Theft of Government Bonds from Pshonka’s Bank. Four Questions for the “Blind” Regulators

Theft of Government Bonds from Pshonka’s Bank. Four Questions for the “Blind” Regulators

The problem is not who turned out to be the final buyer of the effectively stolen securities, but that the infrastructure of the Ukrainian stock market is perfectly suited for such crimes.

“The bonds stolen from Pshonka’s bank 4,7 million dollars ended up in the ex-Gontareva fund.” A flashy headline to attract attention, isn’t it? Or maybe it really is an outrageous fact.

Let me remind you: this is about how domestic government bonds from the ill-famed BG Bank, which is associated with the circle around the family of former prosecutor Pshonka, were sold at an obviously undervalued price and, after passing through several intermediaries, ended up in the funds of the well-known investment company ICU.

The aftershocks of that deal are still reverberating through the market. And, apparently, they will not subside anytime soon.

As the media noted, the bonds were sold to the company PJSC Terra Invest. After that they passed through the companies LLC Fondovyi Aktiv and LLC “Central Broker,” which the media link with the well-known PJSC Exchange Group Perspektyva, whose founders are named as Dnipropetrovsk businessmen Serhiy Antonov and Iryna Filippska.

Immediately after the journalistic investigation was published, everyone began issuing denials, refutations, statements about who is whose beneficiary, etc. To be convinced the media are right, you don’t need to reinvent the wheel.

All the companies listed are professional participants in the stock market. Therefore, you can find a lot of information about them from open sources. In particular, on the website of the Agency for the Development of the Financial Market Infrastructure of Ukraine — smida.gov.ua.

From the information on SMIDA we can see an interesting fact — the four mentioned legal entities listed the same contact phones, emails from the same domain name academy.in.ua, and PJSC Terra Invest, LLC Central Broker and OJSC Exchange Group Perspektyva noted the same registration address: Lenina St., bld. 30, Dnipropetrovsk.

This is actually hard not to notice. However, another point needs to be made here.

The problem is not who turned out to be the final buyer of the effectively stolen securities, but that the infrastructure of the Ukrainian stock market is perfectly suited for such crimes.

In other words — both regulators of our market — the NBU and the National Commission on Securities and the Stock Market (NCSSM) — did nothing to prevent or at least to punish companies for such operations.

Question No. 1. How could it happen that the state-controlled Settlement Center (SC), through whose accounts the symbolic payment passed, that is 8,3 thousand hryvnias for a rather large package of securities (4,7 million dollars), noticed nothing? Moreover, these were securities in a troubled bank that was under NBU control.

Either this organization has no monitoring of transactions at all, or it does, but the managers of the settlement organization turned a blind eye to the glaring mismatch between the amount paid and the real value of the securities package.

The thing is, settlements for all government securities are carried out exclusively using the delivery-versus-payment principle, so the parties to any transaction are required to make payment through the SC. In this case the SC simply should have stopped this operation, and the securities would have remained on BG Bank’s account.

It did not do so and, apparently, did not even report the clearly suspicious transaction to the relevant law enforcement agencies.

The Settlement Center can offer many arguments in its defense, but the fact is that one of the key elements of market infrastructure does not perform functions that are mandatory not only for a settlement bank but for every commercial bank in any normal country.

Question No. 2 — to the National Commission on Securities and the Stock Market (NCSSM), which promptly receives information about every transaction on the market.

Either this information is not processed by the regulator at all, or it cannot or will not do anything with it. The stolen package of bonds was with intermediaries for about a week, and the Commission had the opportunity to block its further movement.

There was enough time — the first trades took place on 4 November 2014, and the next transactions were only on 10 November 2014. But that did not happen.

Question No. 3 — to the new composition of the NCSSM, which has been operating since the beginning of 2015.

Having access to official information and understanding the nature of these operations, the Commission, after many months of work, did nothing to bring to account the licensed NCSSM intermediary companies used in this chain and their beneficiaries.

Why do we even need such a regulator that senselessly collects mountains of information and fails to respond to obvious signs of violations?

We are not talking now about combating price manipulation or other — more complex — tasks. You don’t need to be a mathematician to understand that the chain of executed transactions is outright theft of BG Bank’s assets.

Question No. 4 — to the National Bank of Ukraine, which has the depository that records all government securities and all operations with them.

