BSEC to crackdown on Tk300cr brokerage scam

Infographics: TBS

The Bangladesh Securities and Exchange Commission (BSEC) has decided to seek legal opinions on initiating action against four brokerage firms for embezzling Tk300 crore of investors' money using a fraudulent software database. 

The decision was taken at a commission meeting in late January.

The four firms set to face legal actions are Tamha Securities Ltd, Banco Securities Ltd, Crest Securities Ltd, and Shah Mohammad Sagir & Company Ltd.

Among other decisions, the commission will also form an inquiry committee to investigate PFI Securities and its involvement in the financial misconduct. 

It will develop a roadmap for Moshihor Securities, which misappropriated Tk161 crore, outlining steps to address the irregularities and ensure compliance with regulatory standards.

The regulator will also issue directives to four other brokerage firms – Fareast Stocks and Bonds, Subvalley Securities, Indicate Securities, and Saad Securities Ltd – to address their regulatory violations.

According to the Dhaka Stock Exchange (DSE), the brokerage firms manipulated customer accounts using parallel softwares, misleading clients and regulators with fake transaction records.

How the brokerage scam worked

A Consolidated Customers' Account (CCA) is a separate bank account maintained by stockbrokers to hold unused funds from their clients' beneficiary owner (BO) accounts. These funds are strictly used only for paying for securities purchased by the client or collecting commissions or fees owed by the client. Any unauthorised use of the funds from the CCA results in a deficit.

However, BSEC officials revealed that these brokerage houses misused investors' money by secretly introducing a parallel software system, which reported fake cash and securities balances to clients and regulators and showed fake buy-sell order executions, deceiving investors.

But, despite regulatory orders, these firms failed to return investors' funds, leaving many struggling to recover their money.

Four firms embezzle Tk300Cr

According to the DSE, Tamha Securities Ltd embezzled Tk139.67 crore of clients' money by illegally using additional software and providing fake investment information. Of this, Tk92.57 crore was in cash, while Tk47 crore was in securities. Around 720 complaints were filed against the firm, involving Tk52.39 crore.

In June 2021, the DSE suspended the trading operations of its member, Banco Securities Limited, following primary findings of a Tk60 crore embezzlement. A subsequent investigation into the brokerage firm's accounts revealed a deficit of Tk128 crore in its consolidated customer account, comprising Tk66.11 crore in cash and Tk61.97 crore in securities.

Crest Securities Ltd abruptly ceased its operations and shut down its office without any prior notice, leaving investors deeply concerned about the security of their funds and shares. 

An investigation by the stock exchange revealed a deficit of Tk65.30 crore in the firm's consolidated customer account, consisting of Tk44.90 crore in cash and Tk20.40 crore in securities. 

A total of 6,480 complaints were lodged against 21,180 beneficiary owner (BO) accounts linked to the brokerage. Of the firm's Tk48 crore in claims, only Tk1.32 crore has been settled by the stock exchange so far.

The country's premier bourse suspended transactions of Shah Mohammad Sagir & Company Ltd due to its failure in trade settlements. Following an inspection, the DSE discovered that the brokerage firm had misappropriated Tk13.74 crore. A total of 4,187 complaints were filed against the firm, with 1,081 investor claims still unresolved.

Roadmap for Moshihor Securities

The commission will make a roadmap for Moshihor Securities Ltd which misappropriated client funds invested in the capital market for years, evading regulatory oversight by employing multiple servers and databases, according to a letter sent by the DSE to the securities regulator.

As of 19 August 2024, DSE identified a Tk68.58 crore shortfall in Moshihor Securities' CCA, down from Tk75 crore as of 2 May 2024.  

On 29 August 2024, the BSEC formed a five-member probe committee to investigate the matter after receiving a report that the brokerage firm had misused a total of Tk161 crore, including Tk68.58 crore of investors' funds and Tk92.35 crore worth of investors' shares.

Inquiry committee for PFI securities 

The commission has also decided to form an inquiry committee to investigate PFI Securities Limited.  

In January 2024, the securities regulator granted PFI Securities a six-month extension to adjust the Tk25 crore deficit in its CCA. However, the company failed to fully comply with the regulatory instructions, and as of 21 August 2024, the deficit had increased to Tk28.18 crore.  

Despite the shortfall, PFI Securities holds assets worth more than Tk1,000 crore, including land and buildings.

In September last year, the BSEC had instructed stock exchanges to develop a uniform online platform where stock brokers can update their Consolidated Customers' Accounts (CCA) status daily at the end of trading hours.  

At the time, BSEC said to enhance transparency and accountability, both stock exchanges will create this unified platform for CCA updates. Brokerage firms will be required to update their CCA status daily through the platform, allowing for regular monitoring. If any discrepancies are found, the stock exchanges will take appropriate action.