Insider Trading and Financial Markets in Taiwan

Insider trading, a way of life in our business world. Recently, it seems there's a new case every week:

Taiwan prosecutors have asked the court for permission to detain an executive of Fubon , Taiwan's No. 5 financial holding firm, amid a probe into possible insider trading involving Standard Chartered's acquisition of a Taiwan bank.

Fubon's shares plunged by the daily 7 percent limit on Friday to T$31.45, their lowest intraday level since July 6. The financial sub-index fell 4.45 percent, lagging the broader market's <.TWII> 3.06 percent slide.

Chiang Kuo-liang, Fubon's chief investment officer, had been questioned by prosecutors on suspicion of reaping profits of more than T$100 million from insider trading, said Lin Chin-chun, a prosecutor of the Taipei District Court.

"This is an insider trading case that involved Standard Chartered's acquisition of Hsinchu International Bank," Lin told Reuters by telephone.

Chiang and some of his relatives were suspected of buying shares of Hsinchu, a medium-sized bank in Taiwan, before Standard Chartered's announcement, Lin said.

Back in May, it was top executives at BenQ, including the President and Chairman:

Top BenQ executives were indicted yesterday, May 8, on charges of money laundering and insider trading. The Taoyuan Prosecutors’ Office released a statement accusing chairman KY Lee, president Sheaffer Lee, vice president Eric Yu and two senior financial executives of said crimes. The Commercial Times reports that the Chairman, President, and VP instructed a group of financial employees to sell bonus shares, worth $25.5 million to a BenQ branch in Malaysia, Creo Ventures. The revenue from the sale of these bonus shares were then transferred back to BenQ’s coffers, which can be construed as money laundering.

BenQ asserts that Creo Venture has been used to distribute bonus shares to its overseas employees, a fact that the Taoyuan Prosecutors’ Office had not taken into account.

The BenQ indictments are connected to something larger:

Prosecutors are investigating two Taiwanese information and communication technology companies suspected of insider trading. BenQ Corp. and Veutron Corp.--part of the semiconductor manufacturer Powerchip Group--were raided March 13 and 15 respectively, with evidence seized and a suspect taken into custody.

BenQ's headquarters in Taipei City and Taoyuan County were raided March 13, with three BenQ employees and four company executives summoned to the Taoyuan District Prosecutors Office for further questioning. The prosecutors' latest move follows information received from the Financial Supervisory Commission last December stating that BenQ was involved in insider trading, TDPO spokesman John Chang said in a March 14 report in the Taipei Times. Chang elaborated that the company was suspected of selling around 7 million of its shares between January and March 2006. This was just a few months before BenQ's earnings report was issued last March, which revealed losses in the fourth quarter of 2005.

Using information from the FSC and the bourse, prosecutors discovered that most of the proceeds from the transactions were deposited into the accounts of four of the company's human resources department employees before being remitted overseas. BenQ Chief Financial Officer Eric Yu claimed during questioning that he was entrusted to handle these shares. He failed to elaborate on where the proceeds were distributed, however, said a March 26 report by the Chinese-language Business Today magazine. Yu was taken into custody after questioning, while six other employees were released on bail ranging from about US$6,000 to US$154,000.

And May brought us Chunghwa Telecom as well:

The statement was issued in response to comments by Chinese Nationalist Party (KMT) Legislator Lwo Shih-hsiung, who on Monday voiced his suspicions about the unusual rally in shares of Senao International Co before Chunghwa Telecom's board approved the acquisition on Dec. 26.

"After being alerted by a lawmaker, we dispatched prosecutors to investigate whether there may have been insider trading," said Lin Jinn-tsun, a spokesman for the Taipei District Prosecutors' Office.

Chunghwa announced on Dec. 26 that its board had given the go-ahead to purchase a 32.5 percent stake, or 72.52 million shares, in the local handset retail chain.

Chunghwa said at the time that it would buy Senao shares at NT$15.10 each to boost its lukewarm third-generation (3G) telecom service business.

The Economic Daily News yesterday printed allegations by a board director that Chunghwa had doctored its board meeting record last November to hide evidence of insider trading.

The report, citing Simon Chang, head of the company's labor union who is also one of the board directors, said the company erased the records on board members discussing a plan to buy Senao shares.

And one of the world's most important golf equipment firms, just this month:

Shares of Fu Sheng Industrial Co (復盛公司) yesterday dropped to their lowest level in almost two months, shaken by an insider-trading probe that could dampenforeign private equity investors' interest in acquiring local firms.

On Wednesday, prosecutors searched the headquarters of Fu Sheng, the world's top supplier of golf-club heads, and questioned several officials on suspicion of using insider information to profit from the company's planned takeover by US equity fund investor Oaktree Capital Management LLC.

