Confidence Game

An insider trading scandal at the Philippines Stock Exchange has investors staying away in droves. Can new SEC chief Lilia Bautista bring them back?

When Joseph Estrada telephoned former Securities and Exchange Commission chairman Perfecto Yasay in October, the Philippine president’s tone was brusque and his orders clear. At least that’s the way Yasay remembers it. “He told me,” says Yasay, “to stop the investigation and to make sure that I cleared Dante Tan.” A close friend of Estrada’s, Tan was being investigated by the stock exchange for possible insider trading and pricemanipulation in the shares of gaming company BW Resources Corp.

Yasay’s refusal angered the president so much, says Yasay, that he telephoned four more times in subsequent days. “He called me names,” Yasay remembers. “The first call he was mad, the second call he started to be nice, and then on the third call, he was really, really mad again. He was using this kind of good guy, bad guy routine.”

Estrada does not dispute that he called Yasay but denies trying to influence the investigation of Tan and BW Resources. Nevertheless, the president’s phone calls to Yasay were a prelude to what quickly became the biggest insider trading scandal in Philippine history. The incident has fueled investors’ fears that under Estrada, the Philippines is reverting to the kind of crony capitalism that bedeviled the country’s economy under the late dictator Ferdinand Marcos.

Even as most of its regional neighbors rebound from the financial meltdown of the late 1990s, the Philippines is suffering from a crisis of investor confidence that has hammered the stock market and the peso. “The Philippines is falling off the radar screens of institutional investors,” mourns Alexander Pomento, head of research at Merrill Lynch Securities Philippines.

The woman charged with putting Manila back on the map is Lilia Bautista, who took over from Yasay at the SEC in March. A former trade undersecretary, permanent representative to the United Nations and ambassador to the World Trade Organization, Bautista is a seasoned negotiator, widely respected for her integrity and honesty. She won a global reputation for toughness last year, when the WTO was choosing a successor for director-general Renato Ruggiero. Surprising many more conciliatory Asian diplomats, Bautista stood up for her choice, Thai Deputy Prime Minister Supachai Panitchpakdi, against a powerful U.S.-led lobby that favored former New Zealand prime minister Michael Moore. Both men won terms to lead the WTO; Supachai will take over from Moore in September 2002.

The spotlight on the Philippines Stock Exchange has intensified since Bautista took office. On July 20, galvanized by the BW Resources scandal, Congress passed and Estrada signed into law the Securities Regulation and Enforcement Act, which had been lying around for five years. Crafted mainly by Yasay and by Raul Roco, head of the Senate committee on banks, financial institutions and currencies, the act was designed to privatize the exchange and wrest it from the control of a cozy network of brokers often referred to as an “old boys’ club.” And although the law doesn’t go into effect until August, just days before its passage the SEC issued a report asking Justice Department prosecutors to file charges against Dante Tan, 38 other individuals and eight brokerages for possible violations of securities regulations.

The Justice Department must now decide whether to prosecute. If it does, those found guilty could each face fines of as much as 500,000 pesos (roughly $11,000) and up to 21 years in jail. Estrada says he is cooperating fully with the BW Resources investigation. Tan, who declined to be interviewed for this story, has steadfastly denied any wrongdoing in the affair.

Bautista, 65, is a soft-spoken woman who does not give the impression that she can take on a phalanx determined to maintain the status quo. But she warns that the PSE should not be lulled into complacency by first impressions. “I may look very timid,” she says, “but I get so mad that I blow up in board meetings when I want something that I feel should be done. Then I’m very vocal and certainly very forceful about it.”

In early scuffles with the PSE, Bautista did not fare well. Although she presented the SEC’s report on the BW Resources affair to the Justice Department only a couple of weeks after her self-imposed 100-day deadline, the exchange has stared her down over several key issues. Yet Yasay, who stepped down when his efforts to get to the bottom of the BW Resources matter were stymied, believes that Bautista is the best person to succeed him. “Considering her international exposure, her experience as a former undersecretary of trade and industry, and that she is close to the president and has his support, nobody is better qualified,” he says.

Bautista’s critics say her lack of experience in financial markets makes her unsuited to lead the SEC at this critical juncture. She counters that she has promoted direct investment in the Philippines for much of her career and that her goal now is to do the same thing through the capital markets.

A native of Manila, Bautista earned her law degree and MBA from the University of the Philippines. She also has a master’s degree in law from the University of Michigan, where she was a Dewitt Fellow. In 1963 she won a scholarship to take a special course on corporate finance and reorganization at New York University and worked as a legal editor at PrenticeHall in New Jersey.

