On Aug. 6, 2008, Femi Otedola was in a bouyant mood. Surrounded by executives of 12 of the country's top banks, his African Petroleum was about to raise yet another N50 billion from the capital market. No matter what happened to the hybrid offer, the bankers had guaranteed to pay Mr. Otedola 80 percent of the total amount.
The lead underwriters were Union Bank, whose chief executive, Bathlomew Ebong, was fired Friday by the Central Bank for gross mismanagement, as well as Zenith. Both banks were, by previous agreement of all 12 underwriters, were to account for the lion's share, at N10 billion apiece.
But a funny thing happened on the way to the closing ceremony: Looking at the final documents presented, several banks found that the agreement they signed had been doctored by the lead underwriters, Union and Zenith, whose officials had simply replaced pages in the document with other totally made up pages so that most of the responsibility for paying African Petroleum now shifted from the two banks to the others.
Access Bank, in particular, found that, instead of the N1.4 billion it agreed to, the document now showed that it was liable for N4.8 billion. Executives at Intercontinental, whose CEO, Erastus Akingbola, also was sacked Friday by the Central Bank for mismanagement, similarly found that the N1.6 billion they had signed on for had somehow magically ballooned to N4.8 billion.
In front of them, the underwriting agreement now showed that Zenith and Union, which should each have paid up N10 billion, now were to pay only N897 million each.
The bankers cried foul, but they were already at a public ceremony, and everyone agreed to temporarily sweep everything under the carpet and deal with the matter later. But the aggrieved banks refused to pay up.
"The reason why cheques were not exchanged, some of the banks went there with smaller cheques. When they saw bigger figures, they put their cheques in their pockets, because they told the lead underwriters, the figures here are different from what we agreed in all our discussions," Mr. Akingbola told a committee of the House of Representatives investigating the matter in May. "They said don't worry, don't rock the boat, let this ceremony go on. We will resolve it, and we agreed."
But Mr. Otedola, who has lately been under pressure to repay several hundred billion naira in loans by various banks, wants his money too. He says all the banks, except Diamond, have paid the amounts that are not in dispute.
The story of the forged underwriting documents illustrates the lawlessness and frontiers mentality in which our banking system operated for the past several years. All the regulatory bodies that were supposed to be watching out for the public, principally the Central Bank, but also the Securities and Exchange Commission, the Nigerian Stock Exchange, and the National Deposit Insurance Corporation, failed to act as required by law.
The mess created by those go-go years is now being cleaned up by the Central Bank and its new governor, Sanusi Lamido Sanusi, starting with the Friday massacre, in which Mr. Ebong, Mr. Akingbola, Oceanic's Cecilia Ibru and two others were forced out by the regulator.
The total cost of saving the banking system, regulators now believe, will be in excess of N1 trillion.
Faced with liabilities which they had never agreed to shoulder, the aggrieved banks went to the SEC in protest but, according to insiders, the SEC under its recently forced out director general, Musa Al-Farki, effectively buried the matter. An SEC spokesman, Lanre Oloyi, declined comment, saying the matter was now before arbitration.
Most of the parties in the dispute have told us that Union was primarily responsible for the altered documents. But a Union spokesman declined to address the issue directly. "I am sorry we can't be discussing our customers on the pages of a newspaper," said Francis Barde, the spokesman. Zenith officials also refused to comment.
Mr. Otedola had earlier this year petitioned the House of Representatives, whose committee on the capital market summoned all the principals in May to a hearing in Abuja.
Evidence of Fraud
After about four hours of hearings into the AP hybrid offer, the Committee Chairman, Aliyu Wadada, threw the hall into shock when he he told SEC officials point blank that documents before the committee suggested there was a fraud.
"Sighting this document, there is a fundamental difference between what you sent to us and what we are seeing now; the difference is that, what you sent to us, no signatures were appended to what you sent to us, and what we are sighting now have signatures and that is a very germane difference," Wadada protested.
Wadada was calling attention to what other capital market analysts had been grumbling about for years in muted tones. It is common mantra among market players that all is not well with the nation's capital market operations and that the problems centered on three key points: the poor governance credentials of the institutions; the weak risk management culture in the industry; and the abysmal failure of regulation.
