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Thu, 24 July 2014 12:51:54
Sri Lanka media should not use the term stock market 'mafia': SEC chief
17 Nov, 2012 10:46:34
Nov 17, 2012 (LBO) - Sri Lanka's media should refrain from using the word 'mafia' in relation to the stocks market, because no such organized movement exists, Securities Exchange Commission chairman Nalaka Godahewa said.
Godahewa told reporters during a media conference this week, that rather than the stock market players, the 'mafia' was involved in 'negative' media reports aimed at bringing the market down.

Godahewa was appointed to the position by the state in controversial circumstances after the previous boss, who was cracking down hard on stock market fraud resigned saying he was under pressure.

Mafia

The so-called 'stock market mafia' was a reference by some critics to politically powerful market players who 'cornered' illiquid stocks and pumped them up or engaged in other questionable activities such as chop stock trading or creating false markets.

Questionable trading activities - especially those that become widespread during credit bubbles - are not clearly defined as fraud under Sri Lanka's securities law as in some other countries.

Some of the inflated stocks were then dumped on state managed funds, retail investors and others who chased after quick gains with margin loans, critics said.

Sri Lanka's finance ministry before completion halted one such transaction, involving state-run National Savings Bank.

Bubble Trouble

The trading pyrotechnics were performed during a time when interest rates were low and liquidity was high in money markets, creating conditions for asset price bubbles. The credit bubble later dissipated itself after hitting the balance of payments.

The rupee weakened against the dollar falling from 110 to 134 rupees and interest rates rose. Stock prices gradually came back to earth.

The world's first SEC, in the United States was also created following widespread abuses during the so-called 'roaring 20s' economic bubble triggered by Federal Reserve money printing.

The economic bubble collapsed along with the stock market in 1929 creating the 'Great Depression'. The US dollar was devalued for the first time in its history from 20 to 35 units to an ounce of gold. The US SEC was created in 1934.

The Fed also brought the first rules on margin trading after the market collapsed.

In Sri Lanka the SEC brought in credit restrictions before the market collapsed perhaps preventing further losses to late entrants to the market, analysts say. The moves attracted fire from brokers and politically powerful investors.

Rule making

The credit restrictions were also brought without wide consultation, violating a fundamental principle of rule and law making leading to several changes on the run which some say weakened SEC's authority.

Sri Lanka's SEC has illiberal powers to gazette rules overnight in the style of Germany's 'Enabling Act' without consulting citizens.

Other agencies that make rules without going to parliament, such as the telecom and power regulators have a set process where first consultants are hired to draft rules, which are then opened for public comments.

The process ends with a public hearing where interested persons can voice comments and make presentations. The regulator then announces a determination. In some cases affected people can go to court against determinations.

The SEC has also followed similar processes in other instances.

SEC eventually lost two chairmen and one director general during the bubble, leading to a loss of confidence among the public.

Negative Mafia

Questioned by reporters whether Godahewa was referring to reporters as the 'mafia', Godahewa said he was referring to people who made statements in the media rather than the journalists themselves.

He said 'negative' media reports created a bad impression about the country in the minds of foreign investors, who will shun the country.

After getting into a verbal tiff with a reporter from Sri Lanka's Divaina newspaper who was accused of coming to the media conference with a negative mindset, Godahewa later apologized and retracted the statement.

The reporter said he had asked many tough questions in his life as a reporter and this was the first time he had received such a response from an official.

Other reporters also protested that asking questions was their job, and pointed out that Godahewa himself had said he was prepared to answer any question at the beginning of the press conference.

Foreign Investors

It was also pointed out that foreign investors were now coming to the country despite reports of the stock market mafia, while they were selling even before the stock market mafia phrase hit the headlines.

Godahewa said there could be greater potential that was lost due to negative reports.

Analysts however say if there are perceptions of crime, corruption, lawlessness or even expropriation, some emerging market investors may still come as all risks can be potentially traded off with higher rewards.

As a result, they may demand a higher risk premium, indicating that price to earnings multiples have to be re-rated down make stocks attractive.

Savvy foreign investors who trade on fundamentals, and sold out during the peak of the bubble when price to earnings multiples hit the upper 20s are now coming back, with some well managed firms with fair prospects trading below 10 times earnings.

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READER COMMENT(S)
13. Broke Broker Nov 21
Has anyone noticed how the market started the current dive after SEC chairman's latest press conference. For those who thought they were "goda" (meaning dry land), the market is now in mada (mud). I am, however, is an optimist I am confident that the market will settle with the ASI at around 3,000. I disagree with the pessimists who say it will hit 1,900.
12. Fibonasi Nov 20
Gentlemen, may I suggest that in the interest of maintaining the high decorum and propriety of the CSE we use another term to describe market manipulators, pump and dump triads (the Chinese mafia). How about patriots! That should fit in nicely with the terminology used during the height of the war against Tamil Tigers. Or we can even call the CSE mafia the Api Wenuwen Api brigade. Can we please agree on this terminology?
11. Shaik Ahamath Nov 20
A thief by any other name is still a thief
10. Kapila Nov 20
Thank you for that informative comment Lawdee.
The Sicilian Mafia are a very organised network, which I would say is quite far removed from the state of the CSE.

This is not to say that there was no organisation at all, just something more loose.

Racketeering is a good term, maybe robber baron or as Ranga said, barbarian?

9. Lawdee Nov 20
Hi Kapila. The mafia need not be of Italian origin. Infact the so called 'racketeering' charges stock and debt market miscreants are so often slammed with in the US are in fact from a counter mafia law.

The RICO statute (Racketeer Influenced and Corrupt Organizations Act) was originally brought against the mafia.

Micheal Milken (junk bond king) was one of the most famous people to get hit by RICO.

The organization need not be registered in the Companies Registrar. If they meet at Starbucks or map out the strategy through a conference call it is still a racket. Of course if you use the phone for fraud in the US you get slammed with wire fraud charges as well.

8. Ranga Srinath Nov 20
I suggest ' Barbarians'.
7. Kapila Nov 20
Mr Godahewa is a marketing expert and he knows the power of advertising.

Doubtless the use of the unmentionable phrase is having an impact.

He is quite right that they are not organised like the Sicilian Mafia.

Yet, how is this thing, whose name we may not speak be better described?

"Cronies" comes to mind. Does anyone have a better suggestion?

6. DillonDP Nov 19
Ohhh i should may be clean my own act before i speak about others
5. Puhul Horu Nov 19
Poor SEC chief - he must be taking things a little too personal...
4. Prophet Nov 19
xxxxx is no better than a Dhoby, only there to white wash.(Victim of SEC manipulation)
3. Leeiananda Nov 17
Yes media should use more descriptive statement like "Sri Lanka stock market 'mafia' headed by 'xxxx xxxxxxxxx' with the full backing of 'Sri Lanka xxxxx xxxxxx xxxxxxx'" instead.
2. L.Jinosoma Nov 17
EX-Chairman of SEC and UNP De Silva MP Of Parliement who used Mafia word in Stock Market.
Ex -SEC Chairman nothing exprinces of Stock Market and he is not study of share Market and finicial deals as well as not economist.
Harshe De Silva is like half boil egg has not fully study Global Economy at all.I think he has paid some mount of sum dollars and obtain (Dr) without proper study.

Ignorant elties only word of used mafia for stock market.

1. ranjith Nov 17
Yes But there is Anti Market Mafia.. That exists.