Four years later, she joined the Philippines’ Board of Investments as its chief legal officer, the start of a 25-year stint within Department of Trade and Industry, where she rose to acting secretary in 1992. For the next seven years, she represented the Philippines at the UN and at the WTO in Geneva. In 1999 she returned to the Philippines as senior undersecretary at the Department of Trade and Industry, then headed by current Finance Secretary Jose Pardo. Although Bautista describes her work schedule as “terrible,” she is an enthusiastic if occasional golfer.

Unmarried and childless, Bautista says she discovered early in life that she “didn’t like housework.” When Estrada appointed her as head of the SEC, he announced that she has “no children and no spouse” and thus “no problems.” In fact, while defending herself against charges that she is easy to bulldoze in negotiations, Bautista recalls rather proudly that at the Board of Investments some people called her a “cranky old maid.”

Bautista will need every advantage she’s got. The burden of restoring confidence in the Philippines’ market mechanisms rests largely on her shoulders. Unless her efforts to unravel what happened to BW Resources’ shares result in true accountability, investors are likely to remain skeptical about the country. “We were happy initially to give Estrada the benefit of the doubt,” says Guy de Tonquedec, a Hong Kong-based fund manager with Indocam Asset Management Asia. “But shortly after he was elected, it became quite evident that he just doesn’t get it. As long as this guy is around, it’s a bit difficult to envisage an improvement in sentiment.”

THE BIZARRE SAGA OF BW RESOURCES SUGGESTS that, if nothing else, the PSE could use better oversight. BW Resources stock began 1999 trading at P2.04, then surged more than 5,000 percent, to P107, on October 11. That day it plunged mysteriously, landing at P22 three days later. Ironically, even the arrival in Manila on the same day of billionaire Stanley Ho, the Macao casino magnate, to buy a 10 percent stake in BW Resources and assume its chairmanship could not stop the stock from imploding. The company recently changed its name to Fairmont Holdings Co.—but its shares continue to languish, trading at just P4.5 in mid-July.

The crash prompted the SEC to demand that the stock exchange launch a formal investigation into the share’s trading patterns. Duly—despite the five phone calls from Estrada that Yasay says were intended to halt the process—the PSE’s internal Compliance and Surveillance Group, led by Ruben Almadro, spent four months looking into BW Resources. On February 11 it presented its report to the PSE’s Business Conduct and Ethics Committee, which has the sole right to act on the report’s findings.

According to the report, Dante Tan committed an offense by accumulating a 10 percent stake in BW Resources by December 1998 without disclosing his holdings to the SEC. During the next ten months, the PSE report goes on to allege, Tan and his proxies manipulated the price of BW shares to create the illusion of heavy trading and draw others into buying the stock. The PSE report says Tan used 21 accounts with 14 brokers using his own name plus 11 numbered or alias accounts.

The PSE report alleges that by June 1999 Tan had made an estimated profit of P820 million trading BW Resources stock. The most likely explanation for the shares’ sudden reversal in October, the report says, is that “the issue simply sought its true price level after Dante Tan’s support or pressure was removed from the stock—the typical and, in this case, indubitable proof of Dante Tan’s manipulation.”

Tan has consistently argued that he was a victim, not a perpetrator, of insider trading. He says that he continued buying BW Resources shares after last year’s price collapse, and claims that he has lost P2 billion on his investments in the company stock. “I will not rest until my name has been cleared, my honor restored and my dignity returned,” he told journalists at a luncheon after the PSE released its report.

Tan insists that BW Resources’ shares were manipulated by Wilson Sy, owner of Wealth Securities, the Philippines’ biggest retail brokerage. (Yasay says that Estrada suggested the same thing during his second phone call to the former SEC chief in October.) After the PSE’s report was released, Tan accused Sy of being part of the so-called “Black Samurai” group that manipulated BW Resources shares. He also asked why Wealth Securities was not mentioned in the report, suggesting that Almadro was a protégé of Sy, a former PSE chairman. Almadro answers that his team thoroughly investigated Wealth’s BW Resources transactions and found no evidence to suggest any wrongdoing. Sy says the allegations are designed to deflect attention from Tan’s own involvement in the BW Resources affair and maintains that Wealth did nothing wrong.

Before Estrada came to power, Tan, 50, was a wealthy but virtually unknown businessman who imported truck tires. He almost never talks to the press. But he is widely believed to have contributed generously to Estrada’s presidential campaign and rose to prominence through BW Resources after Estrada took office.

