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Rs. 10 b loss and market manipulations

01 Feb 2020

Note to layout: Insert overline and blurbs please
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Overline:
Central Bank Forensic Audit – Report 2
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Blurbs:
· Email conversations between former EPF Chief Dealer Saman Kumara, and JB Securities (Pvt.) Ltd. CEO Murtaza Jafferjee had indicated that the secondary market was manipulated by some primary dealers, and that Kumara was also involved
· An IT asset register had not been maintained by the IT Department at the Central Bank and as a result the details of IT assets assigned to the Central Bank employees couldn’t be identified with certainty
· He (Udayaseelan) was also unable to deny that employees of PTL, including its CEO Kasun Palisena and Chief Dealer Nuwan Salgadoe, referred to him by a code name: “Charlie”
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Headline:
Rs. 10 b loss and market manipulations
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By Skandha Gunasekara
With Parliament set to debate the Forensic Audit (FA) reports of the Central Bank this month, The Sunday Morning took a closer look at the second FA report probing primary and secondary market transactions of the Employees’ Provident Fund (EPF) between January 2002 and February 2015 – which has uncovered a loss of Rs 9.7 billion to the Government.
The EPF loss from transactions in the primary market – both auctions and direct placements (DP) – was Rs. 9,074.33 million while losses from transactions in the secondary market (investments and divestments) was Rs. 751.61 million.
Findings of the investigation have revealed that lower yield rates offered by the Public Debt Department (PDD) to the EPF in direct placements had resulted in millions of losses.
During the review period of the probe, in 46 out of 203 instances, the yield rate offered by the PDD was lower than the previous auction weighted average yield rate.
“As per the witness statement of Mr. Dhammikka Nanayakkara (the former Superintendent of PDD) before PCoI, confirmed that the Direct Placements of Treasury Bonds shall be conducted at the weighted average yield rate decided at the preceding auction,” the report stated.
As a result of the offered lower yield rates, the EPF had incurred a loss of Rs. 256.37 million.
Furthermore, in 94 instances out of 346, the PDD had offered yield rates lower than the secondary market yield rate which cost the EPF a loss of Rs. 8,716.48 million.
Pertaining to the secondary market, the report highlights the fact that on analysis of purchases during the period of review, purchases made in five particular years, namely 2002, 2003, 2004, 2013, and 2014, constituted 79% (Rs. 142.89 billion) of the total purchases made by the EPF from the secondary market.
The investigation had found that the purchase price of the EPF was higher than the secondary market price in 177 instances out of 651 purchase transactions, resulting in a loss of Rs. 620.81 million.
Additionally, investments made in 2014 contributed to 91.03% of the total loss incurred by the EPF amounting to Rs. 565.15 million.
It was also noted that transactions with Perpetual Treasuries Ltd. (PTL), Pan Asia Bank Corporation PLC (PABC), and Wealth Trust Securities Ltd in 2014, were 52% on the overall loss in the period amounting to approximately Rs. 321 million.
Secondary market manipulation
The probe had also uncovered that the secondary market was manipulated by certain primary dealers who benefitted from such manipulations.
Email conversations between former EPF Chief Dealer Saman Kumara, and JB Securities (Pvt.) Ltd. CEO Murtaza Jafferjee had indicated that the secondary market was manipulated by some primary dealers, and that Kumara was also involved.
The report has recommended that an investigation be carried out to determine any market manipulation during the period from 2015 to 2016.
“It also appears that Mr. Saman Kumara was involved in the market manipulation and he had agreed to share the details with Mr. Murtaza Jafferjee including the person involved. It appears that investigation needs to be conducted for the scenario of market manipulation in the secondary market during the period 2015 and 2016 as stated by Mr. BHI Saman Kumara in his mail that, ‘No it is happen and gone I will tell what happen when I meet you and the person told me that also’ (sic),” the report noted.
T. Udayaseelan – “Charlie”
T. Udayaseelan has been identified in the report as an individual whose involvement in the EPF transactions during the period from 2007 to 2017 had resulted in deviations from the transaction authorisation limits, price variances from the market price, and concentration on specific counterparties such as Perpetual Treasuries Ltd. and PABC.
Udayaseelan was a former Assistant Superintendent at the EPF Department at the Central Bank of Sri Lanka.
As the reason for repeatedly selecting PTL and PABC as primary dealers for investment and divestment transactions, Udayaseelan stated that it was due to these two entities offering better rates and the required quantity.
“However, in absence of the quotes received from the primary dealers and voice recording of the dealer room, the rates offered by other counterparties cannot be confirmed,” the report noted.
He was also unable to deny that employees of PTL, including its CEO Kasun Palisena and Chief Dealer Nuwan Salgadoe, referred to him by a code name: “Charlie”.
There were also discrepancies in the cash flow statement prepared by Udayaseelan which contained the income, assets, and liabilities acquired from 2007 to 2017.
However, in 2015 and 2016, the value of assets acquired had been disproportionate to the accumulated income disclosed in the statement – differential amounts being Rs. 5.7 million and Rs. 8.7 million respectively.
Udayseelan had responded that there was no specific explanation for the disproportion in assets and the report recommends that investigations be conducted to identify the assets of his family members and dependents.
“Mr. T Udayaseelan responded that there is no specific explanation available to provide the reason for disproportionate asset and it is coincidently occurred during the bond scam period of 2015-16. This matter requires to be investigated to identify the assets of his family members and dependents. This information was requested but not provided as on the date of this report (sic)”.
The report has also recommended that inquiry be conducted into cheques received by Udayaseelan from Universe Capital Private Ltd.
“He had received cheques from Universe Capital Private Limited (UCPL) and stated that it was the dividend cheque for the investments made in the shares of Ceylon Tea Services PLC. As per Registrar of Companies information, Mr. Palaniyandy Ramaswamy (cousin of Mr. T Udayaseelan) was director and shareholder since May 2015. Further, Mr. T Udayaseelan had stated that Mr. Palaniyandi Ramaswamy does not have basic educational qualification. This matter requires to be further investigated to identify the purpose of cheque received, the objective of forming UCPL and the ultimate stakeholder of this company. (sic)
Limited probe
The report also pointed out the limitations of the audit, such as the lack of proper digital evidence like recordings of telephone conversations and email conversations.
The report noted that there was no process of recording the telephone conversations between the front office employees at the EPF and the primary dealers or the PDD for the transaction related to treasury bonds through auction, direct placements, secondary market; as confirmed by the EPF, during the review period, and thus whether these communications took place or not could not be independently confirmed or verified.
In addition, an IT asset register had not been maintained by the IT Department at the Central Bank and as a result the details of IT assets assigned to the Central Bank employees couldn’t be identified with certainty.
There had also been multiple instances of email dates being deleted.

“The completeness of the email communication data cannot be established as multiple instances of email data file deletions were noted during the digital forensic procedure on the devices provided by the ITD and backup of the email data was not available comprehensively, on the email server,” the report noted.

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