MONEY MUDDLE

In 2009, the Financial Services Commission (FSC) discovered that the now fraud-hit investment firm Stocks and Securities Limited (SSL) had taken almost $200 million from ‘client accounts’ to finance three companies while “under severe financial stress” a year earlier.

“Substantial amounts of monies were withdrawn from bank accounts SSL had designated ‘client accounts’ for transactions with, and investments in AP Capital Partners, West Indies Aggregates, and Island Ice and Beverage Company Limited,” read one of several findings in a letter dated July 28, 2009 and obtained by The Sunday Gleaner.

It was written by Everton McFarlane, the then senior director of securities at FSC, and addressed to Mark Croskery, SSL’s then president and chief executive officer.

McFarlane later left the FSC and returned in August 2017 as executive director. His contract was terminated on January 31, weeks into the current fraud scandal.

The letter outlined findings of an on-site exam in May 2009, the conduct of which McFarlane emphasised “cannot be over-emphasised” because of SSL’s failure to satisfy the regulator that it had enough capital to operate and whether it addressed violations and concerns flagged in 2008.

The FSC also made specific references to possible fraud and misappropriation of investors’ money at SSL.

Fourteen years later, the company is at the centre of a billion-dollar fraud probe that has captured global attention because one of the impacted investors is sports legend Usain Bolt.

Oversight from the FSC

The 2009 documents suggest that SSL’s problems spanned over a decade and a half, during which the industry regulator gave the 50-year-old firm numerous chances to fix its problems, only for it to find new ones that maintained its reputation for “a culture of non-compliance and mismanagement of client funds”.

The alleged fraud has raised questions about the oversight from the FSC, which regulates investment houses; the role external auditors and ultimately how the company escaped having its licence to operate as a dealer in securities yanked, given its problem-filled sojourn.

It was because of SSL’s constant struggle for money why the FSC appeared shocked when it found out about the investments in the three companies.

AP Capital accounted for $89 million; while $55 million was pumped into Island Ice, which was incorporated in 2008 and later acquired by Pure National Limited in 2018.

Croskery, who was SSL’s boss from 2007 to 2018, and Clinton Brooks, managing director for investments, were directors of Island Ice.

West Indies Aggregates, which accounted for $37 million, “appeared to have been the recipient of working capital assistance by SSL facilitated through the use of SSL client funds”, the letter continued.

According to McFarlane, SSL explained that the monies represented equity investments for the benefit of SSL. The company was incorporated in 2007.

Regarding West Indies Aggregates, SSL reportedly said its stake was acquired in tranches through which it provided financing for operations in return for shares.

But red flags started emerging over how the SSL tried to communicate the investments to the FSC.

According to the regulator, SSL did not indicate the nature of the investment in a draft audited financial statement for the period December 31, 2008. The final report pointed to a $181-million investment in the three companies under the heading “other investments”.

In the draft that SSL first shared, a figure of $184 million appeared under a heading “due from parent company”.

“The notes accompanying [the] said line item indicated that ‘the amount due from parent company is unsecured, bears no interest and has no fixed repayment date’.

“The FSC examination team was not provided with any plausible explanation as to why the reporting change took place, other than the parent company is to be or has already been wound up,” McFarlane said.

In an August 27, 2009 follow-up letter, based on shareholder agreements that SSL submitted, McFarlane pressed Croskery for further information, particularly on AP Capital, a private equity firm that operated out of Florida but whose status, according to the Department of Corporations, is now “inactive”.

SSL’s subscription to AP Capital was through a company named MH Alpha, which is 100 per cent owned by SSL and said to be an “accredited investor” in the US.

Pointing to details in the shareholder’s agreement between MH Alpha and SSL, McFarlane said the investment in AP Capital “represented an illiquid investment in a company with no operating history and embodied very high levels of risk.

“This investment was made after SSL had received an FSC examination report dated 2008 July 18, which had highlighted the fact that SSL was under severe financial stress,” he asserted, before demanding an explanation for the nature of due diligence done.

“In light of the prevailing precarious capital and liquidity position of SSL, please explain the source of funds for the investments, including all supporting documentation sufficient to establish that monies used to invest in these companies were SSL’s own proprietary funds and not client monies.”

Croskery was given a September 4, 2009 deadline to respond. It is not clear whether he did as SSL has declined to comment on all matters surrounding the company since the fraud emerged in January 2023. It has directed queries to the FSC, which has temporary management of the firm.

Queries about those investments were also raised in the context of SSL’s perennial struggle to satisfy minimum levels of capital adequacy. In 2008, it had a capital base of $156 million, falling from $212 million in 2007; and assets of $9.9 billion, up from $4 billion in 2007.

Reckless behaviour

By February 2009, as a global economic recession built partly on reckless behaviour from financial institutions took root, available capital at SSL dropped to $98.5 million, while assets grew to $11.6 billion. This resulted in a capital-to-assets ratio of 0.9 per cent, well below the FSC’s statutory requirement of six per cent to ensure clients’ investments are protected.