BW Resources, too, was little known until its stock’s strange trajectory put the company in the public eye. In March 1999 it bought a Manila Bay hotel and shopping mall that was backed by Starwood Hotels & Resorts Worldwide, the parent company of Sheraton Hotels and Resorts. BW Resources converted the development into a giant casino, the Sheraton Marina Hotel & Entertainment complex-which will house the office of the Philippines gambling regulator.

A year later, the BW Resources name was all over local newspapers, and the investigation into its share-trading patterns took on the characteristics of a national soap opera. When Almadro submitted his February report to the PSE’s Business Conduct and Ethics Committee, the BCEC—seven of whose nine members are considered “old boy” brokers—reviewed its findings in a mock trial at which Almadro acted as prosecutor. By early March, Almadro says, it was clear the committee “wanted desperately to clear the brokers” his report had named.

Events reached a head when Almadro and his Compliance and Surveillance Group colleagues were asked to leave the room just as one session got into full swing. While they were absent, Almadro says, the committee voted to clear the brokers, and later PSE chairwoman and BCEC head Trinidad Kalaw forbade him from speaking to the press. On March 7 Almadro and 16 members of his group walked out of the exchange. Almadro says he took his stand because “the integrity of the entire capital market and the national interest was at stake.”

The walkout prompted Yasay to try to close the PSE on March 10, on the grounds that it could not police itself without the Compliance and Surveillance Group. But the next morning, Finance Secretary Pardo opened the exchange anyway. The loss of support prompted Yasay to step down a couple of weeks later.

The most public incident occurred on March 22. Yasay appeared as the featured guest on Debate, a popular current affairs program taped live every week. As he and other guests discussed whether Estrada had kept his campaign promise to end patronage politics and corruption, the show was interrupted for an important outside call. Suddenly, the president’s voice came over the amplified phone lines. Estrada hurled insults at Yasay, called him a liar and a bribe taker and concluded by shouting, “May lightning strike you down!” Yasay stepped down three days later. Bautista took the helm at SEC on March 27, making the BW Resources scandal and a cleanup of the stock exchange her priorities.

THE BW RESOURCES AFFAIR, HOWEVER, IS BY NO means the only issue troubling foreign investors about the Philippines. Even before many details of Yasay’s investigation had been made public, the market was in the doldrums. Back in January representatives from major global securities firms put their heads together with local brokerage executives to hammer our a consensus on what should be done to win back institutional investors. The financiers arranged a weekend meeting at the exclusive Tagaytay Highlands resort, an hour-and-a-half drive from Manila. Between rounds of golf, the investors planned to work up a proposal for reforms and present them to Finance Secretary Pardo, who attended the meeting, and to President Estrada at a luncheon on the second day.

The colloquy began with gusto. Participants lambasted alleged corruption, cronyism and blatant conflicts of interest within the Estrada administration. “It was great just getting all this stuff off your chest,” recalls the head of a leading European securities house who attended the event. “There was so much vitriol.”

The wide-ranging complaints eventually focused on two issues. The first was the BW Resources affair. The apparent price manipulation of BW’s shares had made the PSE a laughingstock among foreign investors, participants concurred. At its peak, BW’s market capitalization stood at more than $1 billion, topping such market leaders as food and beverage giant San Miguel Corp. and diversified conglomerate Ayala Corp. Nothing justified such a valuation, it was agreed.

The second issue was the May 1999 takeover of PCIBank by Equitable Banking Corp., which is controlled by George Go—a friend of Estrada and also of Dante Tan. Equitable Banking was helped in its takeover of PCIBank by two government pension funds, the Government Service Insurance System and the Social Security System. They joined with Equitable to buy 72 percent of PCIBank for P31.6 billion in a deal reported to have been brokered by Mark Jimenez, another Estrada friend.

Investors had recoiled when the government took sides in a takeover battle, fearful that the Philippines’ commercial playing field was being rigged. One Tagaytay participant says that the Equitable takeover had been seen as the beginning of the end for the Philippines equity market.

On the second day the mood at Tagaytay changed abruptly as foreign and local brokerage heads argued over who should bring up the ugly subject of reforms with the president over lunch. The locals pushed for the job to be given to Matthew Sutherland, former research head at Paribas Asia Equity (Philippines), saying that a foreigner was less vulnerable to reprisals—losing bond business, for example. Participants say Sutherland declined.

