FSCA fines Quinton George and Justin Fletcher administrative penalties

The Financial Sector Conduct Authority (FSCA) has ordered against Mr Quinton George (Mr George) and Mr Justin Fletcher (Mr Fletcher) for breaches of Section 75 of the Securities Services Act (SSA) in that they used manipulative, improper, false or deceptive trading practices to create a deceptive appearance of the trading activity or an artificial price in respect of the ConvergeNet Holdings Limited (ConvergeNet) and Sallies Limited (Sallies) securities.

The two orders are for administrative penalties of R4 million and R1.5 million respectively.

1. Quinton George
• Mr George was the chief executive officer and controlling mind of Trinity Asset Management (Pty) Limited (Trinity); a licensed financial services provider in terms of the Financial Advisory and Intermediary Services Act No.37 of 2002 (FAIS Act).
• In November and/or December 2008 many of Trinity’s clients as well as ConvergeNet’s black economic empowerment structures were invested in ConvergeNet and Sallies single stock futures (SSF). Their exposure was significant, being approximately R25 million in Sallies SSF and R200 million in ConvergeNet SSF.
• Due to the decline of the ConvergeNet and Sallies share prices the SSF contracts attracted a “variation margin”. Variation margin payments were payable daily.
• In order to avoid paying significant amounts in variation margin for the SSF positions held by Trinity’s clients, Mr George employed a strategy where he gave instructions to his trader, Mr Fletcher, near the close of the market with the sole purpose of inflating the closing share price of ConvergeNet and Sallies.
• The effect of his instructions and the resultant artificial and inflated closing prices meant that Mr George avoided or reduced the variation margins that would have been paid in respect of Trinity’s clients SSF positions. The variation margins avoided or reduced ranged from approximately R100 000 on some days to approximately R19 million on other days.

The Authority considered Mr George’s submissions against the totality of the evidence at its disposal. The evidence at the Authority’s disposal reveals that Mr George’s instructions were explicit of his intention and were specific that the relevant shares should be purchased at or near the close of the market.

Having looked at the seriousness of the misconduct the Authority imposed an administrative penalty of R4 million.

2. Justin Fletcher
• Mr Fletcher was an experienced registered securities trader with Imara SP Reid (Pty) Limited (Imara). Imara was an authorized user of the JSE offering stockbroking services in respect of equities and equity derivatives.
• Mr Fletcher received instructions from Mr George to purchase ConvergeNet and Sallies shares at high prices near or at the close of the market.
• It was clear from the context of the instructions that the intention behind the instructions was to create an artificial closing share price.

In arriving at the penalty of R1.5 million, the Authority considered Mr Fletcher’s mitigating factors set out in his submissions, especially his personal circumstances.

Nonetheless, the Authority was even more mindful amongst other factors of the seriousness of the conduct involved in respect of share price manipulation and its impact on the integrity of our financial markets. Further , the Authority took into account, as an aggravating factor, that Mr Fletcher, as a qualified market participant , was the gatekeeper who has been trained and was expected to ensure that he prevents any orders that are intended to diminish the integrity of our financial markets from being executed.

South African financial markets are emerging markets which require integrity to attract global investors and foster investor confidence. Any conduct, in the Authority’s view , that compromises the level of integrity of our financial markets needs to be deterred by imposing significant penalties to ensure that market participants are reluctant to participate in prohibited conduct and are equally reluctant to turn a blind eye.

For a copy of each order, please visit https://www.fsca.co.za/Enforcement-Matters/Pages/ Enforcement-Actions.aspx.

Members of the public should always check that an entity or individual is registered with the FSCA to provide Financial Advisory & Intermediary Services and what category of advice it is that the entity is registered to provide. There are instances where persons are registered to provide basic advisory services for a low risk product and then offer services of a far more complex and risky nature. The FSCA again reminds consumers who wish to conduct financial services with an institution or person to check beforehand with the FSCA on either the toll free number (0800 203 722) or on the website www.fsca.co.za as to whether or not such institution or person is authorised to render financial services.