RAZI-UR-REHMAN KHAN, CHAIRMAN (SECP).---This order shall dispose of the captioned application dated August 15, 2006, filed by Mr. Mahmood Ahmed, former Chief Executive Officer ("CEO") of Crescent Standard Investment Bank Limited ("CSIBL" or the Bank") in the captioned proceedings.
2. Brief background to the captioned application is that on September 28, 2005, the Commission ordered an on-site A inspection of CSIBL in exercise o f its powers under section 282 of the Companies Ordinance, 1984 (the "Ordinance"). During the course of inspection, the Inspectors of Monitoring and Inspection Wing of the Specialized Companies Division ("SCD"). NBFC Department, Securities and Exchange Commission of Pakistan ("SECP" or "the Commission") discovered various irregularities and mismanagement in the affairs of CSIBL in violation of prevalent laws, rules and regulations.
3. The captioned Show-Cause Notice ("SCN" or "the Notice") dated March 17, 2006 was issued to the CEO of CSIBL, Mr. Mahmood Ahmed, by the Commissioner SCD, Mr Salman All Shaikh, Separate Show-Cause Notices were also issued to the Chief Financial Officer ("CFO") Mr. Shahid Latif Dar, the Directors ("the Directors") including Mr. Manzurul Haq, Mr. Iftikhar Soomro, Mr. Shahid Anwar, Dr. Wasim Azhar, Mr. Shezi Nackvi, Mr. Razak Ratne and Mr. Tariq Aleem and the Auditors of CSIBL, namely, Messrs Syed Hussain & Company. Chartered Accountants.
4. The Commissioner SCD held hearings on different dates. However, before the hearing scheduled for July 19, 2006, the counsel for Mr. Mahmood Ahmed, Dr. Pervez Hassan, submitted an unsigned copy of an application in which he sought the transfer of pending proceedings relating to CSIBL from Mr. Salman Ali Shaikh (Commissioner SCD) to another Commissioner of SECP since there was an alleged conflict of interest. The said application was submitted just thirty minutes prior to the final joint hearing that was fixed for the same date. The Commissioner SCD adjourned the hearing and asked the counsel to provide a signed application so that he could formally take up the matter with the Commission.
5. Under the cover of his letter dated July 20, 2006, the counsel for Mr. Mahmood Ahmed submitted a signed application dated July 18, 2006. In the said application, the main allegation levelled by Mr. Mahmood Ahmed was that Mr. Salman Ali Shaikh had a conflict of interest with the subject matter of the proceedings because (i) he had Certificates of Deposits ("CODs") worth Rs.20 million With CSIBL which he encashed prematurely in January and April 2006; and that (ii) he was associated with AI-Towfeeq Investment Bank Limited ("ATIBL) (which was subsequently renamed as First Standard Investment Bank Limited and later as CSIBL), as its Chief Executive Officer from December 1996 to June 1997.
6. The abovementioned application for referral of SCN proceedings to another Commissioner was sent to my office vide communication dated July 28, 2006, wherein the Commissioner SCD denied that the foregoing instances constituted a conflict of interest.
7. As regards his association with ATIBL, he stated that he was the Managing Director of ATIBL, from December 1995 to June 1997. As such, his association with ATIBL ended much prior to it becoming either First Standard Investment Bank Limited or CSIBL. It had thus no nexus with the SCNs or the inspection that preceded the SCNs vide order dated September 28, 2005 or even with the CODs worth Rs.20 million issued to him in August 2002 and April, 2003 when he had yet to join the Commission.
8. As regards the encashment of CODs worth Rs.20 million with CSIBL prior to their full maturity, the Commissioner SCD 'denied that based on his knowledge of the deterioration of the business of CSIBL, he acted for his personal advantage to encash the aforementioned CODs prematurely. He stated that-if he were to so act or were so motivated, he could have easily encashed the CODs much earlier when he first received information as Commissioner SCD of the deteriorating state of affairs within CSIBL based on which the SECP inspection was ordered to be carried out. However, despite there being a substantial cost to his personal finances, he delayed the encashment in the interest of propriety/transparency taking the view that if he were to encash his CODs prior to authorizing the inspection, it would give an inappropriate signal to the entity under inspection i.e. CSIBL as if SECP was acting with a predetermined mind turning a fact-finding exercise of inspection into a fault-finding mission. The Commissioner SCD stated that had he encashed his CODs in July/August, 2005 (i.e. Prior to ordering the inspection), there would have been no occasion to raise any objection of conflict of interest in the first place. He also stated that by the time he last encashed his CODs, the poor financial condition of CSIBL was public knowledge and there was no question of any preferential treatment in any case, as all depositors were being paid by CSIBL on demand during those months as evident from the figures and statistics available from CSIBL.