“Everybody felt that the messenger could get shot—in metaphorical terms,” recalls Sutherland, now with HSBC Securities in Hong Kong. Adds another participant at the meeting: Nobody dared go tell Estrada. This is the kind of far he engenders.”

Eventually, the task was awarded to Pardo, who had listened to the previous day’s complaints. But no confrontation ever cook place. An initial resolution drawn up by the group had referred to Jimenez and Equitable Bank’s takeover of PCIBank. But instead of presenting this to Estrada, the group left it with Pardo, hoping he would pass it on.

Forty-four attendees then signed a letter that was sent to Estrada several days after the meeting. The letter made no reference to Jimenez, the Equitable Bank deal or BW Resources. Instead, it requested that either Estrada or Pardo “issue a clear policy statement against all forms of graft and conflict of interest.” It then suggested a definition of conflict of interest—the authors had concluded that it was necessary to spell out the meaning for the president. No one received a response.

Pardo dismisses the notion that brokerage executives at the Tagaytay meeting had anything to fear. In written replies to questions from Institutional Investor, he says of Estrada, “It is not in his character to discourage anyone to speak freely in his presence.” Pardo adds that he had briefed the president before the luncheon on the executives’ concerns and that Estrada had taken the initiative in addressing them.

Seven months after the Tagaytay Highlands meeting, confidence in the Philippines remains low, even though government officials say the president is working to fix the dysfunctional markets. Rafael Buenaventura, head of Bangko Sentral ng Pilipinas, the central bank, points to the April passage of the General Banking Act, which allows greater foreign ownership of banks, and the Retail Trade Act, which does the same for foreign retailers, as proof that the administration is taking steps to open up the Philippine economy.

Estrada, meanwhile, has set up an Economic Coordinating Council to give more clout to technocrats in the government. He has terminated meetings of his so-called “midnight cabinet,” at which an inner circle of personal advisers enjoyed a steady stream of the president’s favorite whisky—the very costly Johnny Walker Blue Label—while they crafted policy Estrada also has vowed he “will not lift a finger” to help Tan if government prosecutors indict him. “Let the investigation go on,” he was said publicly. “Whoever is guilty should be punished.”

The Philippine president is doing his best to manage his country’s image abroad. He kicked off his first official visit to the U.S. on July 26, reassuring a gathering of computer executives in San Francisco that the fighting in Mindanao would soon be contained and inviting them to think of the Philippines as a high-tech hot spot in Southeast Asia. Estrada subsequently met with President Bill Clinton in Washington before making the rounds on Wall Street to address investment managers’ concerns about the PSE.

IN TRYING TO TURN THE STOCK EXCHANGE INTO a credible, transparent market, SEC chairwoman Bautista faces a brutal assignment. Since the BW Resources case hit the front pages, the PSE has gone backward rather than forward. Its previous three presidents all were nonbrokers tasked with professionalizing the exchange. But shortly after Almadro’s resignation in March, Ramon Garcia, a former broker who proudly describes himself as a “card-carrying member of the old boys’ club,” was voted in to replace Jose Luis Yulo as president and CEO.

Other members of the old guard filling key positions include PSE chairman Felipe Yap, chief operating officer Jose (Pete) Cervantes (installed shortly before Almadro’s resignation) and head of the listings committee Robert Coyiuto Jr. The PSE’s annual elections were held shortly after Almadro’s report on the BW Resources affair was completed.

To date, Bautista has even had difficulty enforcing regulations already on the books. According to the PSE’s own rules, mostly established when it gained the status of a self-regulating organization in 1998, the 65-year-old Cervantes was too old to take the position of COO. The SEC ordered the PSE to revoke the appointment. When the PSE responded by saying it would rather change its rules—and did so—the SEC backed down.

<="" p="">With regard to the dispute over Cervantes, Bautista says she urged PSE president Garcia to comply with the SEC’s recommendation—to no avail. And she says that Almadro’s team forfeited the right to their jobs. “They were not fired, they walked out,” she says. “And they walked out because they felt the PSE was interfering with their functions. They didn’t like the setup.”

Optimists hope that the new Securities Regulation and Enforcement Act will give Bautista the means to be more forceful now. The law requires that the PSE become a stock corporation within a year. It also stipulates that the number of nonbrokers on the PSE’s 15-person governing board be increased to a majority as soon as the act goes into effect. Anyone named president of the exchange must have worked outside the brokerage industry for at least the two previous years. And the board must have at least three independent directors.

