Charges of 'fraud and misconduct': SECP show-cause to CSIBL and directors

The Securities and Exchange Commission of Pakistan (SECP) has issued a show-cause notice to the Crescent Standard Investment Bank Ltd (CSIBL) its chairman and directors why the bank's licence should not be cancelled on the basis of SECP's inspection reports about "fraud, misfeasance and misconduct".
The details of the CSIBL affair are contained in the 29-page SECP show-cause notice sent to the chairman and directors of the CSIBL, a non-banking finance company, on August 29, 2006. The notice has been signed by the SECP chairman, Raziur Rehman Khan.
The SECP notice highlights the use of bank assets to illegally benefit Anjum Saleem and Altaf Saleem. The details run as under: "It has come to the knowledge of the commission that the bank has paid Rs 50 million each on behalf of Altaf Saleem, sponsor of Crescent Group and Anjum Saleem, sponsor and chief executive of the bank.
This matter was taken up with the bank. The commission had undertaken a targeted inspection from June 27 to June 30, 2006 in this regard. This inspection resulted in a report (the third inspection report), wherein it was found as follows:
"CSIBL by pledging its own equity portfolio, assisted Altaf Saleem and Anjum Saleem to obtain running finance facilities of Rs 100 million in February 2005. The amount was received by the CSIBL in April 2005.
However, till December 31, 2005, the said funds received from Altaf Saleem and Anjum Saleem were not appearing in their names and to camouflage the factual position the amount of Rs 100 million was recorded as receipts from the Crescent group companies, namely, Safe Way Fund Ltd, and Asian Capital Management Ltd.
"The examination of relevant records/books of accounts pertaining to the payment of Rs 100 million by the CSIBL to Habib Bank Ltd, KSE branch, Karachi on April 27, 2006 revealed that during the month of February 2005, two running finance facilities of Rs 50 million each were offered by Habib Bank Ltd, KSE branch, Karachi to Altaf Saleem and Anjum Saleem.
The said facilities were granted for the period of one year expiring on January 31, 2006 and the purpose of the facilities was trading in stocks. The offer letters to this effect were issued by the chief manager, Habib Bank Ltd, KSE branch, Karachi to Altaf Saleem and Anjum Saleem on February 9, 2005 and February 28, 2005, respectively.
The facility of Rs 50 million each was granted by the Habib Bank Ltd, to Altaf Saleem and Anjum Saleem against a pledge of following equity portfolio of the CSIBL. PICIC, SNGPL, PIA, Pakistan PTA, General Tyres, and SSGC. Anjum Saleem availed the running facility of Rs 50 million from Habib Bank Ltd, KSE branch, Karachi by drawing cheque dated April 8, 2005 for payment to the CSIBL.
The payment was, however, recorded as amount received from the Asian Stock Fund Ltd, by the CSIBL. As the maturity date of the running finance facility in the name of Anjum Saleem was falling on January 31, 2006, Anjum Saleem requested the Habib Bank Ltd, to roll over the running finance facility for a period of another one-year. His request was acceded to and facility of Rs 50 million was renewed up to January 31, 2007 in the name of Anjum Saleem.
During the months of May and June 2005, out of the above stated Rs 100 million received from Altaf Saleem and Anjum Saleem, major chunk of Rs 55.13 million was transferred to Crescent Jute Products Ltd, and recorded as adjustment of the outstanding liabilities of Rs 100 million of the Safe Way Fund Ltd, and the Asian Capital Management Ltd.
Up till December 31, 2005, the books of accounts of the CSIBL never depicted the factual position in respect of Rs 100 million funds received from Altaf Saleem and Anjum Saleem. However, on December 31, 2005, six-months COIs aggregating Rs 44 million, representing the remaining amount out of Rs 100 million as reduced by the payments made to the Crescent Jute Products Ltd, and other payments/credit of mark-up/profit etc, during the period April 2005 to December 2005 were issued in the name of Altaf Saleem and Anjum Saleem having maturity date as of June 30, 2006."
"The notice states that based upon the facts highlighted in the First Inspection Report, the Second Inspection Report, the Third Inspection Report, the A.F. Ferguson & Co, Chartered Accountants' (AFF) reports and the Auditor's Report, "the commission is prima facie satisfied (subject to such explanation as may be provided later to the contrary) that:
"The bank has committed serious contravention of the provisions of the Ordinance, the Non-Banking Finance Company (NBFC) Rules, Prudential Regulations and various directions given to the bank by the commission.