9. The Commissioner SCD thus denied any conflict of interest and stated that the matter pertaining to CSIBL had been dealt with in the most appropriate and professional manner and that the trail o f events clearly depicts an impartial B and firm approach adopted by the SECP team. He also stated that he never let the existence of his COD's in CSIBL conflict with or impair his ability to act in the matter impartially and in an unbiased manner.
10. In the end, the Commissioner SCD on his own, citing the larger interest of the Commission, disassociated himself from both the captioned SCN proceedings and other matters pertaining to CSIBL.
11. The request of the Commissioner SCD was-accepted and . The captioned SCN proceedings were transferred to and taken over by me pursuant to my concurrent powers to proceed under SRO 1061(1)/2005 dated October 18, 2005. The counsel for Mr. Mahmood Ahmed was duly informed by the Commissioner SCD vide letter dated August 10. 2006, that the captioned proceedings had been transferred from him to the Chairman, SECP. That said letter reads as under:-- "This is with reference to your visit to my office on July 19, 2006 followed by your letter dated July 20, 2006, with which you enclosed an application on behalf of your client, Mr. Mahmood Ahmed, seeking the transfer of the pending Proceedings in the Show-Cause Notice (SCN) issued to him by the Commission on March 17, 2006.
Please be advised that I do not consider it appropriate to comment upon the merits of the application. The averments made therein are neither conceded nor discussed in this communication. This is to inform you that in order for the proceedings in the Show-Cause Notices
(SCNs) issued in the matter of CSIBL (including the one issued to Mr. Mahmood Ahmad) not to be unnecessarily affected or delayed. I have on my own decided to disassociate myself from the said proceedings. The Chairman SECP has been informed about my decision and he has accepted my request for withdrawal from the SCN proceedings. The entire record of this matter now stands transferred to the Chairman, SECP for necessary action pursuant to his concurrent powers to proceed in these matters under SECP's SRO 1061(1)/2005, dated 18 October, 2005."
12. As such, the prayer of Mr. Mahmood Ahmed made in his application dated July 18, 2006, i.e. That Mr. Salman Sheikh, Commissioner, SECP may not hear the show-cause matters against the Directors and management of CSIBL and ...That these matters be referred to another Commissioner", was effectively granted.
13. In the captioned application at hand dated August 15, 2006 apart from reiterating and relying on the same facts mentioned in his earlier application dated July 18, 2006, seeking transfer of SCN proceedings to another Commissioner, Mr. Mahmood Ahmed further stated that the fact that the application was made to resign in early April, 2006 before he had even responded to the SCN and inclusion of his and Mr. Tariq Aleem's name (another Director of CSIBL, who has also been issued a SCN) in the Exit Control List ("ECL") despite no similar action being taken against other Directors of CSIBL, clearly establishes an element of partiality and bias against him. Mr. Mahmood Ahmad asked that the entire proceedings conducted by the Commissioner should, therefore, be declared vitiated and that the whole proceedings from the point of initiation of the inspection through the hearing and recording of evidence he started afresh/de novo.
14. During his oral submissions, counsel for Mr. Mahmood Ahmed stated that nobody can eat from the fruit of the poisonous tree and all that has been built so far in this particular case is illegal, void and mala fide. He stated that Mr. Mahmood Ahmed was the first person to be sent a SCN, to be put on the ECL and was removed as a Chief Executive when there was nothing substantially different against him that was said in the Inspection Report as against the others. Hence, there was a lingering bias against him since inception, which as per the counsel stands admitted by the Commissioner SCD when he disassociated himself from the proceedings and, therefore, I should proceed in a de novo fashion undoing everything done so far, which according to the counsel would show that justice is not only being done but in fact is seen to be done.
15. The counsel for Mr. Mahmood Ahmed has also cited different case law in his captioned application in support of his contentions which shed some light on the aspect of the matter highlighted by him.
16. I have considered the detailed written and oral arguments advanced on behalf of Mr. Mahmood Ahmed. To start with, the facts borne on record refrain me from agreeing with his counsel's submission that there was nothing substantially different against Mr. Mahmood Ahmed in the Inspection Report than others.
