Best World Resources Stock Scandal of 1999 and Enactment of the Philippine Securities Regulation Code of 2000

May 15, 2019

John Francis Diaz, PhD, CEA*

Abstract: The Philippine Stock Exchange (PSE) experienced the biggest insider trading scandal in 1999. The BWR scandal was so massive that the closure of the PSE was considered. A positive result of the scandal was the enactment of the Philippine Securities Regulation Code (SRC) of 2000. The new code added new regulations on insider trading, and separated the broker and dealer function to avoid conflicts of interest. The BWR insider trading scandal not only served as a lesson on the value of regulatory-compliance and honest trading practices, but also showed the importance of long-term investing potential over the short-term gains of unethical financial market schemes.

Overview

The Best World Resources Stock Scandal of 1999 is the biggest insider trading scandal to hit the Philippine Stock Exchange (PSE) to date. The scandal was so massive and controversial that the closure of the bourse was contemplated in its aftermath. The BWR stock scandal was also a primary reason why a former Filipino President, Joseph Estrada, was forced to leave his office in January 2001. The independent government investigation found conflicts of interest in the issuance of gambling licenses, and the former President’s involvement in the insider trading scandal. The Philippines Securities Regulation Code (SRC) of 2000 was the positive offshoot of the scandal, and was enacted to regain public trust in the PSE.

According to Aggarwal & Wu (2003) all informed insider parties in a corporation are likely to be manipulators, thus, strong guidelines should be implemented to minimize, if not totally eliminate transfer of private information to the detriment of public investors. The SRC contain new prohibitions on insider trading and related transactions, which separated the broker and dealer function to prevent market abuse and fraud. The BWR scandal offered a lesson of being regulatory-compliant, and the importance of seeing the long term investment promise of sound fundamentals over the short term gains of market manipulation.

Case Objectives

This case examines the biggest stock trading scandal in the Philippines stock market, and illustrates how stock market reforms regained the trust of both foreign and local investors. First, it describes the events that led to the BWR insider trading scandal, and how conflicts of interest of major players contributed to the scam. Second, the case also explains how the SRC empowered the Securities and Exchange Commission (SEC) in preventing insider trading, and in investigating market irregularities. Lastly, the case discusses how the involved personalities were punished, and shares lessons that every investor can learn from this scandal.

*Associate Professor, Department of Finance and Department of Accounting, College of Business, Chung Yuan Christian University, Taoyuan City, Taiwan.

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About the Journal

Moral Cents: The Journal of Ethics in Finance (Winter/Spring 2019)
“A lack of transparency results in distrust and a deep sense of insecurity.”Words spoken by the Dalai Lama in reference to China’s totalitarian rulers, apply aptly to financial markets as well. Indeed, transparency as a general rule is good practice in any area of human endeavor. In finance, where immense sums of money entice dishonesty, transparency in all transactions and services is vital. This issue of Moral Cents comprises articles that call for enhanced transparency in different spheres of financial services.
Harry Cui argues for greater transparency in pension funds and uses commutative justice as his theoretical foundation. In particular, undisclosed and unanticipated fees such as inactivity fees, contribution charges, exit fees, and platform fees contravene the principles of commutative justice and transparency. Yet, 37% of the largest US state sponsored pension funds report gross returns, without deducting management fees. Cui recommends regulations, such as the UK Stewardship Code and the US ERISA, be strengthened and enforced with greater zeal.
Financial transparency should reveal not just fees but also the impact from and mitigation of climate change. Tom Wilkinson responds to the Financial Conduct Authority’s Discussion Paper Regarding Green Finance. Financial institutions have a moral obligation to disclose the effects of climate change on their operations and profits. In addition, the organizations should disclose steps they are taking to mitigate climate change. Wilkinson suggests improving the framework for comparing company disclosures to help investors and the public rank companies according to how they address their impact on climate issues.
Billie Trinder extends the call for transparency to the use of big data by banks. Financial institutions use big data for purposes such as determining the credit worthiness of customers. Algorithms using big data can become so complex that in retrospect their working and logic is opaque even to their creators. Most obviously, this is an issue of transparency loss. When it comes to banks using big data analytics for key tasks such as credit rating, transparency issues become institutional problems. Trinder would like more human participation throughout the algorithmic decision-making processes to ensure greater transparency and implementation of an ethical framework.
John Francis Diaz rounds out the issue with some recent history pertaining to market transparency. He writes of the case of Best World Resources (BWR) in the Philippines. The case gives some historical context for the enactment of the Philippines Securities Regulation Code of 2000, which no doubt buttressed the market against insider trading. The Code also increased market transparency through mandating investors be provided with up-to-date material information to enable informed investment decisions. The full-disclosure approach required the SEC to review compliance of disclosure documents. The Code also made the signatories (i.e., issuer, underwriters, corporate secretary, directors and related parties) of the registration and disclosure documents, administratively and criminally liable if wrongdoings were uncovered.
The cry for more transparency in financial services leads to effective action as organizations such as the Transparency Task Force engage in this movement. Regulators will hopefully heed the call and pull recalcitrant financial service providers towards greater openness, so we no longer have distrust and insecurity.

Dr. Kara Tan Bhala
Editor-in-Chief

Moral Cents: The Journal of Ethics in Finance is published by
Seven Pillars Institute for Global Finance and Ethics
ISSN 2326-5663

Editor-in-Chief: Dr. Kara Tan Bhala
Editor: Eric Witmer

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