Pakistan’s billion-dollar fund manager resigns quietly as SECP investigates suspicious transactions. Here’s what went down

It was the sort of notification you wouldn’t take much notice of unless you were from Pakistan’s asset management industry. 

On the 1st of March, Al Meezan Investment Management (Al Meezan) announced that its CEO of nearly three decades, Mohammad Shoaib, was leaving. After 29 years at the top one might assume that this was like any other ‘change in management’ announcement and that Mr Shoaib was stepping down to enjoy retired life. But that wouldn’t quite add up. For someone who has been CEO of one company for so long, he is surprisingly not that old. 

Shoaib graduated with an MBA from IBA in 1988. Armed with this and a diploma in banking from the Pakistan Banking Institute, he worked at the Pakistan Kuwait Investment Company for five years before becoming the founding CEO of Al Meezan. Under his leadership, the asset management company has grown to be the largest fund manager in Pakistan managing a pool of investment worth well over a billion dollars in different asset classes with a team of over 600 employees.  

So why does a CEO with decades of experience, who is years away from retirement age, and running a very successful company suddenly decide to retire? There was certainly no news of a better job offer luring him away. And the initial word from Al Meezan was that he was retiring entirely for personal reasons. 

The reason was vague enough, but didn’t quite pass the smell test. People within the industry and the company were also taken by surprise, which led to many speculations as to what the actual reasons behind this unexpected departure could be. Over the past few weeks, Profit has dug into what exactly went down at Al Meezan Investments. What has come to light are suspicions of breaches of fiduciary duty towards clients, letters coming in from the Securities and Exchange Commission of Pakistan (SECP), and pending investigations. 

The SECP points a finger 

It was still cold enough in February for the air conditioning to be off in most office buildings this year. Despite the chilly weather, one can imagine the atmosphere in the boardroom at Al Meezan’s headquarters got a little heated.  

The board had just received a letter from the SECP. The subject of the letter was the CEO of their company.  In the letter, the SECP noted that the CEO and his family, including spouse, son and daughter had engaged in some personal trading of shares which contravened SECP’s regulations that aim to prevent conflicts of interest of senior employees of Asset Management Companies (AMC).

What conflict of interest? 

It is quite simple really. The stock market has regulations that are supposed to ensure transparency and fairness for all players involved. Al Meezan is a massive company that controls a wide portfolio and has a lot of investors’ money to play with. An asset management company of this size investing in a particular side of the stock market could shift stock prices around. This is no problem of course. The way an asset management company works is that it pools money together from numerous investors and then invests that money in different financial assets (mainly shares of listed companies and government bonds) and distributes the profits to their clients, called unit holders, in exchange for fees. 

The only problem is that these massive funds are run by people. Managers, accountants, and CEOs alike are simply people. And these people not only have access to prior information regarding investment decisions of their asset management companies but also have influence over these decisions. As such, the information they have is considered insider information. And insider information, if used for personal gains, could lead these people to making unfair gains at the expense of not just other market participants, but also the asset management company’s own unit holders. 

Among stock market veterans such activity is known as front-running. It is a type of illegal insider trading but is distinctly different from the plain vanilla illegal insider trading where usually company officials trade in the shares of their own company based on undisclosed price-sensitive information. In the case of front-running, generally, a middleman uses knowledge of a large pending share trade, to make direct or indirect personal gain.

Consider an example. Assume that a brokerage house has been asked by its client to buy a very large number of shares of a company XYZ. The current price of XYZ is Rs10 per share. Now, the broker knows that entering a buy order of such a large quantity will increase the share price of XYZ. As the broker has taken the order from the client and the order is pending, he can buy 500,000 shares of XYZ for himself, before executing the trade for his client. Once the trade for the client is executed, the price ends up at Rs12. The broker can sell his own shares to either his own client or back into the market at Rs12 and make Rs1,000,000 in a risk free manner. Front-running, which is an illegal act in almost all jurisdictions, is also considered a criminal offence in Pakistan.

