Cablegate: Morocco's Market Watchdog Bares Its Fangs


DE RUEHRB #0275/01 0881702
R 281702Z MAR 08





E.O. 12958: N/A

1. (SBU) Summary: Morocco's Securities and Exchange
Commission, the Conseil Deontologique des Valeurs Mobilieres
(CDVM), for the first time in its fifteen-year history moved
this month to impose order in Moroccan securities markets by
issuing sanctions and warnings to a range of brokers who
violated market procedures during several recent high profile
initial public offerings. One firm, Upline Securities, was
ordered to pay a 10 million MAD fine and faces loss of its
license to act as a depository institution. Three other
firms received warnings of varying severity. Given the
prevalence of the sanctioned activities in recent years,
commentary has been mixed on the merits of the specific
punishments, but observers agree that a more active and
independent CDVM is a prerequisite for further deepening and
strengthening of Moroccan financial markets. End Summary.

2. (SBU) Morocco's long bull market, which has seen the
exchange's capitalization double over the last two years, has
been fed by a series of high profile public offerings, which
have skyrocketed in value on their introduction into the
market. These offerings have been surrounded by widespread
rumors of favoritism in allocation of the initial blocks of
shares, as well as of shady dealings by brokerages. While
the CDVM has investigated such cases in the past, never
before had it taken action to sanction offenders, despite
being publicly encouraged to do so by Central Bank Governor
Abdellatif Jouahri, among others. That changed on March 17,
however, with announcement that the Council had fined Upline
Securities for irregularities surrounding last year's initial
public offering for real estate developer CGI. The financial
sanction was the first imposed since Morocco's securities
markets were reformed in the early 1990s, and at 10 million
MAD (or 1.28 million USD) was an eye-catching sum. More
significantly, the CDVM asked that Upline's license as a
despository institution be lifted, threatening its future
operations. Three other firms-- Safa-Bourse, Attijari
Intermediation, and BMCE Capital Bourse received warnings of
varying severity, with the most serious going to Safa and the
least serious to BMCE.

3. (SBU) Rather than favoritism in allocating blocks of
shares, the CDVM's allegations relate to the brokerages'
failure to carry out their responsibilities as
intermediaries. The Council alleges that the firms failed to
verify the identity of bidders and to ensure that they had
deposited sufficient funds to cover their positions.
Observers note that in the run-up to the CGI offering, which
was expected to be particularly lucrative, foreign investors
had constituted a range of hedge funds which registered to
participate. On securing initial blocks of shares, they
quickly turned around and resold them for a quick profit. To
different degrees, as reflected in the severity of their
punishment, given their expectation that the initial
purchasers' positions would be quickly liquidated, the
brokerages failed to ensure that their clients had funds to
cover their positions. What aggravated Upline's case, CDVM
Dounia Taarija has said in public interviews, is the fact
that it used funds deposited by other clients to settle these
accounts. In so doing, she charged, Upline had violated its
fiduciary responsibilities as a depository institution, in
that "unlike banks, brokers don't have the right to
"globalize the deposits they have received and use them for
other purposes."

4. (SBU) If observers agree that a strong and independent
market watchdog is an essential prerequisite for further
strengthening of Morocco's capital markets, the specific
sanctions applied in this case have had a mixed reaction.
One of Morocco's leading French weeklies, "Le Journal Hebdo,"
which has given extensive coverage in recent weeks to
Upline's troubled relationship with the CDVM, has been
particularly critical, arguing that the CDVM has "Hit Hard
instead of Hitting Fairly" and thereby exercised a "selective
coercion." It notes that the same practices were widespread
during other recent oversubscribed public offerings,
including for Maroc Telecom and Addoha, hinting obliquely
that the CDVM is seeking to settle scores with the firm for
its willingness to air the matter in public.

5. (SBU) "Le Journal" and other observers also highlight the
fact that the problems in Moroccan markets have stemmed not
just from shady practices, but from "shortcomings" in
regulations governing Morocco's security markets. They argue
that the purchase of stocks on credits is allowed virtually
everywhere in the world except Morocco, and as a result the
law has been largely ignored-- trading on credit, one broker
told "Le Journal," is "like alcohol, tolerated, but not
legal." The CDVM has also held back from other steps that
some believe would increase the market's transparency-- such
as requiring that all transactions occur on the central
exchange, and thereby eliminating the secondary market where
blocks of shares often trade hands for prices below those
quoted on the central exchange. "Le Journal" and others thus
question whether Upline really was a particularly bad actor,
and have contrasted its fate with that of CFG securities,
which also handled a large volume of the transaction but
escaped unscathed. (For their part, CFG executives note that
they were not part of the syndicate that handled foreign
hedge fund shares, and were fully cleared by the Council of
any wrongdoing.)

6. (SBU) Comment: Whatever the merits of the specific
punishments, which undoubtedly will be the subject of
litigation in coming weeks, a more active market watchdog is
good news for Moroccan securities markets. Central Bank
Governor Jouahri and others have called repeatedly in recent
months for the council to not just study abuses, but to
actually sanction offenders. By doing so, the CDVM has put
market operators on notice and begun the process of
increasing the market's transparency and instilling greater
market discipline. Our contacts in the field note that the
institution has been ready to take this step for some time,
but was held back by its political masters, and in particular
the former Minister of Finance, who felt Moroccan markets
were not ready for such a step. Under new Minister of
Finance Mezouar, who chaired the council that approved the
penalties, Moroccan market regulation has clearly turned a
new page. End Comment.

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