The National Bank simply could not have failed to see these agreements and knew best about the problematic situation at BG Bank. Nevertheless, it also turned a blind eye to this fraud, although it could have prevented it within six days while the stolen package had not yet been resold at market price.

There are actually no questions for ICU. It is possible they did not know the origin of the bond package and were a “bona fide purchaser.” Any other large investment company or even a bank could have been in their place.

Sources on the stock market report that an identical package of bonds was offered to other companies as well.

While we have been talking about reforms for the second year, fraudsters continue to use our “heavily controlled and overregulated” state stock market. At the same time, crimes are uncovered only after a year and not thanks to regulator investigations, but due to journalists.

I hope that law enforcement agencies together with the NBU and NCSSM will take up this case and bring to justice the officials of all organizations involved in this deal. Probably the NCSSM will even revoke the licenses of the relevant securities dealers. Won’t it?

In general, this sad story reveals not just an isolated offense but a much deeper, one could say — systemic problem. It is hard to imagine a developed state where such a brazen scheme could be carried out using state debt obligations, a state-controlled settlement bank (SC) and a depository that is a division of the central bank.

Ukraine needs reforms. But can the state authority reform itself? Regarding the stock market — there are serious doubts.

—

Dmytro Verbytskyi, economist; published as the author’s column on the website Ekonomichna Pravda

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Timur Khromaiev wants more powers

The National Commission on Securities and the Stock Market currently lacks sufficient powers to investigate the theft of domestic government bonds from BG Bank.

This was written on his Facebook page by the head of the NCSSM, Tymur Khromaiev.

“You constantly speak of the Commission’s inaction on countering abuses in the securities market precisely when you observe such outrageous cases,” Khromaiev wrote.

He noted that “within its meager powers the NCSSM this year records, documents and issues administrative decisions on facts of abuse in unprecedented numbers.”

“Despite this, we fully realize that this work is a weak and inadequate response to the level of abuses we observe in our market. Weak counteraction does not help prevent this activity in the future, as it demonstrates impunity and ‘profitability,’ ” said the head of the NCSSM.

Khromaiev admitted that the theft of domestic government bonds from BG Bank, the use of government bonds to launder funds out of system banks, Ukrainian financiers trading on the U.S. market based on insider information, and other high-profile episodes discredit everyone working in this market.

“That is why our activity is now focused on the institutional development of the NCSSM and increasing responsibility for market abuses in accordance with international standards. Major work is currently underway by all the mentioned state bodies (including the Ministry of Internal Affairs, the SBU, and the Prosecutor General’s Office) and international organizations (the IMF and IOSCO),” he said.

According to him, “partners from the regulators of the United States, Germany, Poland and other countries are being involved. Based on their findings and recommendations, and taking into account the Ukrainian legal framework, relevant bills are being prepared that will be presented to parliament in the near future,” the head of the NCSSM said.

“Therefore, I would like to move from conjunctural-populist accusations to constructive and professional dialogue. This way we will demonstrate that professionals have agreement and acceptance of the ‘new’ rules and market requirements for investor protection and the irreversibility of punishment,” he concluded.

Translation: Argument

OUR COMMENTARY: Tymur Khromaiev is dissembling. All that was required of the structure he heads and of him personally was to publicly condemn the criminal transaction and file the corresponding statement about the committed crime with law enforcement agencies — the Ministry of Internal Affairs and the prosecutor’s office. He did not do that.

Both the head of the NCSSM Tymur Khromaiev (you can learn about the official’s roots from the publication “The Band of the Savlokhov Brothers — by name. TOP 450: bandits, athletes, prosecutor-accomplice, ‘Zurik’ Khromaiev”), and the head of the National Bank Valeria Gontareva — are creatures personally of Petro Poroshenko, President of Ukraine. And the operators of the stolen securities from Pshonka’s bank are long-standing participants in the Ukrainian securities market. The beneficiary became a commercial structure personally overseen by V. Gontareva. Someone adapted like T. Khromaiev apparently did not want to “pick a fight” with it. Thus, most likely this was a premeditated crime, whose participants included not only the brokers trading the stolen assets but also senior officials of the NBU and the NCSSM.

It goes without saying that in a normal state with independent law enforcement bodies, both V. Gontareva and T. Khromaiev would already have been summoned for questioning. Resignation from their posts would have been automatic.

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