For much of the period since, previously published information shows that despite FSC-mandated remedies, the situation continued while investors were kept in the dark.

Bolt, who established his account in 2012, was unaware of the issues, his then adviser said.

There were other discoveries in the 2009 on-site examination.

The FSC team examined a sample of 76 payment transactions from SSL’s client accounts held in US and Jamaican currencies. They found that approximately 41, or 54 per cent, of the transactions displayed “no evidence” of supporting documents such as client instructions, requests or acknowledgement that they received payments.

Ten of the transactions from the US-dollar client accounts were used to reduce SSL’s exposure, a “commingling” of client and company money which the FSC said led to “great uncertainty” about the extent to which proper controls was being exercised.

“This again raises the possibility that client funds are being misappropriated,” McFarlane said.

The FSC also accused SSL of “possible fraudulent misrepresentation” over inaccurate statements on clients’ contracts.

This was found during a review of contracts for investments in repurchase agreements (repos).

A repo is a transaction in which the borrower temporarily lends a security such as a bond to the lender for cash with an agreement to buy it back in the future at an agreed price. Because it is short term, it’s considered a quick way to get cash.

Some of SSL’s repo contracts included a note which said: “This contact note complies with the Financial Services Commission 5.00% margin requirement”.

But the FSC said that was not true.

A margin is the difference between the price at which a product or security is sold and the costs associated with making or selling the product.

“SSL did not apply a margin to all repo transactions as statutorily required. As such, the statement is both false and misleading,” the regulator said.

The repo business was central to SSL’s operations at the time, but it was found in a series of violations.

The FSC team discovered 14 transactions totalling US$6.6 million and 11 Jamaican-currency transactions amounting to J$71 million that were not invested and other cases where investments that matured and were ready for payment were assigned to clients whose investments were not matured.

There were also instances of repo investments identified on clients’ contracts that were different from what was on SSL’s systems.

Up to May 11, 2009, there was a short in funds under management. The repo investments amounted to $8.5 billion, but SSL’s total assets was $4.3 billion.

“To the extent that client contract notes are dispatched with descriptions of securities (stocks and bonds) purchased, repo shortfall highlighted in the securities verification exercise may also raise an issue relating to possible fraudulent and/or deceptive practices,” the FSC said.

Sold the portfolio of 500 clients

SSL lacked an approved master repo agreement and its problems with that aspect of its business continued until it sold the portfolio of 500 clients to JN Fund Managers, a member of the Jamaica National Group, in 2013.

Other questionable cases flagged in 2009 included three instances in which clients were allowed to withdraw monies or conduct transactions for values in excess of funds they had in their accounts.

SSL’s audited financial statement for December 2008 did not show any overdraft and repayments were made from the clients’ accounts, so the FSC concluded that there might have been a loan service being funded through other investors’ monies.

SSL explained that the situation resulted from inadequate reconciliation of multiple accounts operated by some clients.

Late filing of financials, irregular dispatch of client statements of accounts, incomplete requests for proposals that would contain information on clients’ risk appetite, anti-money laundering deficiencies and corporate governance initiatives were also highlighted in 2009.

“The SSL full board has never held a formal board meeting,” the FSC further revealed.

SSL committed to several improvements such as implementing new systems to improve record-keeping, having board meetings, and appointing an internal auditor.

The FSC issued directives in 2010 which required certain actions by the SSL to gain compliance. Those were varied in July and August 2012.

By 2013, however, the FSC issued further directives to SSL after citing “unsafe and unsound business practices”.

The non-compliance continued and in 2016, the FSC again issued directives with a threat to suspend its licence if it did not comply by August 25, 2017.

Finance Minister Dr Nigel Clarke has since indicated that SSL satisfied the directives and gained compliance in August 2017.

Serious concerns

But two years later, in 2019, the FSC found further issues and concluded that there were serious concerns regarding the adequacy of securities to cover clients’ obligations as well as the magnitude of operational risk faced by SSL because of poor record-keeping.

On January 10, 2023, SSL, which has a 2 per cent share of the $1.4 trillion securities market, reported the fraud to the FSC.

Prime Minister Andrew Holness, who said he opened an account at SSL in 2008 and instructed that it be closed in September 2021, along with Clarke, has strongly condemned the alleged theft.

An ex-employee who has been implicated has not been charged.

SSL’s leadership includes Mark Croskery’s father, Hugh Croskery, the founder and executive director; and Chairman Jeffrey Cobham.

They broke their silence last week to shine the spotlight on the ex-employee whom they said “remains at home”.

“SSL has had an enviable reputation over the years for the management of client portfolios … . There was no indication of any fraud or use of client funds by SSL in any audits, whether by independent auditors or by the FSC,” they said, an assertion betrayed by the damning FSC findings over the years.

A senior government source with deep knowledge of FSC’s operations said one key question needs answering.

“I know it’s important for us to know how the fraud went undetected. But how did SSL escape suspension given the weight of the FSC’s findings over those many years? It’s not enough to dish out that it continued to regain compliance,” said the official.

jovan.johnson@gleanerjm.com