Regulator seeks to recover client funds from fraudulent brokers

BSEC's Efforts to Recover Investors' Embezzled Funds

• The Bangladesh Securities and Exchange Commission (BSEC) has adopted a comprehensive strategy to recover investors' funds misappropriated by stockbrokers.
• The regulator has directed the prime bourse to settle smaller claims using brokers' funds or assets under its custody, according to BSEC sources.
• For larger claims, the BSEC is considering seeking legal advice to involve law enforcement agencies in holding brokers accountable and ensuring investor reimbursements.
• When requested for updated data on unresolved claims, the BSEC declined to provide information.

Persistent Issues with Fund Mismanagement

• Embezzlement and mismanagement of clients' funds by stockbrokers have remained longstanding challenges.
• Major fraud cases have involved firms such as Crest Securities, Tamha Securities, Banco Securities, Shah Mohammad Sagir & Company, and Mashihor Securities.
• The latest scam, involving Mashihor Securities in August last year, resulted in the misappropriation of over Tk 1.68 billion in clients' funds and shares.

Actions Against Fraudulent Brokers

• Law enforcement agencies imposed travel bans on Mashihor Securities’ CEO Ziaul Hossain Chisty, Managing Director Mashihor Rahman, and Director Sheikh Mogol Jan Rahman over fund embezzlement accusations.
• Measures like suspending and freezing brokerage firms' BO (beneficiary owner's) and bank accounts, along with travel restrictions on their owners, have yielded little success.
• While the BSEC cannot file criminal cases on behalf of defrauded investors, it can act against securities violations, insider trading, and illegal transactions.
• The regulator is now seeking assistance from state agencies to initiate criminal cases against fraudulent brokers.

Legal Challenges in Recovering Investors' Funds

• Some legal actions have been taken, such as cases filed by the Anti-Corruption Commission (ACC) against brokers like Tamha Securities.
• However, legal proceedings often lead to further complications.
• In 2022, a lower court ordered the confiscation of Tamha Securities' owner’s assets to compensate investors, but the order was later overturned after an appeal by Pubali Bank, which had provided loans to the brokerage firm.
• In response, the BSEC recently requested the ACC to take legal measures for investor fund recovery.

Investor Participation in Recovery Efforts

• BSEC Executive Director Md. Mahbubul Alam emphasized that investors' involvement is crucial in recovering lost funds.
• Many clients received bounced cheques from brokers but failed to file legal complaints.
• In January 2023, the BSEC identified 68 brokers guilty of misappropriating client funds.
• Some settlements have been made, including compensation to clients of Sinha Securities, which repaid investors by liquidating shares owned by one of its stakeholders in a listed company.

Settlement of Small Claims

• The stock exchanges have been tasked with facilitating the settlement of small claims.
• The Dhaka Stock Exchange (DSE) has been engaging with brokerage firms to pressure them into compensating investors.
• Between 2019 and 2021, Tamha Securities, Banco Securities, Crest Securities, and Shah Mohammad Sagir & Company collectively embezzled over Tk 2.0 billion in investor assets.
• As a result, transactions at these firms remain suspended.
• The DSE has refunded around Tk 300 million to affected investors from these four brokerage firms in two phases between 2022 and 2023.

Methods Used by Brokers to Misappropriate Funds

• Investors deposit funds into Consolidated Customers' Accounts (CCAs) maintained by brokerage firms for secondary market investments.
• Brokers exploited the system by withdrawing funds from CCAs using cash payee cheques.
• Some brokers accepted client deposits but failed to deposit the funds into CCAs.
• There were cases where brokers used client funds to purchase securities in their own accounts without informing investors.
• In some instances, brokers sold investors' securities from their BO accounts using duplicate back-office software.

The BSEC continues to push for stricter measures and legal interventions to address these financial malpractices and ensure investor protection.