Stock market integrity at stake

An hour after stock market trading closed last Friday, telecommunications giant PLDT Inc. submitted a sober disclosure to the Philippine Stock Exchange (PSE) on what it called a “budget overrun” amounting to P48 billion on its capital expenditure spending in the last four years. The announcement followed weeks of rumors of an internal probe at PLDT over reported financial anomalies. In the disclosure, however, the company stressed that it had so far found no fraudulent transactions arising from the capital spending overruns. “Certainly, we’ve taken a knock on our reputation. We pride ourselves on governance, on disclosures, and we’re going to get a knock. We have a job in trying to recover our credibility,” said PLDT chair Manuel V. Pangilinan (MVP) after he detailed in an exclusive interview with the Inquirer how he learned initially of as much as P130 billion in undocumented purchase orders made in the last four years.

There are, however, two side stories arising from the PLDT disclosure. One happened hours before it was filed when trading of PLDT shares was rather too brisk to catch the attention of regulators. On Sunday, PSE president Ramon Monzon told the Inquirer that the bourse will investigate the trading activity on shares of PLDT after they noticed heavy selling minutes before the market closed last Friday and about an hour before the financial anomaly was officially disclosed to the investing public. Monzon said the bourse will coordinate its probe with the Capital Market Integrity Corp. (CMIC), a multisectoral watchdog responsible for preventing, investigating, and penalizing trading malpractices in financial markets. “We saw what happened, and we want to know why that happened,” Monzon pointed out.

He was referring to the 4.5-percent decline in PLDT’s share price in the last few minutes of trading last Friday. That selloff brought PLDT’s price down from P1,548 to P1,478 just four minutes later, wiping out more than P18 billion in market capitalization. On Monday, the first trading day since the disclosure, investors sold PLDT on worries about the impact of the budget overrun on the company’s profits. PLDT shares were battered throughout the day, plunging nearly 17 percent during the morning session before extending losses to 19.35 percent at the close of trading,
erasing about P62 billion in shareholders’ value. In all, those who knew beforehand the budget overrun issue—or the people with information not available to the investing public—avoided losing about a quarter of their investment in PLDT shares by selling ahead of the others.

The second issue threatening PLDT, and the Philippine equities market for that matter, is the threat of several US law firms to probe PLDT for possible federal securities laws violations on behalf of investors. Glancy Prongay & Murray LLP, The Schall Law Firm, Johnson Fistel LLP, and the Law Offices of Howard G. Smith are seeking out affected investors to prepare for the potential filing of class action suits. PLDT shares are traded on the New York Stock Exchange via PLDT American Depositary Receipts (ADRs). The ADRs fell more than 23 percent on Monday, “thereby injuring investors,” said the Pennsylvania-based Law Offices of Howard G. Smith. “The investigation focuses on whether the company issued false and/or misleading statements and/ or failed to disclose information pertinent to investors,” the Los Angeles-based The Schall Law Firm added.

These two critical issues relating to the PLDT spending fiasco have cast doubts on the workings of the Philippine capital markets. Both the PSE and corporate regulator Securities and Exchange Commission (SEC) need to address them before investors—both local and foreign—lose their trust. The SEC has already ordered an investigation of possible insider trading and has directed the PSE and CMIC to submit “initial reports on their investigation into the trading activities that have resulted in the sudden and sharp decline in the share prices of PLDT before the official disclosure of the budget overruns.” PSE’s Monzon said they found no evidence so far of insider trading, but clarified that the probe is ongoing and they have expanded its scope to cover PLDT’s trading history going back to the start of November this year. Analysts do not expect anything to come out of this PSE probe as those with prior knowledge will not be dumb enough to link their
names to any PLDT transaction that Friday, or even days and weeks before, but the timeline of events suggests that there obviously was insider trading.

Investors are watching how this PLDT drama will play out. PLDT has promised to coordinate with the SEC, the PSE, and CMIC in their inquiry and to cooperate in the probe into suspicious trading activities on its shares. While PLDT does its work of probing and instituting changes to its own operations, the PSE and the SEC need to come to the bottom of the “insider trading”
angle to assuage investors—big and small, local and foreign—that there exists an even playing field in the local stock market.