Fu Sheng said in a filing to the Taiwan Stock Exchange on May 9 that Oaktree had offered to purchase at least 51 percent of the company's outstanding shares at NT$37.5 each from the open market during the period ending June 27.

Fu Sheng shares yesterday closed down 1.9 percent to NT$36.2, the weakest since it closed at NT$34 on May 8.

The company denied any wrongdoing yesterday.

"We have made all efforts to prevent any confidential information about the deal from leaking. The company does not have anything to do with any possible illegal transactions made by any individual to make profits using the info," Fu Sheng spokesman Hsiao Chia-shih (蕭家適) told the Taipei Times by telephone yesterday.

The government has long standing plans to make the island an international financial center, dating back to the abortive Asia-Pacific Regional Operations Center (APROC) that sank without a trace after 2001. Though APROC is history, the idea lives on. The current moves against insider trading are part of this operation. In 2005 the Taiwan Journal reported:

Although there is still a lot of planning to be done, Thomas Yeh is confident that with further liberalization, there will be more room to develop financial products in insurance fund and banking services. He believes Taiwan can replace Hong Kong as a regional financial center in three to five years. This presumption, however, is too optimistic for some. Yang Ya-hwei, a researcher at Chung-Hua Institution for Economic Research and director of the organization's Center for Economic and Financial Strategies, thinks the plan still has a long way to go.

Yang says that a regional financial center needs to be equipped with a strong economy and financial power, the free flow of capital and manpower, competitive tax rates, sound infrastructure and sufficient professional expertise. She says Taiwan's advantages, a rapidly growing market, service providers, and plenty of foreign reserves and domestic savings, are all key to the government's goals. However, she also warns that Taiwan faces challenges from home and abroad that are not likely to be overcome in a short period of time.

In order to attract international capital, Yang says, Taiwan must first have a capital market that is competitive with those of existing regional financial centers such as Hong Kong and Singapore. Currently, however, the Taiwanese market is still rather small compared to its competitors. Although Taiwan is in the process of liberalizing, it has regulatory restrictions that limit the flow of capital and manpower. Such restrictions have led international investors to regard Taiwan's reputation, when it comes to capital markets, as less than stellar. In the 2004 IMD World Competitiveness Report, the reliability of Taiwan's stock market information ranked 34th--much lower than Singapore (3rd) or Hong Kong (22nd). Insider trading is more of a problem in Taiwan than in those places. To attract more investment, Taiwan needs to improve its image.

Professional manpower is another concern. The weakness of Taiwan's financial professionals is their English language skills, which are crucial to international financial operations when communicating with clients or researching global financial markets. To compete with the region's existing centers, Taiwan needs to expedite steps to upgrade domestic financial service professionals' skills, as well as recruiting foreigners.

Cross-Strait relations are also a pressing issue and political stability is always a key factor in any business' evaluation. It is Taiwan's policy to maintain a stable and peaceful development in cross-Strait relations so that political interference in the financial market can be minimized. There is no guarantee, however, that China--who does not want to see Taiwan becoming any kind of regional center--will adopt the same policy.

The problem is the old government-business intertwining. Commonwealth Magazine observed earlier this year:

In the past, lower-level financial investigators have uncovered problems at Taiwan's financial institutions quite early on and promptly reported them to higher authorities. Unfortunately, once notified, the higher-level officials would deal with the reported problems only passively. Behind all of this could be seen the highly entangled personal relationships between finance officials, elected representatives, and business groups. "The key problem is people. No matter how good the financial-supervision system is, once the people in government and business develop close connections, everything comes to naught," says Taipei District Court Judge Liang Yao-bin, who specializes in reviewing financial crimes.

Established in July 2004, the FSC is charged with targeting large business conglomerates run by influential families that have formed political connections with Taiwan's financial authorities. These business groups are often made up of powerful financial institutions and numerous subsidiaries. To carry out this mission, the commission was supposed to integrate the originally separate investigation systems for the banking, insurance, and securities sectors in order to develop the capability to supervise Taiwan's entire financial market across sectors.

..........

The FSC Financial Examination Bureau, formerly the sole government unit with the power to conduct financial investigations, has lost its ability to function, due to the involvement of its former director general in the "Stock Vultures" insider-trading scandal. Furthermore, the decision-making power of the FSC lies in its Board of Commissioners, which may have great authority, but is composed for the most part of academic types and lacks people with battlefield experience in the real world of financial supervision. A top finance official who has been through numerous financial bailouts likens this situation to that of a medical student who has never been an intern entering an operating room to perform surgery. How will he be able to make the crucial incision and remove the chronic disease?

