SIGNS OF CHAOS, AFTER THE THEFT OF THE SHARES OWNED BY THE HEAD OF IFC ROMANIA: The ASF shuts down the pension funds for an audit

The private pensions division of the Financial Oversight Authority (ASF) has decided to prevent the private pension funds from trading shares, on Friday and today, in order to review their portfolios, after the BURSA newspaper was the absolute first to report on Thursday, that the head of the IFC, Ana Maria Mihăescu, saw EUR 200,000 worth of stocks stolen from her brokerage firm account.

The information from BURSA was subsequently reported by other newspapers.

Even though Ion Giurescu, the vice-president of the ASF for private pensions, makes a connection between the reporting of the theft in the press and the halting of trading at the pension funds, the vague explanations of the ASF leave room for interpretation.

Some sources claim that the surprise decision of the ASF has no connection to the case of Ana Maria Mihăescu, but give no other reason for it.

The communication department of the ASF insists that the measure is preventive, but does not explain what has caused the ASF to become so cautious all of a sudden.

"Yes, it is an unprecedented measure, of a preventive nature. The ASF, which has made this decision based on the law which governs its operation, wants to once again ensure that the pension funds are once again certain that their stock holdings exist in their portfolios", the representatives of the Authority have informed us.

They have also told us that, "according to the regulations, the shares in the portfolios of pension funds are held by custodian banks, which check everyday whether the stocks reported by the funds exist in their portfolios and certify daily whether the value reported by the fund is accurate".

So, if everything is verified so strictly on a daily basis, what is the logic of this preventative measure?

And if the verification can be done in one day, then why does this one take two days?!

And even further: if such "preventative measures" can be taken by the ASF without any reason, then what is to stop the ASF from shutting down trading every two days and just keep doing audits?!

That would be the perfect supervision.

Several market players expressed their disappointment with the decision of the ASF. Some considered it illogical, ridiculous and bound to cause uncertainty among investors.

No matter how much the ASF may want it, no one can believe, like the ASF would want it, that there is no connection between the pension funds being prevented from trading and the theft of the shares owned by Ana Maria Mihaescu, as long as the ASF does not mention a specific reason for the audit.

Because, if following the law to the letter, then the uncertainty concerning the integrity of the portfolios of pension funds can not be generated by anything else but the suspicion concerning the honesty of the services provided by the Central Depository.

In fact, the pension funds are required by law to have a depository, as the word "custodian", used in the explanations provided by the ASF, is not used in the legislation; but the depository banks do not hold the shares - the shares remain stored at the Central Depository ; instead, they have to maintain the evidence of the holdings of the client, like a third party that certifies the results of the management of the funds, preventing frauds like the one that was perpetrated at the FNI (where the fund manager kept its own records and did whatever it pleased, a crime which was tolerated by the CNVM led by Ştefan Boboc, with an apocalyptic result).

In practice, the contracts with the depository bank also stipulate the custodian service, which we take it to mean that the Central Depository can not find who is the end owner of the stored shares, as it only has the custodian as their owner on its records (from the perspective of the Central Depository, the shares become anonymous).

Because of that, two avenues of attack against the integrity of the portfolios held by the pension funds appear - the brokerage firms and the custodians themselves.

The Authority has taken two days off for "taking stock", and has barred the pension funds from trading, just like a grocery store would.

"In a preventative step and to ensure the safety of the participants in the pension funds, the ASF wants to find out from pension funds whether on September 23rd, 2013 they are certain of their holdings", the representatives of the ASF told us.

Yes, chaos.

The theft of the shares of Ana Maria Mihaescu happened in the beginning of the year, and the ASF found out about the case in April, if not even earlier.

How can the ASF become anxious all of a sudden, after so much time?!

Is it because it was only now that BURSA made the situation public?

In that case, we would like to apologize that even though we were the first in the mass-media to report the case, we were that slow; we weren't aware that the ASF isn't capable of doing its job without us.

The only case in which the ASF could stop looking ridiculous would be if, the "preventive" measure to verify the integrity of the portfolios of the investment funds just coincidentally happened at the same time as the publication of the piece of news about the theft of shares.

Which is a possibly that we won't rule out.

It's just that it's a bit unlikely.

• The holdings of other investors will not be audited

Market reactions were particularly harsh, as more or less jokingly, some investors felt discriminated: "I mean, why not just halt trading for the entire stock market? Ort why not check the holdings of the investment funds?"

One possible answer would be that the decision has not been made at the level of the entire ASF, but only in the "private pensions" department, with the people in charge of the area of the former CNVM (Romanian National Securities Commission) shrugging their shoulders.

Mircea Ursache, the vice-president of the ASF in charge of the capital market, told us that the decision to halt trading was made by the private pensions department of the ASF and that "it has no connection to the CNVM side".

The representatives of the communication department of the ASF consider that the pension funds being absent from the market should prove irrelevant: "Pension funds are < buy and hold > investors, they invest over the medium and long term, so the impact of two trading sessions in which they wouldn't trade should be irrelevant, as pension funds are not speculative nor intraday investors".