"The bank is carrying on unauthorised business. "The business of the bank is being conducted in a manner oppressive to its members and depositors, and, "That the management of the bank has been guilty of fraud, misfeasance and misconduct towards the bank and its members and depositors.
This has attracted the provisions of sub-section (2) and (3) of section 282J and section 309(c) of the Ordinance, rendering the licences to be cancelled, and the bank to be wound up.
The SECP had ordered an onsite inspection of the CSIBL on September 28, 2005 in exercise of its powers under section 2821 of the Ordinance. The findings of this inspection were later formalised in an inspection report.
During the course of the inspection, the inspectors discovered, inter alia, that the bank was maintaining parallel books of account under the head of "Managed Portfolio". The inspectors further discovered that while the published accounts for the half-year ended June 30, 2005 showed an asset base of Rs 9.559 billion, another balance sheet showed an asset footing of Rs 5.252 billion.
The inspection findings further revealed that the bank entered into a number of transactions in violation of various provisions of the Ordinance, the NBFC rules and the regulations made thereunder.
The bank had entered into musharaka ventures with its associated company, Maghrib Development Corporation (Private) Limited (MDPL) for an aggregate amount of Rs 1.540 billion (Rs 655 million as shown on the published books of accounts as on June 30, 2005 and an additional Rs 885 million shown on the parallel books of accounts being maintained by the bank).
The paid-up capital of MDPL at that time was Rs20. As per the borrower's basic fact sheet and corporate application form provided to the commission's inspection team it transpired that the then CEO of the bank, Mahmood Ahmed, was also the CEO of MDPL and Tariq Aleem, an ex-director of the bank was also a director of MDPL.
MDPL was, therefore, an associated company of the bank in terms of the definition contained in section 2(2) of the Ordinance. Furthermore, as per the information filed by MDPL with the commission in October 2005, MDPL is a wholly owned subsidiary of the Crescent Standard Business Management (Private) Limited (CSBM).
Despite MDPL being an associated company of the CSIBL, these financing facilities were approved by the bank without a special resolution, in contravention of section 208 of the Ordinance.
The board of directors appointed Mahmood Ahmed as the chief executive of the bank who was also at the same time the chief executive of the MDPL. This act of the board of directors was in violation of Rule 5(2)(e) of NBFC rules.
The CSIBL had violated the prudential regulations issued by the commission in exercise of its powers under section 282D of the Ordinance and had taken up the exposure on group companies by way of investment in their shares amounting to an aggregate of Rs 2.163 billion as on June 30, 2005. Details of the number of shares, market value and names of the companies have also been mentioned.
Moreover, the bank had provided financing facilities to its associated company, namely, MDPL amounting to Rs 1,540 million. On an aggregate basis, the bank's exposure to its group companies, therefore, equalled Rs 3,703 million, which was approximately 240 percent of the equity of the bank, which stood at Rs 1,537.728 million and, therefore, constituted a violation of Regulation 1(2) of part 2 of Prudential Regulations as well as Rule 16 of the NBFC rules.
As per the First Inspection Report, the bank's equity had been eroded by Rs 949.795 million from June 30, 2005 to February 28, 2006. The report also mentions the details.
These violations were communicated to the chairman of the board of directors of the bank and in response Manzurul Haq, chairman of the board replied as under: "I would like to confirm that I had no personal knowledge of any of the matters raised in your letters and these have never come up before the board, during my tenure."
The bank's board of directors reprimanded the management and decided to merge the books. The proceedings have been recorded in the minutes of the board of directors meeting of November 28, 2005, as under:
"The board reprimanded the management for exceeding their power and borrowing huge amount (approx. Rs 6 billion as per SECP) without the knowledge/approval of the board. The board also expressed its displeasure and grave concern for keeping parallel books of accounts and also non-disclosure of transactions to the external auditors. The board directed the management to immediately rectify the situation and record all items in the books."
As a result of consolidation of published accounts with the parallel books, the assets of the bank increased from Rs 9.559 billion to Rs 14.811 billion and simultaneously the liabilities (deposits and borrowings) jumped from Rs 6.027 billion to Rs 11.202 billion.
On November 28, 2005 Anjum Saleem was co-opted in place of Dr Wasim Azhar as director on the board of directors of the bank. He was also inducted as a member of the audit committee of the bank in place of Dr Wasim Azhar.
