KSE March 2005 Crash: SECP Forensic Investigation Report

At the request of the Securities and Exchange Commission of Pakistan (“SECP”), Diligence USA, LLC (“Diligence”) conducted a forensic examination of certain alleged manipulative and/or illicit activities related to the stock market events of March 2005, as
transacted on the Karachi Stock Exchange (“KSE”). The primary allegations examined related to the withdrawal of regulated COT (“Carry Over Transaction” financing, also known as “Carry Over Trade” or Badla financing) and in-house Badla, wash trades, and
violations of Clause 3(b) of the Regulations Governing Futures Contracts (exceeding the Rs 50 million reporting threshold).

This Report of Findings (“Report”) presents findings and conclusions from the work completed by Diligence and incorporates facts and information brought to our attention
as of November 21, 2006 on these issues. The Report is intended for the use of the SECP, pursuant to its Letter of Engagement with Diligence (“LOE”) and without the prior consent of the SECP, may not be released or used for any other purposes. Diligence
shall not be responsible for, and hereby expressly disclaims any liability whatsoever directly or indirectly related to, use of the Report by parties other than the SECP for any reason or purpose whatsoever.

Diligence was not tasked with examining, and therefore the Report does not systematically analyze, trading activities and related issues which may have occurred on the Lahore or Islamabad exchanges during March 2005.

Summary of Findings:

Under the existing circumstances, and on the basis of the evidence examined to date, we render findings and conclusions that greatly differ, in many respects, with the findings and conclusions rendered by the Taskforce. Most significantly, we do not find sufficient evidence to support the paramount scheme of manipulation in the manner put forth by the Taskforce for the period in question. Nor do we find sufficient evidence to support the alleged scheme’s primary element (withdrawal of COT) that was ostensibly responsible for the fall of market prices. We find no patterns of activity or credible evidence to support a theory that, during March 2005, certain influential brokers systematically and manipulatively inflated and then deflated market prices, reaping substantial profits in the process.

It is important to note however that, as a result of our analyses, we did find prima-facie evidence of possible wrongdoing by a significant number of brokers in certain areas. We are of the view, however, that these potential wrongful acts individually or collectively were not elements of an elaborate scheme to manipulate the volatility of the market, as alleged by the Taskforce. In all such cases, Diligence has provided its underlying data and analyses to the SECP for its action as per law.

Download SECP Forensic Investigation Report