17. During SECP's inspection into CSIBL's affairs, when the parallel books of accounts were unearthed, several letters were written from SECP in November, 2005 to the Chairman of CSIBL's Board of Directors, namely, Mr. Manzur-ul-Haq as well as the Board's Audit Committee asking them to explain various unexplained issues/transactions. The Chairman and the Board's Audit Committee were informed that dining the inspection. SECP had found that CSIBL had liabilities of around Rs.5.252 billion which. Were not appearing in the financial statements of CSIBL as on June 30, 2005 and that these were other than those disclosed by CSIBL in its financial statements for the same period.
18. In response to the abovementioned letters, Mr. Manzurul-Haq vide his letter dated December 9, 2005 addressed to the Commissioner SCD, which is also part of the Inspection Report stated as under:-- "I would like to inform that I had no personal knowledge of any of the matters raised in your letters and these have never come up before the Board during my tenure as Chairman". [emphasis added]
19. Mr. Lftikhar Soomro, Member of Board's Audit Committee, vide his letter dated November 15, 2005 addressed to Director (Monitoring & Inspection), which is also part, of the Inspection Report stated as under:-- "As you pointed out, the management was maintaining parallel books. Therefore, I did not know about the "Parallel" work being conducted by the management. The external auditors never pointed this out earlier. I have checked the past agenda of the Boar, s Audit Committee and the Board of Directors; I find no clue of the items pointed out by you am also alarmed by the exorbitant rates at which CSIBL has been borrowing and my knowledge."
[emphasis added]
20. On November 28, 2005. CSIBL's Board held its 58th meeting to discuss the situation as conveyed by SECP. The final draft minutes have been made part of the Inspection Report. It was recorded in the meeting as under:-- "The Chairman said that it was the duty of a CEO to inform the Board regarding the full facts of the business and all the matter of the Company. It was also incumbent upon the management to obtain all relevant approvals and abide by all regulations.....All these transactions were carried out without the authority or approval of the Board and the Board was kept totally in dark." (emphasis added]
21. In the same meeting, the CEO was asked to explain the matters raised by the Commission to which the CEO stated that he has not been sent a copy of the letter. The Chairman of the Board provided him the copies of the letters of SECP. It was recorded in the meeting as under:-- "...The CEO informed the Board that he himself told SECP that he had not informed the Board about the managed portfolio which is being treated as an off balance sheet transactions. The CEO confirmed that he had not obtained the Board's approval of these items and had carried out all these transactions of his own accord. The CEO informed the Board that the decision of managed portfolio was done by him in the best interest of CSIBL as per his understanding of the SECP rules and information had been provided to SECP to have their guidance on the issue." [emphasis added]
22. On December 15, 2005, Chairman of the Board informed the Commission that with regard to the issues raised by SECP, the CEO of CSIBL has been issued a show-cause notice by the Board.
23. In view of the abovementioned admissions on part of the CEO for maintaining the parallel books of accounts and denials by the Chairman of CSIBL Board and the Board's Audit Committee regarding knowledge of the same, the inspection team of SECP also confirmed that various transactions on parallel books which were treated as an off balance sheet item were not only well within the knowledge, but were in fact made on the instructions, of the CEO i.e. Mr. Mahmood Ahmed.
24. It was on the basis of the foregoing that Mr.. Mahmood Ahmed was the first person to be issued a SCN. The serious nature of allegations against him could also be expected to result in his resignation and further in him being placed on ECL, in view of considerations of public interest involved. However, I do not wish to enter here into the merits of Mr. Mahmood Ahmed's and Mr. Tariq Alim's requests for being removed from ECL for which they have separately applied for, which do not need to be dealt with as part of these SCN proceedings.
25. It should not be forgotten that similar SCNs were also issued subsequently to the CFO, Mr. Shahid Latif Dar on May 3, 2006, to the Board of Directors on May 4, 2006 and also to the external auditors Messrs Syed Hussain & Co., Chartered Accountants on May 11, 2000. More importantly, for the same irregularities as alleged in the captioned and related SCNs and their drastic fallout on CSIBL, while all SCN proceedings were still pending, the Board of Diredors along with the new CEO of CSIBL, Mr. Anjum Saleem (who replaced Mr. Mahmood Ahmed) were also superseded/removed and replaced - all at a time when the Commissioner SCD had disassociated himself from CSIBL-related affairs as mentioned earlier.
26. I, therefore, do not find myself in agreement with the proposition that there was any bias against the person of Mr. Mahmood Ahmed when the Commissioner SCD proceeded in the matter from the institution of inspection through the issuance of captioned SCN to Mr. Mahmood Ahmed.
27. The apprehension of bias expressed by Mr. Mahmood Ahmed is not founded in sound perception or reasoning which could afford him a valid legal ground for seeking complete vitiation of the proceedings starting from the inspection till issuance of captioned SCNs.
