Capital market regulator in internal conflict over LR Global

A top official of the stock market regulatory body, the Bangladesh Securities and Exchange Commission (BSEC), has accused his chief of soft-paddling on the LR Global Bangladesh Asset Management Company Ltd that the BSEC department concerned has blamed for a swath of irregularities.

BSEC Commissioner Dr Mizanur Rahman, who looks after mutual funds and special purpose vehicles, in a letter to Chairman Shibli Rubayat-Ul-Islam has accused him of ignoring the asset manager's "violations of laws" and a series of "financial crimes".

These "irregularities" were dug out in an investigation by a BSEC committee last year, on top of the previous regulatory findings and actions regarding LR Global in 2014.

In the letter on 9 March, Mizanur Rahman said the commission is obliged to take legal actions against LR Global Bangladesh AMC, its Chief Executive Officer Reaz Islam and other management executives for the anomalies as per recommendations of the investigation committee.

The five-page letter includes a litany of irregularities against LR Global, the asset manager of six listed mutual funds.

"The asset manager continued scores of financial crimes – it was engaged in money laundering, abused resources of mutual funds for private gains, and made unlawful investments and expenditure. It also submitted false or misleading statements and declarations and failed to comply with critical provisions of securities laws," reads Dr Mizan's letter.

The BSEC probe committee last November had recommended ousting LR Global from the six funds that it manages, and transferring the asset management to another company of national repute to safeguard the interest of investors.

When contacted, LR Global's CEO Reaz Islam denied each of the allegations and regulatory findings in a text reply to The Business Standard.

BSEC Commissioner Mizan alleged, "The BSEC chairman wants to ignore criminal violations of laws and a series of financial crimes committed by the asset manager and the people involved in it."

He also expressed his frustration, saying the commission had lightly discussed "such a critical regulatory case as a miscellaneous agenda of the BSEC Law Department without even a working paper in the 3 February 2021 commission meeting."

"The issue was not consulted with the MF & SPV [mutual fund and special purpose vehicle] Department, and it had no prior knowledge of the agenda. The choice of the chairman not to obtain official views of the MF & SPV Department and the commissioner concerned in this case is not understandable," the letter reads.

Mizan also criticised the commission's late-February decision to revoke two of its previous orders to replace LR Global as the asset manager of the Green Delta Mutual Fund and the DBH First Mutual Fund based on the majority unitholders' verdict.

"The revocation will be a grave mistake for the commission in its mandate to establish good governance in the capital market. It would damage regulatory effectiveness of the commission to ensure good governance over 93 mutual funds and protect the interest of thousands of mutual fund investors," reads Mizan's letter to his chairman.

When contacted, Dr Mizan declined to comment on his stance as "everything was elaborated in the letter to the BSEC chairman."

Meanwhile, BSEC Chairman Prof Shibli Rubayat-Ul-Islam told TBS over the phone, "We observed that many mutual funds and their investors have been suffering from a few asset managers' non-compliances and also because of an unwanted battle among the asset managers.

"We are trying to bring the sector back on track in a constructive way, which may include punishment, warning, and most importantly enforcing a regulatory ambience so that asset managers operate for the investors' best interest."

When asked about his commissioner's dissent regarding LR Global and the blame on him, Prof Shibli declined to comment.

Asked why the regulator revoked its December 2019 order to oust LR Global from the management of the two funds, the BSEC chairman said it was a part of BSEC's efforts for conflict resolution within an intermediary industry, which "needs to be forward-looking, of course, with corrections of the previous problems."

LR Global Bangladesh Asset Management Company

Bangladeshi investment professional Reaz Islam with a background of working in Wall Street launched the LR Global Bangladesh Asset Management Company in 2008, following the global financial meltdown.

LR Managers Investments LP, registered in the Cayman Islands and operating from New York, joined Reaz with less than half of the shares in the Bangladeshi asset management business. 

LR Global Bangladesh got the regulatory approval to manage six closed-end mutual funds in Bangladesh, which have had a total net asset value amounting to over Tk1,050 crore at the end of 2020.

LR-managed funds had attracted many reputed institutional investors because of their stock selection and return performance.

The first controversy

But, the asset manager began to draw criticism in June 2014 as soon as the BSEC prosecuted it with Tk50 lakh in fine for violating securities laws. 

According to Dr Mizan's letter that cited old BSEC documents, the violations of rules included frequent inter-account fund movements, mishandling fund assets through payments for intangible expenditure, frequent cash withdrawal, unlawful investments in private equities, manipulative trading across funds under own management, and non-submission of securities to the custodian. 