So the question can be raised, against whom the crime has been committed? Well, the fact is that the client could have gotten his shares cheaper. Let’s say the client wanted to buy 1000,000 shares at any cost from the market. There were 500,000 shares being sold for Rs10 and 500,000 shares for Rs11. If the broker had been honest and had not carried out front-running, the client would have made the purchase of 1000,000 shares for Rs10,500,000. However, as the broker bought the shares at Rs 10, the client will end up buying shares at a higher cost than what should have been paid in a fair manner. The client trusts the broker and expects to get the best price in the market. The broker breaches that trust and disadvantages the very person he is supposed to look out for.

This can also happen on the sell side where the broker sells his own shares before his client’s knowing that a large quantity will be sold which will depress the prices of the stock. 

How it works with asset management companies

The process is a little different, but front-running also applies to large financial institutions or asset management companies like Al Meezan. Asset management companies run mutual funds and have fund managers and fund management investment committees who meet regularly to determine whether they should buy or sell certain shares and other financial assets. These meetings are documented and the recommendations made are scrutinised. 

Once the committee makes a decision, the goal is to buy or sell the security which will benefit the fund and in the end the clients who have invested in the fund. As mutual funds combine the investment of hundreds of investors, they can buy or sell large quantities of stock over a period which could have an impact on the price of the stock.

Now consider someone who is part of the management committee or can get hold of the minutes of any such meeting. Being purview to this information that a fund is going to buy hundreds of thousands of shares of a company, an individual can buy a certain stock for themselves in their account. Once the fund executes its order and the buying has been completed, it is obvious that the share price will increase. From here on out the process of how a fund manager can take advantage of this is pretty self-explanatory.

And even though not many people realise, front-running is common enough in Pakistan. Though not widely publicised, even in the past the SECP has filed criminal cases against senior bankers, fined leading brokerage houses, and even revoked the licence of an AMC in one case. All of these cases related to front-running.

1. i) Front-running by UBL’s head of capital markets

In 2017, SECP filed a criminal case against Khalid Iqbal, head of capital markets at UBL after it found him guilty of front-running charges. It all started when SECP noticed two back to back unusual purchases by UBL. The bank had bought 6.5 million shares of Gharibwal Cement Limited, a share in which not a lot of trading is done. A few days later the bank purchased another 6 million shares.

During investigations, it turned out that Iqbal was authorising these purchases on behalf of UBL where the counterparties (sellers of shares) were his three accomplices. Essentially the scheme was that Iqbal’s accomplices would purchase the shares from the market at a cheap price and then Iqbal would get his bank to purchase these shares at a higher price.

The court found all four guilty of front-running charges stating that the accused made illegal profits, causing financial loss to UBL.

1. ii) BMA Capital fined Rs50 million for front-running

In 2013, BMA Capital Management, faced a maximum fine of Rs50 million from the SECP for front-running a foreign client. Their approach involved buying shares of Bata Pakistan from the National Bank of Pakistan and subsequently selling them to their client Bafin (Nederland) BV, a holding company for most of Bata’s global subsidiaries, at a higher price. BMA Capital was aware of Bafin BV’s intention to purchase shares of Bata Pakistan.

Instead of acting as an intermediary between its brokerage client Bafin and National Bank for the purchase of these shares, BMA Capital first directly acquired 578,000 shares of Bata Pakistan at Rs920 per share from National Bank and later, they sold 587,500 of these shares to Bafin at Rs1,000 per share.

Interestingly BMA kept changing its stance during the investigation. In the first letter sent by the firm’s CEO to the regulator BMA admitted that they were negotiating with NBP on behalf of their client Bafin. In subsequent letters, drafted by BMA’s lawyers, the company claimed that its trade was a purely proprietary one, that is, BMA was buying these shares for itself.

The SECP order found that BMA bypassed its fiduciary responsibility towards its client, illegally profiting Rs46 million from the trade. However, this order was later set aside by an appellate bench of the SECP.

iii) AMC Dawood Capital Management’s licence revoked, CEO fined for front-running

Likewise in 2013, the SECP ordered to revoke Dawood Capital Management’s licence and fine its CEO, Tara Uzra Dawood, Rs20 million for front-running.