28. I am afraid the case-law cited by Mr. Mahmood Ahmed, despite not being directly related with SCN proceedings held by a quasi judicial forum like SECP, does not come to his rescue either as there is no reasonable apprehension of bias expressed by him. In fact, as discussed in the paras below, there is no real likelihood of prejudice being caused to Mr. Mahmood Ahmed even if bias is assumed .To be present for the sake of argument.
29. The matter is, however, rather simple and not as complicated as it may otherwise seem.
30. As stated earlier, the captioned SCN proceedings were transferred from Commissioner SCD to me when he voluntarily disassociated himself from the proceedings in the larger interest of the Commission, which he did in order for the proceedings;. Not to be unnecessarily affected or delayed. This fact was also duly communicated to Mr. Mahmood Ahmed's counsel in so many words and, for all practical and legal purposes, the prayer made in Mr. Mahmood Ahmed's first application on this issue (which merely sought transfer of the SCN proceedings from Commissioner SCD to another Commissioner) was effectively granted. Accordingly, to say that the Commissioner SCD's voluntary disassociation vindicated any bias alleged by Mr. Mahmood Ahmed would be quite incorrect.
31. However, even if, for the sake of argument, the bias alleged by Mr. Mahmood Ahmed is assumed to be present, all I would then be concerned with in the captioned SCN D proceedings is whether the captioned SCN as issued is lacking in any respect which could be attributed .To such bias.
32. While the counsel for Mr. Mahmood Ahmed has taken pains in attempting at proving bias on Commissioner SCD's behalf in proceeding against Mr. Mahmood Ahmed, when repeatedly asked if he could point out any specific instance of mala fides in, or anything wrong with, the Inspection Report or the captioned SCN which could be attributed to such bias, he could not bring anything - to my notice in this regard.
33. It is noticeable that Mr. Mahmood Ahmed duly D responded in writing to the captioned SCN, joined the proceedings and did not raise any objection to the captioned SCN proceedings being tainted with bias or mala fides even at the time of identifying the conflict of interest allegedly existing in respect of the Commissioner SCD in his first application on the issue which was effectively granted in his favour as mentioned earlier.
34. The inspection of CSIBL was carried out by a full-fledged inspection team comprising of responsible officers of SECP, namely, Mr. Muhammad Arshad, Deputy Director, Mr. Muhammad Osman Mirza, Deputy Director, Mr. Suleman Pervaiz, Deputy Director, Mr. Zain-ul-Abidin, Deputy Director, Mr. Hassan Ashraf, Deputy Director, Mr. Asif Jalal Bhatti, Joint Director and supervised by Mr. Shahid Nasim, Director (Monitoring & Inspection). As such, the inspection was not carried out by the Commissioner SCD but SECP's aforementioned officers.
35. Having examined the Inspection Report, the captioned SCN and the written response submitted thereto by Mr. Mahmood Ahmed, I do not see anything biased or malicious that materially prejudices Mr. Mahmood Ahmed in his defence to the captioned SCN, nor has any such thing been pointed out by him or his counsel. In the absence of anything wrong with E the Inspection Report or the captioned SCN attributable to the alleged bias on part of the Commissioner SCD; I do not feel inclined to entirely scrap the Inspection Report and the captioned SCN and start wholly afresh. It would be tantamount to reinventing the wheel, a duplication of effort and a sheer wastage of time.
36. Admittedly, the SCN proceedings are still pending and the Commissioner SCD disassociated himself from the proceedings before concluding and deciding them one way or the other. The proceedings in all related SCNs were duly transferred at the very instance of Mr. Malimood Ahmed and were taken over by me under my concurrent powers.
37. While assuming jurisdiction over the matter, on the very first hearing on 15th August, 2006, I had categorically stated that I would fully rehear the oral arguments in the matter and further that I will not be relying in this regard on what went on in earlier hearings i.e. Prior to my taking over the proceedings. Hence, nothing that was said or heard during hearings held by the Commissioner SCD shall he taken into account. As such, no reliance will be placed on any of the oral arguments and evidence that has been recorded in the previous hearings, which were presided over by the Commissioner SCD.
38. I may also mention that Mr. Mansoor Ali Shah, counsel for five of the Directors of CSIBL, who has also been issued SCNs, have disagreed with the contentions of the counsel for Mr. Mahmood Ahmed and has stated that there was no bias and prejudice in the instant case and there is no need of declaring the whole proceedings from the initiation of the inspection as vitiated.
39. In light of what has been stated above, the captioned application in hand is dismissed being without merits.