Fiasco at Dealstream strikes one more firm

Fiasco at Dealstream strikes one more firm
September 26, 2008

By Roy Cokayne

Pretoria - The fallout from the collapse of stockbroker Dealstream Securities widened yesterday.

Listed automotive electronics group Control Instruments reported that the stockbroking firm held about R3.4 million of its cash and it believed the recoverability of this money had been "materially prejudiced".

Control Instruments' announcement follows the 31.3 percent slump in the shares of Vox Telecom on Tuesday, after it said it had lost R30 million following the collapse of Dealstream.

Dealstream - which ceased trading earlier this week - was one of South Africa's largest contract-for-difference traders. The company was run by Russell Leigh, a regular market commentator for many financial publications, and investors included Argil Venture Capital.

The share price for Control Instruments remained unchanged in Johannesburg yesterday at R1.50.

However, the announcement about the Dealstream losses was made after JSE trading had closed for the day.

Control Instruments said yesterday that it appeared that Dealstream, or its management and staff, had misappropriated funds of the group and its directors.

It said the group had used Dealstream to acquire approximately 23 million shares in the open market.

Its total expenditure in respect of these shares was about R10.4 million.

A spokesperson for Control Instruments said neither the group nor the directors' accounts with Dealstream were in default of their margin requirements at the time that Dealstream ceased trading.

"On the contrary, the directors' accounts had substantial cash balances, as the directors had introduced their own equity to ensure that more than sufficient cover existed at all times."

The group said it was taking legal advice in regard to claims that it might have against Dealstream and its staff, but "none of the above should have any impact on the day-to-day operations of the group's subsidiaries".

It added that Dealstream's positions in Control Instruments securities had been assumed by one of Dealstream's counterparties.

The group had contacted the counterparty to facilitate the orderly uptake of these securities.

Rand Merchant Bank, which was responsible for clearing Dealstream's trades, had restricted it from trading.

The bank also assumed all Dealstream's open trades after the firm failed to meet obligations for deals done on the bank's behalf on the JSE derivatives divisions.