As if the main concern was the potential drop in the daily turnover of the stock market, instead of the suspicion that the Romanian stock market is in full chaos, even though we claim that it is "organized, regulated and supervised".

Of course, a rather weak attempt to shift attention from the subject, one which Radu Soviani seems to be proud of being familiar with.

No, Mr. Soviani, your professional concern, according to your job description, should be by the issues concerning the market supervision, because you are hired by the regulator.

Or, who knows, perhaps this time you are acting as an "analyst" and we are having problems over here discerning when you are acting as an employee of the ASF and when you are acting as a journalist - we would advise you to get two tags: "journalist" and "ASF employee".

This would help you as well in distinguishing the two phases, because it would seem you are the victim of our confusion as well.

Regardless, we have noted your valuable contribution to analyzing the market - the market will not be affected.

The reaction of Marius Popescu, the president of the APAPR (the Association for Private Managed Pension Funds in Romania), who, being entitled to be concerned about the pension funds, said that they will not be affected by the decision of the ASF, considering that they are long term investors.

He said, on TV, that there is a very clear difference between the theft of shares on the retail market, where it was all about trades made using fake IDs, through a broker, and the pension funds which are institutional investors, operating based on a legislative framework that includes many safety measures, among which the most important is the depository banks, overseen by the ASF and the NBR.

"The pension fund is an institutional investor, we trade on the stock market through brokers, but the trades are settled using a custodian bank and the holdings are kept in custody by a depository, and this depository settles all transactions and certifies the existence and the amount of the holdings", the president of the APAPR also said.

• Other scenarios: irregularities in the reporting of the funds or more victims of stock thefts

Regardless of how many times the ASF repeats the word "prevention", some people just aren't buying the explanation that the pension funds have been barred from trading for two days in order for their portfolios to be checked, as they are arguing that the audit could have been done without stopping trading.

In their opinion, the measure has nothing to do with the checking the stocks, but rather with verifying that the portfolios actually exist, namely with finding "irregularities" in the reporting of the pension fund assets.

Since the investigation concerning the theft of shares from the account of the head of the IFC is nothing new, the ASF could have opted to take "preventative" measures a few months. Of course that means actually expecting that one department of the ASF knows what the others are doing, specifically that the members of the CNVM and those of the CSSPP had worked together.

The ASF told us that it has not uncovered situations similar to that of Ana Maria Mihăescu.

Nevertheless, the existence of other victims is possible, as often times, such crimes are not discovered when they are committed, but rather, far longer after they occur.

And the two days that the ASF has set aside for audit raise suspicions, as they make us think of the 3-day settlement period.

If the ASF wasn't planning on performing audits, during the sessions, it would have had plenty of time to do them outside the trading period, some people say.

• The source of the information which the thieves had

There are many ways for those who stole the shares of Ana Maria Mihăescu to have gotten hold of her personal data, so every possible avenue needs to be investigated.

The Financial Supervision Authority has decided to conduct for cause audits at SSIF Actinvest and at the Central Depository, following the investigation of Ana Maria Mihăescu, conducted between April and July 2013.

Once the for cause audits are completed, should the ASF uncover any violations of the stock market legislation, it will publish the measures adopted according to the standard procedures, as stated in the response sent by the representatives of the Authority to BURSA, following its enquiry.

The ASF has presented a timeline of how the shares of the head of the IFC were stolen: "The opening of a trading account at SSIF Actinvest, of a bank account, as well as the transfer of the shares owned by Mrs. Ana Maria Mihăescu from a certified intermediary to SC Depozitarul Central SA (the Central Depository), and subsequently from the Central Depository SA to SSIF Actinvest SA, were done by a third party using a forged ID, containing some of the identification data of Ana Maria Mihăescu".

According to the officials of the Financial Supervision Authority, the investigation conducted by the ASF between April and July 2013 has targeted the trading activity conducted in the account of Ana Maria Mihăescu at brokerage firms authorized by the ASF, and as a result the ASF has not found any situations similar to that of Ana Maria Mihăescu.

The ASF considers that the case of Ana Maria Mihăescu was not caused by regulatory deficiencies; rather it is the result of the failure of the authorized personnel of the brokerage firms involved to comply with the stock market regulations.

Still, it should not be disregarded that currently, the transfer of the shares from the Depository to the brokerage firm can be done by the latter simply by presenting the Personal Numeric Code of the client.

The case of Ana Maria Mihăescu is a repeat of the thefts of shares which occurred in 1998-1999, which was revealed by BURSA as well.

The difference is that, at the time, the CNVM denied that the news published by BURSA was accurate, and as a result we were forced to resort to our own investigations, to find the method used and to find the group of criminals (and published the photo of the "brains" behind the operation), through our own forces.

By comparison, today's ASF seems far more willing to cooperate.

Before the international standards or the corporate governance, the stock market should make sure that shares don't get stolen.

No one can tell for sure anymore if their stocks are lying peacefully in the Depository or if someone else is trading them.

The only good news that the thefts can only be in line with the market size.

In other words, minuscule.