After assuming the chairmanship of the FSC in August 2006, Jun-ji Shih set out to rebuild its authority and prestige. He entrusted greater responsibility to the commission's existing operational unit directors, but due to the high level of specialization and complexity in financial markets, Shih was unable to demonstrate his talents within the five short months before he resigned.

Besides the obstacles presented by the connections between government and business and the unproven performance of the FSC, the commission's inability to cooperate closely with other governmental investigative agencies provides further opportunities for business conglomerates determined to commit embezzlement.

Cooperation Breakdown

The Ministry of Justice has permanently assigned prosecutors to the FSC. However, this has become a mere formality, as the commission has been unable to either establish direct lines of communication with the MOJ or make good use of the judicial capabilities of its personnel. This goes far in explaining why the last straw that set off the run on The Chinese Bank – the announcement on January 4 that China Rebar Co. and Chia Hsin Food and Synthetic Fiber Co. had filed for insolvency protection with the courts – appears to have caught the Securities and Futures Commission and Taiwan Stock Exchange unaware, allowing Rebar executives to casually flee abroad.

The Taipei District Prosecutor's Office has also assigned some of its prosecutors to the FSC. Though the prosecutors participate in the investigations of financial crimes carried out by the commission's task force, this collaboration is a mere courtesy, and the two organizations have failed to achieve a higher degree of cooperation. Moreover, ever since the conviction in June 2006 of Lee Chin-cheng, former director general of the FSC Financial Examination Bureau, for his involvement in the "Stock Vultures" scandal, the state of cooperation between the two governmental bodies has become further clouded.

With the FSC having employed officials of such dubious integrity as former spokesperson Lin Chung-cheng and Lee Chin-cheng, the reputation and capabilities of the FSC have suffered even more. Prosecutor Eric Chen of the Taiwan High Prosecutor's Office Investigation Task Force for Criminal Profiteering Crimes does not mince words when he asserts, "There are still stock vultures that have yet to be caught. I'm afraid similar insider-trading scandals will arise in the future."

One senior prosecutor notes that in Taiwan, "There are far too few prosecutors that truly comprehend financial crimes." The FSC Financial Examination Bureau employs no more than three hundred personnel, and these personnel must keep track of the more than 5,000 branches of banks and credit cooperatives in Taiwan. It is therefore no wonder an exasperated FSC acting chairperson Susan Chang says, "We were fooled too!"

The FSC is further stifled by limited resources. Units within its organization presently employ around 800 personnel. Forty-four percent hold undergraduate degrees, while forty-six percent hold masters or doctorate degrees. This means that, among government bodies, the FSC has the highest percentage of people with university degrees or higher, even higher than that found among Ministry of Foreign Affairs personnel that are dispatched overseas. Nonetheless, a person with a PhD that has been newly hired by the commission as an associate researcher will receive a monthly salary of less than NT$62,000. [MT: a PHD in the university makes about $65K -- working 20-25 hours a week, not 50] That this is a lower pay rate than that of a secretary to the general manager of an international securities firm means that the FSC faces a great challenge in attracting and keeping talented personnel.

In a society where ethics are relational, and guanxi relationships fed and watered by reciprocal exchanges of favors, insider trading is probably the norm. Although both the KMT and the DPP accuse each other of corruption, the situation is more complex and business officials cultivate politicians from both sides. Consider the opening to the Commonwealth magazine article, about Wang You-theng, the head of Rebar, who fled overseas a few months ago when his company collapsed, and wandered from country to country like the Shah of Iran (Wang is currently in the US):

Wang You-theng's son, Gary Wang, was elected to the Legislative Yuan in 1989, while Wang himself was elected to the Central Standing Committee of the Chinese Nationalist Party in 1994. Members of the Wang family occupy the chairperson seats on the boards of over thirty business associations in Taiwan.

When power switched from the KMT to the DPP in 2000, the Wang family's influence remained as strong as ever. Wang You-theng continued to work hard at maintaining his relationships with officials at the highest levels of government. The Rebar CEO has accompanied President Chen Shui-bian on seven of the ten overseas visits the president has made while in office.

Why all this interest in financial enforcement in Taiwan? Well, part of it is to clean up the financial markets so Taiwan can move forward with its plans to be a regional operations center, an event that will probably occur at about the time a virgin graduates from my high school. Another reason? The island is negotiating with the US over an investment agreement...

The U.S. and Taiwan are considering a bilateral investment agreement after a recent round of trade meetings, U.S. trade officials said Wednesday.

This investment agreement, if it moves forward, would aim to increase investor protections and regulatory transparency, said Deputy U.S. Trade Representative Karan Bhatia, on a conference call with reporters. Senior officials from the two governments met this week under the auspices of a trade and investment framework agreement.

Good luck, Taiwan.

[Taiwan]