Top financial chiefs in Lagos seeking anonymity at the weekend described the crisis in the capital market sector of the economy as "systemic" saying the AP underwriting process only illustrates, in a graphic way, how commercial banks that perform as underwriters show no regard for due diligence, and in the process, expose shareholders and the general public to grave and reckless financial risks.
On the AP hybrid offer, in August 2008 the oil marketing company sought to raise N49.7 Billion in public and another N60.5 Billion in rights issues. Union Bank Plc and Zenith Bank Plc opted to be lead underwriters with a commitment of N10 Billion each to the offer. They lined up 10 other financial institutions who agreed also to be co-underwriters at lower commitments to the offer.
After a series of fruitful planning meetings, it seemed a deal was finally struck, paving way to the Completion Board Meeting set for Aug. 5 at Golden Gate Restaurant in Ikoyi, Lagos, where cheques were to be exchanged. On this particular day, however, representatives from Diamond Bank, Access Bank, and InterContinental Bank balked, furiously protesting that they smelt a rat They quickly beat a retreat, refusing to cut a cheque.
The fraud that the three objectors were speaking to was the tinkering with their initial commitment from N1.6 billion for Intercontinental and N1.4 billion for Access. Diamond, whose exposure did not change, simply refused to pay up because it argued that the transaction had been tainted and until all doubts had been resolved she would rather keep its cheque. That was not all, Mr. Akingbola added that: "Suddenly they removed their banks and put their issuing houses or capital companies."
This was, in part, what Mr. Wadada decried. In their initial planning papers, the co-underwriters were told their lead underwriters were Union Bank Plc, and Zenith Bank Plc. Curiously however, the underwriting agreement due for signature of all the parties suddenly indicated that the lead underwriters were now Union Capital Ltd, and Zenith Capital Ltd. This has the effect of shifting liability from the two banks to their subsidiaries.
Keeping mute
Duro Fadeyi, a House committee member, demanded at the hearing why the SEC refused to address the string of anomalies that bedeviled this transaction even though it was represented at the meeting by Charles Udora, its legal officer and head of compliance.Daisy Ekihne, acting Director General of SEC, responded vaguely.
A knowledgeable SEC analyst told NEXT in Abuja that the "institution has serious systemic problem for responsible oversight, and that the former director General, Al-Faki, epitomized that failure of leadership for which the AP matter was the last straw that even his board could not tolerate, leading to his ultimate removal."
The gaps in the rules allow SEC to waddle. For instance, although they were present at the completion board meeting, and accepted the signed underwriting agreement, they claimed no liabilities for failure of scrutiny and oversight. Liabilities are ultimately on the parties. Ms. Ekihne said: "Normally they file the documents with us. They are held liable for everything that is in that document and that is why there is a liability clause. The parties are liable for whatever they submit to the commission and whatever they distribute."
The failure of SEC in providing effective oversight, led the parties in conflict to seek salvation beyond the regulator. An arbitrator will now decide whether the altered documents invalidated the entire agreement.
A matter of law
Mr Udora, head of compliance at SEC, reasoned that the issues in contest had criminal implications and encouraged the parties to contact law enforcement authorities. The "contest is criminal in nature and they have every right to write to the criminal authorities to investigate the crime" he said.
The apparent criminality does not seem to end there, as Ms. Ekhine observed before the House of Representatives committee. "It is a civil wrong and criminal offence under the Investments and Securities Act, No 29, 2007 to issue a prospectus that contains false and misleading information." The rule further states that the clearance by SEC does "not relieve the parties from any liability arising under the Act for false and misleading statements"
It is unclear if evidence of criminal culpability will lead the Economic and Financial Crimes Commission to take up the matter. Femi Babafemi, the EFCC spokesman, told NEXT that he was not aware that the matter is before the agency yet. "There are other government agencies like the SEC and NDIC that supervise these issues. It is not impossible that some of these things have been reported to them already" he said, adding that "If the NDIC is handling the matter, you cannot expect us to just walk in and push them out and take over the matter. It is not in all cases that you take over the jobs of other agencies. In most cases, when these agencies get stuck, for example, they need technical support, then we can come in."
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