In 2014, the BSEC also ordered LR Global to return Tk48.5 crore to the mutual funds that it had invested in private securities. 

It also asked the LR to return to mutual funds Tk5.9 crore of intangible "office and administrative expenditure", and Tk31.62 lakh of ineligible "legal expenses" using various funds under the LR's management. 

Reaz told TBS, "We are not aware of any legitimate findings. All issues in 2014 were fabricated by a BSEC insider in coordination with our key adversary. The goal of this individual was to dismantle LR Global and threaten our staff to pave the way for a substandard competitor. That is why as a last resort we very confidently went to the Supreme Court."

Regained investors' confidence and a fresh dent

However, leaving bad things behind, the LR Global again gained investors' confidence through better fund management after 2015.

The confidence again had a dent in 2019 following LR Global's announcement of investing Tk49 crore in a top online news portal bdnews24.com from its six listed mutual funds and that resulted in a collective plea by some top institutional investors owning more than two-thirds of the units of two of the funds for replacing the LR as the asset manager of two funds.

The investors feared that the LR made the investment at a much higher valuation than it deserved. 

Based on the majority unitholders' plea, the BSEC ordered the trustee Bangladesh General Insurance Company (BGIC) Ltd to replace the LR as the asset manager of the two funds in December 2019. 

The LR went to the court with a writ petition and finally lost the legal battle in March 2020 as the Supreme Court upheld the BSEC decision, according to Dr Mizan's letter to the BSEC chairman.

LR Global argues that since alongside staying the High Court stay order on asset manager replacement, the Supreme Court Appellate Division also directed the two parties to get the rule heard by a High Court Division Bench and that was still pending, LR did not lose the legal battle.

However, the change in asset manager did not materialise and the complaining investors sold off the units they held.

Following this, the BSEC in February decided to revoke its previous order of changing asset manager, despite the fact that the MF & SPV Department of the BSEC in their investigation report in early November 2020 recommended exemplary legal actions against top officials of the LR Global Bangladesh along with their recommendation for bringing back the money invested in the media portal and a private distillery to the six mutual funds from which the investments were made.

The investigation committee also said, "Mutual Fund's money is not safe to keep under the management of the LR Global."

"This was the last failed attempt to hamper our reputation," Reaz Islam said referring to the BSEC probe committee recommendations. 

Claiming the LR as the top-performing mutual fund manager, he said the LR paid its investors over 43% in dividends over the last decade and the funds have consistently beaten the benchmark by 5% on an average over the same period. 

"Even our competitors take a position in our funds, given our solid track record," he added.

In the meantime, Commissioner Mizan in his letter said the private companies in which LR Global invested are "unprofitable and comprised fictitious assets and deeply illiquid", adding that trustee The BGIC claimed before the investigators that fair value of the private investments would be substantially less than their acquisition costs.

"Completely baseless," Reaz said to defend his investment decision in private companies. 

Amid the fact that the BSEC chairman told media recently that the regulator allowed the LR to continue with the said two mutual funds' asset management on condition to withdraw the investment from the media portal and pay all the previous regulatory fines, Reaz still spoke for his decision to invest in the media company.  

He said the LR paid one-third of the price suggested by the investment bank, Brac EPL Investments, and bdnews24.com was almost at the breakeven point and debt-free during the investment. 

Without the benefits of LR's investment, the media site already moved up to the number nine in the global ranking of Bangladeshi sites from its previous position of 14th and it is because of the quality of its contents, said Reaz. 

Taking on the BSEC investigators he said, "We cannot do anything to educate individuals that are completely ignorant, refuse to accept the proven potential of digital transformation and have no clue about the well-established basic valuation process for digital media." 

A stable, loyal and growing organic customer base of 5-6 million unique visitors per month of bdnews24 is a prime target for monetisation via e-commerce, said Reaz. 

However, he also said "In this regard, we will provide complete cooperation and work with the BSEC to come up with a very constructive solution as the commission desires," 

By unlawful investments and expenditures from mutual funds, the asset manager impaired more than Tk120 crore of assets of the six mutual funds, wrote Dr Mizan as the head of MF & SPV Department of the BSEC.

Reaz claimed the regulatory allegations were "completely baseless."

"All our expenses are well within limits and items disclosed in offering documents and permitted by trust-deed and BSEC rules, "he said.