After a thorough nine-month investigation, the SECP in its order found the CEO guilty of not fulfilling her fiduciary duty towards the investors in Dawood Capital-managed mutual funds. This the SECP order alleged was due to her exploitation of her position as CEO and her advance knowledge of an impending write-down in the mutual funds’ value.

Dawood Capital Management, a subsidiary of First Dawood Group, had invested in corporate bonds issued by several defaulting companies, including Pace Pakistan, Maple Leaf Cement Factory, Pak Elektron, and Telecard.

During a February 21, 2012 audit committee meeting, auditors recommended a write-down on the bond investments, pending a precise determination at the April 28, 2012 board meeting. Before this meeting, between April 6 and April 26, Tara Dawood, her family, and associated companies sold nearly Rs117 million worth of units in the Dawood Income Fund and Dawood Islamic Fund, sparing themselves a combined Rs18.2 million loss.

Dawood Capital Management attempted to evade scrutiny by modifying board meeting minutes allegedly to conceal the write-down discussion. However, SECP’s request for initial drafts revealed the truth, corroborated by independent directors’ testimony, leading to their resignation.

In hearings held in early 2013, Dawood Capital Management defended the redemptions as coincidental and attributed minute falsifications to a clerical error by the CFO, Syed Kabiruddin. The CEO also contended that she was unaware of close-period regulations under which company insiders are not allowed to trade after the announcement of a board meeting. However, the SECP order deemed these explanations insufficient, resulting in the unprecedented revocation of Dawood Capital Management’s licence, a fine for the CEO, and orders to dismantle the mutual funds and refund investors.

However, the story did not end there. Dawood Capital Management and its CEO appealed the SECP order in SECP’s own appellate bench composed of two of SECP’s commissioners. The appellate bench, after hearing both sides, set aside the earlier order completely, mostly on technical grounds. For one, the bench said that the SECP executive director who had passed the order “did not have the power to pass the impugned order”. Secondly it said that since the AMC had not gained anything from the redemption of investments by the CEO and her family etc, AMC’s licence should not be revoked. Thirdly, it said that the specific clauses of the regulations invoked in the SECP’s earlier order, related to the company and could not be used to charge individual executives of the company. Lastly, and probably most importantly, the bench said that there was not enough evidence against the CEO and other executives.

As we explain below, the case of Al Meezan is closest to Dawood Capital Management’s case back in 2013 because of the involvement of the CEO of the AMC and gains made by an individual rather than the AMC. 

What happened at Al Meezan? 

Let’s get down to the technicalities. According to the NBFC and notified entities regulation section 38(B), an asset management company is required to put in place appropriate policies and procedures, approved by its board of directors, which govern trading or investment in securities by AMC employees, their spouses and dependent children.

What the regulations prevent is deriving gains using information that is generally not available and also ensures that proper disclosures of trades by employees are made. Based on the rules outlined by the regulator, asset management companies have their own code of conduct, which could prescribe even stricter rules than those prescribed by the regulator. 

Both the regulations by the SECP and Al Meezan’s own code of conduct require employees of the company to not engage in personal trading in securities in which the AMC also has a pending order to trade in. Essentially what this means is that an employee who is privy to the AMC’s investment decisions has to wait for 24 hours after the pending trade by the AMC is executed or cancelled before they can trade in their personal accounts. This is what is called a blackout period. This is to prevent any unfair gains made by the employee through front-running. It would seem that the SECP feels that Al Meezan’s CEO failed to adhere to this rule.

As per an official close to the company, one of the things that SECP pointed out in its letter was that in some of the transactions, the CEO and his family had traded in the shares of the same companies as Al Meezan traded in. The SECP noted that in these transactions the CEO and his family had traded at a better average buy/sell prices as compared to the average buy/sell prices of the mutual funds of Al Meezan Investment, resulting in an alleged personal gain of Rs 22 lac approximately over a two year review period. 

