Fraudsters' muddy dealings

My late father frequently repeated yarns about the antics on the trading floor of the JSE where he spent the better part of his life.

And each time we heard his stories, his enthusiasm and passion for the camaraderie and friendship that existed among stock market traders around the world made them all the more appealing.

One of his favourites was about a town clerk who, just after the end of the war, was invited by the JSE committee to collect a donation organised by the dealers and partners of the various broking firms for some or other disaster that had befallen his municipality. The formally attired gentleman nonchalantly wandered on to the trading floor, an area confined exclusively to authorised traders, evading a military-style commissioner stationed in the foyer.

It was a regular occurrence right up to the market's closure in 1996 for casual visitors, unaware of the existence of a public viewing gallery, to stroll accidentally into the rowdy trading den; the custom being to entrap these innocent intruders in a tight circle and begin shouting boisterously and gesturing riotously, mimicking frantic dealing action, until the remissive commissioner rescued these hapless victims of stock exchange frivolity.

The public official, expecting a formal welcome, was instead confronted by a horde of delinquent traders who mistook him for a stray tourist. Above the entrance of the old Hollard Street trading floor (demolished in 1958) were numerous mounted antelope heads, apparently hunting trophies of one of the brokers. In what was considered to be good humour, the mob of troublemakers mischievously teased their prey, one clerk tossing the elderly man's hat playfully into the air. Whether by design or not, it lodged on a protruding horn.

Order was restored when the committee appeared on the floor, at the preordained time, to find their honoured guest dazed, dishevelled and hatless.

Happily, the generosity of his tormentors and a profusely apologetic president made up for his ungentlemanly treatment. The cleaning staff recovered his hat later that evening; the JSE administrative staff returning it unceremoniously the next day.

Despite all the backslapping and good-fellowship that existed in the community, the JSE had its fair share of scandals. I have lived through many in my time as a member of the JSE, the biggest being the Chweiden, Poplak and Greg Blank affairs. Most of the frauds were inside jobs involving the use of clients' scrip and cash or, in the case of Blank, accumulating a parcel of shares for a syndicate, manipulating the price higher and realising the profit by offloading the holding to a complicit institutional buyer.

In nearly all cases, the crimes were committed at companies where internal controls were lax with too much authority vested in a single person. Yet, on no occasion did the public or the firm's clients suffer any losses, the shortfalls being covered either by a guarantee fund established by member firms or by specially protected insurance policies.

With progress, though, the linking of global financial markets, the speed at which information and cash flows across borders and the exotic nature of products has radically increased the risks of trading fraud. Overseeing a book of securities that requires an understanding of intricate formulae and computer-driven algorithms invites misconduct, especially when volatility in prices can cause wild swings in the worth of one's positions.

The latest revelations of a $2-billion loss at giant Swiss bank UBS, allegedly hidden since 2008, demonstrates that, in spite of vast efforts to regulate trading, after the collapse of the sub-prime market and a à5-billion breach by Societe Generale's Jerome Kerviel, modern risk management techniques are still fraught with weaknesses.

The incident will certainly tarnish UBS management's reputation and cost the investment banking division its bonuses, but it is UBS shareholders who will carry the burden of the hefty losses.

It is not only "rogue" traders who dishonestly abuse their positions and engage in unlawful business activities. There are ample examples in the annals of stock market history where top management has cooked the books to mislead the authorities.

My best story by a long stretch is about Henry Cooper, a revered and respected member of the JSE and a pillar of the establishment who added an extra nought to a handwritten Eskom loan certificate that he lodged with the bank as security for his eponymous firm's overdraft.

He escaped detection for years, until the day the bank's auditors decided to validate the collateralised scrip lodged in their safe, whereupon they noticed that the ink on the extra nought inserted by Cooper's had faded differently from the other scripted numerals. Cooper was "hammered" (expelled) the next day.