How stock brokers misled investors in 2011

Gained benefits fraudulently by artificially increasing the price of shares

• Raised the price of a share from Rs. 75.10 to Rs. 241.50 within 27 days
• The SEC alleged that the other suspects too abetted the first suspect during the whole process
• 472 investors misguided causing Rs. 50 million loss

There were allegations that the Sri Lankan share market had reached its peak in 2011 due to various market manipulations. Possibly, a series of such illegal manipulations could unfold in the coming months, as four stock brokers including Lanka Kannangara had been named as suspects in a court case filed by the Securities and Exchange Commission (SEC) at Colombo Fort Magistrate’s Court over a share market manipulation that allegedly took place in 2011.

The Colombo Fort Magistrate’s Court recently released two suspects including Kannangara on bail after they turned up before court over the case in which they were charged for allegedly manipulating the share market in 2011 by interfering with the free operation of the market and creating artificial and misleading appearances with respect to the price of shares of a company called ‘Radiant Gems International PLC’.

Initially there were four individuals named as suspects in the magisterial inquiry. However, two other suspects were not served with summons yet, as they were not in the country at the moment. Colombo Fort Magistrate Ranga Dissanayake directed to reissue the summons against those suspects and fixed December 13, 2019 to serve charge sheets against the suspects.

Counsel Sajitha Jayawardena appeared for the two suspects while Additional Solicitor General Sudarshana de Silva represented the Prosecution.

In the meantime, Kannangara had allegedly earned Rs. 22.2 million by trading through nominal accounts of which he had control

Legal powers vested upon SEC to initiate action over share market manipulations

The Securities and Exchange Commission of Sri Lanka had initiated the inquiry based on the legal powers vested upon it under the section 13 of the Securities and Exchange Commission Act 1987 to conduct investigations into any alleged violation or contravention of the provisions of the Act or any rule or regulation.Under the Rule number 12 of Securities and Exchange Commission of Sri Lanka “no person shall create, cause to be created or do anything that is calculated to create a false or misleading appearance or impression of active trading, or a false or misleading appearance or impression with respect to the share market for or the price of any securities listed in a licensed stock exchange”And the section 51 of the Securities and Exchange Commission Act 1987 stipulates that “any person who is found guilty of an offence under this Act shall be liable on conviction after summary trial by a Magistrate to of imprisonment of either description for a period not exceeding five years or to a fine not less than fifty thousand rupees and not exceeding ten million rupees or to both such imprisonment and fine” According to the Prosecution, suspects of this case -- Lanka Kannangara (suspect 01) and Faarik Furkhan (suspect 03) -- were employees of Lanka Securities Pvt. Ltd as stock brokers in 2011. Suspect Kapila Senarath Bandara (Suspect 02) was a stock broker of Lanka Equities Pvt. Ltd while the other suspect Ravindra Mallawarachchi (suspect 04) worked at SC Securities Pvt. Ltd as a stock broker.

SEC detects unusual price increase of a share

During the time period between September 02, 2011 – September 29, 2011, these four suspects had allegedly conspired and had interfered the market to mislead the price of the shares of ‘Radiant Gems International PLC’ in a fraudulent manner.According to the SEC, in 2011, Radiant Gems International PLC (RGIP) had been recognised as a company listed in the share market, which had shares of lower liquidity. And its share market records had also showed that its financial status was not good at that time, as it got transferred from the ‘Main Board’ to the ‘Default Board’ of Colombo Stock Exchange during 2011.

Despite such circumstances, suspects had traded shares of RGIP with much intensity and had raised the price of a share from Rs. 75.10 value to Rs. 241.50 within just 27 days (Sept. 2 - Sept. 29, 2011). It was a 222% increase of the value of a share of RGIP. This unusual fluctuation of price had been detected by SEC as a result of suspicious trading patterns deployed by the suspects through their clients and as stock brokers.

The SEC had identified some of the suspects’ methods to manipulate share market as following: Placing matching buy and sell orders, Placing orders at the end of the trading, Placing huge orders, Making transactions that do not reflect any benefits, Continuously being the highest demander for the shares, Transactions between same individuals, Setting orders in away raising the share price of Radiant Gems International PLC and misleading the market with artificial tactics.

According to the SEC, in 2011, Radiant Gems International PLC (RGIP) had been recognized as a company listed in the share market, which had shares of lower liquidity

472 investors misguided causing Rs. 50 million loss

According to SEC, first suspect, Lanka Kannangara in particular had allegedly used different artificial methods to churn up the trade volume, making the stock look more interesting to other investors, and thereby increasing the demand for the shares drastically. 

He, as a stock broker, had also used central accounts of his clients to do the manipulation by misleading the appearances of the value of the shares.

The SEC had also identified in its investigation that all suspects had dishonestly earned benefits by using central accounts of their clients and first suspect Kannangara in particular had used ‘nominee accounts’ of his clients to trade, thereby earning money in an inappropriate manner. As a result of main suspect, Kannangara’s fraudulent methods to raise the price of the RGIP’s shares, 472 investors had been misguided to purchase the shares resulting them a loss of over Rs. 50 million. In the meantime, Kannangara had allegedly earned Rs. 22.2 million by trading through nominal accounts of which he had control. The SEC alleged that the other suspects too abetted the first suspect during the whole process, thereby committing offences.
Therefore, the SEC has brought charges against all suspects for breaching Rule 12 of the Securities and Exchange Commission of Sri Lanka and Sections 51 (1)(a) and 51(2) of the SEC Act, reading with the section 102 of the Penal Code for abetment over the offences.

• As a result of main suspect, Kannangara’s fraudulent methods to raise price of the RGIP’s shares, 472 investors had been misguided to purchase the shares resulting them a loss of over Rs. 50 mn.
• Despite such circumstances, suspects had traded shares of RGIP with much intensity and had raised the price of a share from Rs. 75.10 value to Rs. 241.50 within just 27 days (Sept. 2 - Sept. 29, 2011)

A trading session at the Colombo Stock Exchange in progress