Latest Articles

On Monday 22 September 2008 the trading activities of Dealstream Securities (Pty) Limited (a local online broking firm) were restricted by Rand Merchant Bank, its clearing member. The action was taken due to Dealstream’s “failure to meet its obligations in respect of transactions concluded on its proprietary account on the Financial Derivatives Division of the JSE.” What this means is the company is barred from opening new Single Stock Futures (SSF) positions through the exchange on behalf of its clients.
And that’s just the beginning of the bad news for account holders. Dealstream wasn’t only trading in regulated SSFs; but also unregulated Contracts for Differences (CFDs). When new clients opened CFD trading accounts Dealstream placed their money in trust with Investec Bank. The Dealstream website declares: “Once a live trading account is activated, Dealstream will open a Trust Account at Investec Bank in your own name.” Balances in these trust accounts are supposed to be applied to clients’ trading positions as and when required. But it appears Dealstream was forced to ‘raid’ many of these accounts to try and salvage massive loss positions in various open trades. The result: many account holders may have lost money.
The Financial Services Board (FSB) received complaints on Friday last week. On the following Tuesday they issued this useful statement: “The FSB issues a warning to the investing public to proceed with caution when trading with Dealstream Securities (Pty) Ltd.” But it came too late!
Trading on the edge
It seems Dealstream had been misleading potential clients with false claims on its website since day one. They incorrectly stated that their CFD trading was somehow underpinned by the JSE’s single stock futures programme – thus making it a regulated product and protecting clients should Dealstream go under. This was never the case and the JSE Limited claims to have correspondence dating back to 2006 in which they advised Dealstream to make changes to these claims. Why the JSE never escalated this correspondence to concrete action is anybody’s guess!
Since the collapse, account holders have been forced to read press release after press release in which companies linked to this mess deny any accountability. Rand Merchant Bank has washed their hands of the CFD trades and will fulfil its obligations in terms of JSE requirements where SSF trades are concerned. Investec has made it quite clear that its relationship is with Dealstream and not the individual account holders. It won’t have to answer to individual account holders – who will be left knocking at Dealstream’s door for money. And the JSE has clearly stated that it has no obligations to guarantee Dealstream account holders’ funds either. How is it that the corporate players always find a way to duck and dive when problems emerge?
And what can be said for the watchdog for the financial services industry – the Financial Services Board? Dealstream’s website proudly announced that it is a licensed Financial Services Provider (xxx). And until recently anyone checking this fact on the FSB website would have found details of the licence with the status: “Applied.” When FAnews Online checked the FSB website yesterday the status had been changed to “FSP number cancelled.” A comment by a Fin24 reader (possibly with FSB links) reads: A new application will always have the status of APPLIED until the license is issued. Business and the public should not deal with an entity until the status change to ISSUED. Else you jump the gun and then this kind of problem bites you. The public can view the status on the FSB website!” That’s crazy talk; but if true the FSB would have to police the financial services environment to make sure no licence applicant advertises its licence until it is granted. To shift the blame to the consumer would be crazy!
Time for the FSB to get with the programme
Despite rumours of serious financial problems at Dealstream the FSB website carries no official warning for visitors. We haven’t seen any communication that Dealstream’s licence has been cancelled either. In fact, the latest media release carried on the website is more than a month old, dated 6 August 2008. There’s no surprise that a broker is the subject of the FSB’s censure. The release reads: “In order to protect the interests of consumers, the FSB today, issued a warning to consumers not to conduct financial services business with Theresa Fourie Financial Brokerage, which is rendering financial services without having the requisite licence to do so…” If so much care is taken to warn people about a small operation without an FSP licence, why is it so difficult to sound the alarm when a big operation with thousands of account holders goes bust?
Although small ‘fly-by-nights’ pose a great deal of danger to unsuspecting clients it’s always the larger companies with licences in place that cause the damage. Just you’re your mind back to LeaderGuard and Fidentia. Granted, Dealstream was a high risk operation and people knew that they could lose money trading in the financial instruments offered by the company. But that should never have included the deposits and account balances that weren’t physically tied to an open market position.
There are plenty of other questions we can ask around this issue. We’re sure some will be answered in due course. We believe there are too many financial collapses that could have been avoided if licensing processes were better applied – and approved licences actively monitored. If one good thing can come from this saga, let it be this: That the FSB takes the necessary steps to improves the quality of its communication to all stakeholders in the financial services industry. And for heaven’s sake – could someone please get the Dealstream website taken down?
Editor’s thoughts: We’re tired of the financial services industry regulator always popping up at the wrong side of a financial crisis. Given recent large-scale collapses should we still have any faith in the Financial Services Board? Or should we just accept the excuses that the failed firm wasn’t entirely theirs to regulate? Add your comments below, or send them to gareth@fanews.co.za
Comments received on the article above
Lourens wrote: The FSB! On various occassions I have voiced my opinion about the incompetency and blatant "don't care" attitude of the FSB. I have reported a number of cases to the FSB as far back as 2 years ago and they still have not attempted an investigation - maybe they are in cahoots with the perpetrators? A sorry lot they are.
DJT wrote: The Dealstream fiasco once again highlights the weakness of the FSB to protect the consumer & their pathetic 'head in the sand' attitiude. They only go for soft targets. It's very easy for them to debar a small broker on 'suspicion' & unproved allegations, but where big money is involved (eg Kebble saga) they are useless. There are too many investment companies who find ways around regulation. What about the hedge fund industry?
Colin Gillot wrote: My concern is with Investec. How many 'bad' deals has this company got into? I know they got out of the American sub prime crises by selling their 'book' to Goldman sacks, but there have been others: Trinity Holdings and the Kebble saga. There was one other 'shady deal' where they were implicated, and now this. Perhaps you know of the others. One cvan understand the American issue, but are they a crowd that looks for 'high risk' with border line regulatory procedures? I know they have some gery good funds on their balanced portfolio where I hav e placed clients money, but now I am becoming skeptical.