This would mean that the CEO and his family members were trading at the same time Al Meezan was making investments. Coupled with the fact that Shoaib was privy to investment decisions by the company because Shoaib was a member of the investment committee at Al Meezan as per the company’s annual accounts for 2023, front-running can not be ruled out. It is even possible that the counterparty in the trades carried out by the CEO and his family could have been Al Meezan itself, the family making gains for themselves at the expense of Al Meezan’s unit holders.

The same regulations and code stipulate that even outside of the blackout period, trades by the CEO and his family be reported immediately to the internal compliance head of the company. There is also a requirement to report personal holding positions at the end of each quarter.

The official source close to the company told Profit that in his capacity and for his spouse, Shoaib had been reporting trading transactions that were carried out to the company quarterly and only failed to do so for his adult children, which the source thinks could be a genuine oversight or a result of a difference in interpretation of regulations.

Upon initiation of a review by Al Meezan’s board, the CEO offered to resign to carry out an impartial investigation of the matter. “The board approved his resignation,” said the official source. 

However, two sources, one a high-ranking official at the SECP, while speaking to Profit on condition of anonymity confirmed that the CEO did not resign voluntarily, and was asked to resign by the board based on charges by SECP.

When contacted, a senior official representing Al Meezan’s board informed Profit that SECP’s observations do not relate to investment/fund management and financial reporting of Al Meezan or the Funds managed by it. 

“SECP has shared certain observations relating to personal shares trading by family members of the CEO with the Board of Directors of Al Meezan and the board is reviewing the same.  The CEO has decided to resign from his position,” the statement from Al Meezan Investments read. 

It is important to note that as per Al Meezan’s code of conduct for asset managers, a violation of company’s trading policy for employees requires them to forfeit any gains made through such transactions.

Where will the investigation lead? 

What could have possibly transpired in Mohammad Shoaib’s case? Shoaib would certainly be privy to a lot of information about trade transactions that he could have used to his benefit but as one investment professional puts it, “if he had to carry out front-running, he could have used better proxies than his own wife and children. Knowing also that since he’s been around at the company for about three decades, he would obviously know the rules governing such transactions and the consequences of violating these rules”.

On the other hand, a source in the industry argued that the CEO being lax about oversight for two years felt out of touch, and reflects badly on the board and is an issue on its own. 

For now, the fate of this case rests in the hands of the investigating officers of the SECP, and only time will tell what conclusions they come to. We can, however, take an educated guess based on similar investigations that the Securities and Exchange Commission has carried out in the past. When it comes to front-running, if found guilty, Al Meezan’s former CEO can definitely be penalised. But that isn’t all. Because of the CEO, the asset management company itself can be caught in the crosshairs too. But even if the SECP does end up giving an adverse order, there are precedents where these orders were reversed by either the SECP’s own appellate bench or by the higher courts. 

More importantly, as the case of Dawood Capital Management from 2013 shows, criminal charges in general, and those related to white-collar crime in particular, are very difficult to prove as the prosecution is required to prove the defendant’s guilt beyond a reasonable doubt. This means that the evidence presented must be so convincing that no reasonable person could have any doubts about the defendant’s guilt.

In its official response, the regulator did not disclose details about the investigation and said, “To perform its regulatory functions, SECP regularly carries out inspections, inquiries, and investigations and takes other regulatory actions, per its administered legislation.”

“However, on account of SECP’s operational SOPs and relevant laws, unless a matter is concluded, we cannot either confirm or deny initiation of any purported action or proceedings against any regulated entity or person.”

“Any conclusion, decision, or enforcement action, if any, is made public through placement on SECP’s website for public information, subject to the policy of the Commission and permissibility under the law.”

When reached out by Profit, Muhammad Shoaib decided not to respond.

Editor’s Note: After the publication of this story it was brought to our notice that the orders passed by SECP against BMA Capital and Dawood Capital Management were later reversed by an SECP appellate bench. The story has been updated to reflect this information, and the oversight is regretted.