Bautista herself suggested before the law’s enactment that she was holding fire. “I wouldn’t want to compound my problems with a quarrel with [the PSE] so long as they are complying with what we have basically asked them to do,” she said. Outside observers think this makes sense. “If she took on the broker mafia before, she had to do it with small arms,” says Alex Magno, a political scientist at the University of the Philippines. “Now that the new law has passed, she can move against them with heavy artillery.”

Investors hope that the report Bautista handed to the Justice Department on BW Resources in July will produce action. Only 18 pages long—compared with the 400-page report Almadro completed in February—the July filing mentions several additional names in connection with the BW Resources scandal and lists eight rather than five brokerage houses that it says may have been complicit in illegal share dealings. The Justice Department gave those named in the report until July 27 to respond but is not obligated to disclose any such responses. At the end of July, none had been reported.

Yet even though Bautista has cast a wide net and recommended that criminal charges be brought against Tan and others, few with knowledge of the Philippine judiciary are confident that the case will be resolved in a timely fashion. Nobody has ever been jailed for insider trading in the Philippines. Already, Tan business associate Jimmy Juan has won an injunction from the Court of Appeals that prevents the PSE’s initial report on the BW Resources affair from being used in legal proceedings against those named in it. Juan’s lawyer argued that his client had no opportunity to defend himself before the PSE and had thus been denied due process. The ruling confounded financial and legal experts alike. The SEC is appealing the ruling but in the meantime has had to begin investigating the BW Resources case all over again.

TIME IS NOT ON BAUTISTA’S SIDE. WHILE THAILAND and Malaysia are bouncing back from the regional financial crisis, the Philippines is wrestling with a host of economic negatives. HSBC Securities predicts that the Philippines will post GDP growth of 2.5 percent this year, compared with 3 percent in Indonesia, 5.3 percent in Thailand and 7.5 percent in Malaysia. Exacerbating the slowdown, says HSBC fixed-income analyst Dilip Shahani, is the fact that economic policies have actually started to tighten as Manila tries to shore up the deteriorating federal budget. In addition, the central bank has raised interest rates to stop further peso weakness. “The government has stopped pump-priming the economy,” says Shahani.

Political risk has also increased. Observers fear that a war against Mindanao’s Abu Sayyaf Muslim rebels will wind up in the streets of major urban centers. The rebels have already conducted a bombing campaign against Manila shopping centers. An ongoing hostage crisis after the Abu Sayyaf abducted 21 people, mostly foreigners, in April, has brought negative press about the Philippines to every corner of the globe.

For investors, much damage has already been done. The Philippines composite index is down 28 percent so far this year and nearly 40 percent since June 1999, making the Philippines Asia’s worst-performing market over the past 12 months. Turnover on the PSE has plummeted from an average of $73 million a day in 1999 (and more than double that before 1997’s financial crisis) to just $41 million a day during the first six months of this year. In June daily turnover slumped further, to just $22 million a day.

The dwindling liquidity—and the PSE’s waning reputation—have already driven two of the country’s leading companies, processed food titan Del Monte Philippines and electronics makers Ionics EMS, to list their shares on the Stock Exchange of Singapore. At least four more companies--Bayantel Telecommunications Holding Corp., airport services provider Macroasia Corp., Pryce Gases and cable TV company Sky Vision Corp.—are considering listing in Singapore, as is one of the Philippines’ most exciting technology stocks, Music Corp.

The PSE can ill afford the loss of such quality stocks. The Philippines’ weighting in Morgan Stanley Capital International’s Asia free ex-Japan index has fallen to just 1 percent, from some 1.6 percent at the beginning of the year, partly because of Malaysia’s reinclusion in the index and partly because the Philippines’ market capitalization is growing more slowly than its neighbors’. “The market is becoming statistically insignificant,” says Neel Sinha, head of research at SG Securities (Philippines).

Perhaps the ace up Bautista’s sleeve in fighting the “old boys” on the stock exchange is that she feels she has nothing to lose. “You can only bow down to pressure if you have some other agenda in your mind,” she says. “Pressure is what I’ve lived with for so many years in government, and it doesn’t bother me. I’m at the end of my career and I don’t need to cling to my job at all cost. I can walk out of this job at any time; I expect that I can go play golf after this.”

Investors can only hope her sangfroid holds up against the entrenched old guard. Some fear that only a new administration can alter the Philippines’ fortunes. Right now, Indocam’s de Tonquedec says he can think of no good reason to be in the Philippines market at all. He believes there is little prospect that the investment climate will improve before 2004. That year, of course, is when the Philippines next holds its presidential elections. Estrada, who can serve only one term, will then be gone.