Taking a bite out of crime

Almost eight years ago, Jacek Socha realized that the Securities and Exchange Commission (KPWiG) lacked an essential ingredient that its more successful Western brethren thrived on - the power to execute its authority. Though the commission had the right to fine security code violators by up to zł. 500,000 and suspend and revoke brokerage licenses, the commission was handcuffed in pushing for criminal prosecution in cases of securities fraud. Today, the chairman of the KPWiG is finally beginning to see the fruits of his labor in cracking down on fraudulent activity on the Warsaw Stock Exchange (WSE), which he says is just one step in resuscitating Poland's ailing capital markets. The exchange's WIG 20 blue-chip index has plunged from a peak of 2,491.77 points at the height of the global technology and telecom boom in early 2000 to 1,084.7 points today. "We will soon propose to the Council (of Ministers) and Parliament amendments for the securities act that will give the KPWiG more power," said Socha, who took over as head of the watchdog agency in 1994 and was reappointed to a new five-year term in May. Of the more than 300 annual cases of securities fraud or insider trading that the commission sends to the public prosecutor's office, only 50 end up in court, with just a handful resulting in convictions, he said.

Cleaning up their act Socha said he would like to see improvements in the way the KPWiG investigates possible violators and sends information to public prosecutors and to the courts. All three parties need more power of authority, and in the case of the latter two, more financial knowledge, he said. "There is the question of law," said Tomasz Mazurczak, the head of research at BRE Bank. "In Poland we used to have a strong base of investors and quite a high propensity for risk among Poles." The KPWiG will work more closely with authorities in the future, Socha said. Mazurczak explained that the lack of laws tailored for the securities market has partially eroded investor confidence and attitude toward risk, both of which have dropped steadily over the past few years. KPWiG has a number of suggestions to stem the slump in confidence. "We'll have new categories of criminal offenses on the market, and a new understanding of criminal offenses on the market," Socha said. The Democratic Left Alliance (SLD) government this month created an intergovernmental ad hoc commission, which should present the Council of Ministers with a new system of supervising the capital markets, he said. Socha insisted, however, that the purpose of the new system would not be to give more power to the KPWiG only, but also to strengthen the hands of prosecutors and the court system. "We should not only think that the additional power given to the KPWiG is the solution to the problem," he said. "We should think much wider and look at the whole system - the KPWiG, the (public) prosecutors and the courts of law." Socha said that he, as chairman of the commission, would like to see the courts demonstrate greater expertise in financial markets. "(We want) the creation of a section of the court that will belong to the district court, (which will) focus on finance, the capital markets," he said. "We are trying to have judges who will specialize in issues related to the capital markets, which is a very sophisticated and specific thing. Financial crimes are different than ordinary crimes." The chairman's recommendations translate into better communication between the various government agencies that deal with the capital markets. "There will be new relations between the public prosecutor, the KPWiG, the court and the police," Socha said. "This would be the new system. So in October, I think we will be able to go through the details and to say, 'here we have a government proposal.' "

Exchanging ideas Similarly, the WSE has a strict agenda of reform for the next year. "I believe that the Polish market will have to be a part of a wider European network," said Wiesław Rozłucki, the president of the WSE. "There are three leading exchanges in Europe - in London, (on the) Euronext and in Frankfurt. We will definitely seek offers from those three exchanges plus maybe some Scandinavian exchanges. Warsaw must be part of the wide European network." Market watchers agree. "There should be a merger of exchanges," BRE's Mazurczak said. "I think it's inevitable because it will save costs." The WSE will look to strike a deal next year, either a full merger or a strategic alliance, Rozłucki said. "We want to get linked to European networks. If you don't belong to any of them, you can be marginalized."

The EU factor The aforementioned changes at the KPWiG and the WSE are the bare minimum to bringing Poland's floundering capital markets up to international standards, especially as its heads toward European Union membership, expected in 2004, market watchers said. Over the past three years, the KPWiG, the WSE and other financial institutions have completed a number of mandates to trim inefficiencies and beef up vigilance to make Poland a more attractive place to invest money. In July, the WSE announced a new set of rules to improve corporate governance concerning shareholders rights, information policy and the roles of independent directors and auditors. The earth-shaking accounting scandals at U.S. firms Enron and WorldCom, both of which led to criminal prosecutions, sparked the WSE and other business associations to call for similar tough measures. Last December's bond default by conglomerate Elektrim and the recent bankruptcy of the Szczecin Shipyard in June also influenced the move. "What will be crucial for the future of the capital markets is good performance by the listed companies, which would be influenced by good governance," said Rozłucki, who helped draft a code of conduct for publicly traded companies in July. He set out the formal guidelines for the code last week. "Today we announced the way it will be implemented," he said. "We want to stop the deterioration of good practices." The jury is still out, however, on how companies will comply with the code. "This will be a slow process," Rozłucki said. "A process that will require many months if not years."

Better numbers needed The KPWiG recently launched another initiative to restore faith in Poland's capital market system by laying out how equity analysts should write their research reports. The resolution calls for stock analysts to publish any potential conflicts of interest they might have with the stocks they cover. They are also expected to provide historical data on their recommendations. With this measure, the KPWiG intends to decrease particular discrepancies in stock recommendations to prevent confusion among investors, similar to what happened with media group ITI's failed initial public offering (IPO) in July. "This has no doubt something to do with the failed placement of the ITI," Socha said. At the time, various analysts used different methods of evaluating the company in their IPO reports, prompting investor confusion. Analysts had priced the company at zł.4-zł. 16 per share. Erste Securities, for example, valued ITI at zł. 4, but eventually withdrew its recommendation after alleged threats by ITI to take legal action. The KPWiG is investigating whether these pricings were based on correct data. "We had several brokerage houses that had presented some recommendations related to ITI, and (they) were really different in the pricing of (the company)," Socha said. He did not know when the investigation of the matter would conclude. Investors insist that this is exactly the type of behavior that needs to be reined in.