cannot be considered to be an existing option.

2.      The damning report by the US SEC on the market, its operators and the exchange.

3.      The court case instigated by the Shareholders of AP Plc (widely acknowledged to have been ‘encouraged’ by Mr. Femi Otedola) was given a major boost by the judgement directing a return to status quo ante as if the election never took place.

4.      The inability of the NSE to seek a legal interpretation of what constitutes the status quo of its highest corporate governance machinery – deciding whether a new election should hold or an interim council should be in place to address the lacuna created – meant that the NSE was functioning as under a sole administrator.

5.      The petition by Alhaji Aliko Dangote, an action without precedence and without exhausting the options open to him to query the DG, request information from the auditors or alert the council members as to his concerns, meant that the SEC was faced with a situation where order and decorum at the highest level of the exchange has taken place. Media publications – some ludicrous and irresponsible – meant that the market was drifting and it had to act to arrest the situation.


Learning from Experience


There are two perspectives to this – the Ndanusa and the Grosso incidents in Nigeria and USA respectively.


The Suleyman Ndanusa Lesson (SEC – Nigeria)

Dennis Odife and the rest of his team found an ally in the then Director General of the Securities & Exchange Commission, Mallam Suleyman Ndanusa, with the support of the late General Sani Abacha’s administration and took an unprecedented step of issuing an order of removal of Alhaji Abdul Razak as the President of the NSE and Ndi Okereke-Onyuike, the Director General. 


This action, now fondly referred to as “The Ndanusa’s removal order” was premised on the refusal of the Nigerian Stock Exchange to revert to its original name: The Lagos Stock Exchange in order to accommodate the newly formed Abuja Stock Exchange.


The matter went to court and was eventually settled out of court after several months of a bruising ‘war’.


This was the first and most openly played out leadership challenge for the control of the soul of the capital market ever witnessed in the Nigerian financial market.  The rest, as they say, is now history.


The Richard Grosso Lesson (NYSE – USA)

In August of 2003, the Securities and Exchange Commission (the SEC) made a seemingly routine request for information from the NYSE related to its operations. In the report that was submitted, the SEC was shocked to find that NYSE Chairman, Mr. Dick Grasso had been given a compensation package on the order of $140 million.


The SEC immediately demanded more information and was aghast to learn that another $48 million was still to be paid. This set off alarm bells and the SEC decided to investigate further.


When the public got wind of this alarmingly huge pay package a firestorm of outrage erupted. Coming on the heels of other scandalous CEO pay packages being contested, very publicly, in the courts, the public was outraged. After all, the NYSE is supposed to be a regulator and shining example of integrity for the broker industry.


The public outcry caused Grasso to resign in September of 2003 and prompted investigations by the SEC, by the New York Attorney General and internally by the NYSE itself.


Grasso and the Public Interest Test

A very interesting aspect of this case is its relevance to the public interest debate and invocation used by the SEC.


The final decision on this matter, aptly captured here by Wikipedia. We have reproduced the entire section to allow you identify why we highlighted the bold sections and its possible relevance to our clime –


“On 27 August 2003, it was revealed that Grasso had been given a deferred compensation pay package worth almost $140 million. This caused immediate controversy, as the hand-picked compensation committee consisted mainly of representatives from NYSE-listed companies over which Grasso had regulatory authority as head of the Exchange.


Following criticism of the deal from U.S. Securities and Exchange Commission chairman William H. Donaldson, who preceded Grasso as Chairman of the NYSE, and several pension fund heads (who control some of the largest pools of equity investment capital in the U.S.), the Exchange board met and in a 13 to 7 vote asked Grasso to leave. Grasso stepped down on 17 September 2003.


On 24 May 2004, Grasso was sued by New York state Attorney General Eliot Spitzer, demanding repayment of the majority of a nearly $140 million pay package. Prior to being dismissed, Grasso had been in line to receive an additional $48 million over the $139.5 million he had already received; he was not paid the additional funds. Grasso has sued to gain those funds. According to the suit, Grasso, along with former NYSE director Kenneth Langone, misled the NYSE board about the details of his pay package, beyond that of comparable chief executives. The NYSE was a non-profit institution during Grasso’s reign, and as such was governed by State of New York rules governing executive compensation for non-profits. That the NYSE was a non-profit, goes to the heart of Grasso’s compensation, as for-profit companies have traditionally received much greater leeway in executive compensation matters, even when the compensation might appear to be excessive to stockholders. In addition, there were issues of premature withdrawals of Grasso’s retirement compensation. Retirement packages often have strict timetables as to when withdrawals can be made.


On May 26, Grasso responded with a countersuit against the Exchange and its then-chairman, John Reed, seeking payment of unpaid portions of his pay package, as well “besmirching his name”. Grasso went on to place a 1500-word op-ed article in the Wall Street Journal, detailing this countersuit, as well as his grievances against Spitzer.


The lawsuit against Grasso continued to move toward trial in 2006, with neither side showing any interest in settling.


On October 19, it was reported that the New York State Supreme Court issued a summary decision ordering Grasso to repay a significant amount in excess compensation in an article entitled “Ex-NYSE chief ordered to return part of $188M”.[4] Although Grasso will appeal, the same article reports that Spitzer’s office has disclosed the amount of restitution is in the tens of millions of dollars. In his ruling, Judge Ramos wrote that Grasso’s failure to disclose the true extent of his total compensation prevented the compensation committee from exercising its fiduciary duties. The above CNN article also reported that Grasso’s counterclaim of defamation was dismissed.


The suit against Grasso has come under criticism from some commentators, with journalist Charles Gasparino lambasting it in the epilogue to his book Blood on the Street. He is the subject of a book by Gasparino, King of the Club.


On 1st. July, 2008, the New York State Court of Appeals dismissed all claims against Grasso. The majority opinion stated that since the NYSE was now a subsidiary of a for-profit multi-national corporation that the State of New York had no oversight over the affairs of the company in this matter and that prosecution was “not in the public interest.” Current Attorney General, Andrew Cuomo stated that he had no intention to appeal this decision any further and that the case was effectively over. The court ruled that Grasso was entitled to the entirety of his compensation. The court also dismissed Grasso’s actions against the NYSE and other parties as related to this matter.


According to the Washington Post, during a SEC investigation Grasso invoked his fifth amendment rights against self-incrimination in refusing to answer questions regarding his conduct during an NYSE investigation into possibly improper activities by Exchange specialist firms. The specialist firms paid $242 million in settlements with the SEC, and the NYSE itself was censured for failing to properly supervise the specialist firms.” 


What must happen?

Events are still unfolding and we will keep the market updated. We do not expect to see any jubilation from SEC, or the instigators and pawns that facilitated this precipice.


The jury is still out on the SEC itself, especially over its own internal corporate governance issues, endemic incestuous relationship with operators mitigating supervision and enforcement, and the conflicted corporate governance structure that guides its board – which rightly places its motives, intent and wider objectives in question.


Beyond all the permutations, perspectives and postulations that will dominate the news cycle in the days to come – it is well for everyone to recognise that this is not one of our finest moments as a market.


It could well be but for today, a wound has been inflicted on the soul of the market for way too long – and it could well be that this action will be the first step towards the definition of the battle ground of a final solution.


A word of advice though to those who seek to bring the market down for their own ends – “A strong wind can uproot the oak, but no wind, however strong, can uproot the grass that bends flat before it”. – Proshare NI




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