The SECP chairman in his report has pointed out that in the meeting on December 15, 2005 between the commission and Manzurul Haq, chairman of the bank and the main sponsors thereof, namely, Anjum Saleem and Altaf M. Saleem, the sponsors gave firm commitments to the commission to the effect that in case any shortfall arose in the equity of the bank, they would step in and bridge the gap.
The bank's chairman constituted a special committee and simultaneously slashed the financial powers of the chief executive, Mahmood Ahmed on February 4, 2006. However, it transpired that he continued to approve transactions with Crescent Group entities and the constitution of the special committee was merely a smokescreen.
Out of a total amount of Rs 604 million claimed as injection by the CSBM, detailed scrutiny of Rs 200 million was carried out on sample basis and it was concluded that Rs 200 million was never injected by CSBM on February 14, 2006 as claimed by the chief financial officer; rather, the injection was made by and not earlier than March 31, 2006. Furthermore, the money allegedly injected prior to that date had been raised by using assets of the CSIBL as collateral and the proceeds had been camouflaged to look like an injection of funds.
A report regarding the scrutiny carried out by the SECP was subsequently prepared (the Second Inspection Report). Contrary to the claims being made by the CSIBL, the actual trails of events have been detailed by the SECP chairman in his report.
Despite the extension granted until June 29, 2006 by the SECP on June 1, 2006 for holding of AGM and presentation of its annual accounts for the year ended December 31, 2005 to its shareholders, the bank, till the date of this notice, failed to circulate its audited accounts for the year ended December 31, 2005 and hold its AGM, in violation of sections 233 and 158 of the Ordinance.
On March 29, 2006 the commission once again asked for a plan by April 14, 2006 for equity injection into the bank to the tune of Rs 2 billion in order to safeguard the interest of depositors and other stakeholders.
The commission was informed that the bank had made arrangements for liquidity through Orix Investment Bank Limited against the Crescent Standard Tower building in Lahore for contingency in case there is a run on the bank.
On June 12, 2006 on receiving various complaints from the depositors of the bank and in view of its rapidly deteriorating financial position resulting in suspension of its credit rating by JCR-VIS, the commission in exercise of its powers under section 282D of the Ordinance, directed the bank to immediately cease issuance of any new certificates of deposits (CODs), cease to roll over the existing CODs of individuals on maturity and to en-cash the existing CODs of individual depositors as and when they become due.
The Auditor's report highlights a number of violations of law and practice by the bank as evidenced by the audited accounts for the year ended December 31, 2005, as under:
-- The bank has not maintained proper books of accounts as required by the Ordinance and the NBFC rules.
-- The bank has provided financing to related parties amounting to Rs 5.424 billion. The total exposure of the bank is equal to 45 percent of its total assets (excluding tangible fixed assets and intangible assets).
-- The bank has undertaken and executed real estate transactions with the chairman, board of directors as well as friends and associates of the chairman as well as with the current chief executive, and his close relatives which is in violation of Rule 7(2)(b) of the NBFC rules.
-- The bank has provided financing sans-recourse to a company against right of future sale of club membership cards. The entire transaction has been inappropriately reflected as other finance receivable, which is not allowable business activity under rule 14 of NBFC rules.
-- Despite negative equity of Rs 643.398 million, the bank has invested in the shares of its associated companies.
The commission has also received complaints that the bank has not released shares of Pakistan Services Ltd, pledged with it by Associated Builders (Pvt) Ltd, Zaver Pharmaceuticals (Pvt) Ltd, Brillux (Pvt) Ltd, Hashoo Holdings (Pvt) Ltd, and Gelcaps (Pakistan) Ltd, but has unauthorisedly re-pledged/transferred those shares to other financial institutions.
The SECP chairman has called upon the bank to show-cause, in writing, to him, being duly empowered by the commission in this regard, within 14 days of the issuance of this notice and explain as to why the licences may not be cancelled, and why the commission may not move the court for the winding up of the bank.
In order to afford an opportunity of being heard, a hearing shall be conducted by the SECP chairman, on September 28, 2006 at 10:30am at the head office of the commission situated on the 12th Floor, NIC building, Blue Area, Jinnah Avenue, Islamabad.
The bank, its chairman and directors have been directed to appear at the hearing either in person or through a duly authorised representative. They have also been asked to bring any documents they wish to rely upon or furnish to the commission.
It is the understanding of the commission that all material referred to herein is already in their possession. However, to the extent that they wish to obtain copies of or inspect the documents referred to or relied upon herein, they may contact the SECP chairman.
The show-cause notice has been issued without prejudice to any other action that may be taken or warranted on the basis of the facts and grounds noted in the order.