After Mr X, comes Customer Q. A customer account of the UK’s UBS Wealth Management codenamed ‘Q’ played a pivotal role in the routing of illegal investments into Indian stocks, according to the UK Upper Tribunal case documents accessed by Business Standard.
Mr X was a mystery man who surfaced in the UK Financial Services Authority’s (FSA’s) case against former UBS employee Sachin Karpe. Mr X, as the person was referred to by the tribunal, had denied he owned an account with UBS Wealth Management, called Customer A account, used to make large unauthorised transactions, as reported by Business Standard yesterday (http://www.business-standard.com/475646/).
Q’s account in the UK was allegedly used by UBS staff to route an investment by Reliance Group firm Reliance Natural Resources Ltd (RNRL) in the Indian stocks of another group entity Reliance Communications (RCom) through a Mauritius-based structure called Pluri Cell E. The transaction was allegedly executed in two tranches in January 2007 in a manner that Indian regulators did not come to know the beneficial owner of these investments was an Indian company. According to regulations framed by the Securities and Exchange Board of India (Sebi), the foreign institutional investor (FII) route is framed essentially for foreign investors. Indian individuals or companies (both resident and non-resident) are not allowed to use this structure for investment in Indian securities.
|CURIOUS CASE OF Q
|* Customer Q account used to transfer money from RNRL to Pluri Cell E
|* $68 million transferred in Jan 2007 in two tranches
|* First tranche of $18 million for a joint bid by RNRL and Q
|* Second tranche of $50 million said to be for an acquisition attempt
|* Customer Q unaware of transactions, not related to Reliance
In a recent judgement, the UK Upper Tribunal said former UBS Managing Director Sachin Karpe had used this account to conceal and disguise Reliance investments. “Our conclusion is that Mr Karpe deliberately concealed what he had been doing from compliance. He must have known that what he was doing was wrong, having regard to the fact that he had disguised the investment by Reliance in Cell E, not only by making the investment through structured notes, but also by routing the money through the other (unconnected) client account, known as Customer Q.”
An RNRL spokesperson said, “These alleged payments, which are now more than five years old, have already been dealt with in RNRL’s case by the Indian regulators in January 2011, and closed under the consent framework, as widely reported at that time.”
The spokesperson further noted that the fact of a huge number of unauthorised transactions being conducted by the concerned employees in relation to a large number of UBS customers, "including inter alia unauthorised transactions of which Reliance was not aware, has been documented in great detail in the proceedings in question, and also reported by your newspaper".
According to the spokesperson, the aforesaid two payments also fell in the same category of unauthorised transactions. "There were no charges levelled against RNRL in the proceedings in question, and RNRL was neither party to the proceedings, nor represented therein, and as such, there was neither any necessity nor any opportunity for RNRL to rebut any observations,” the spokesperson added.
"The entire funds deposited by RNRL with UBS, including in relation to the aforesaid alleged two payments, have been repatriated back to India nearly nearly years ago in 2008, and the relevant accounts duly closed. No loss has been caused to RNRL and/or its shareholders in this regard."
An email questionnaire sent to the UK regulator, FSA, on the tribunal order through its website did not elicit any response.
Karpe declined to comment on specific queries related to Customer Q. In an emailed response, a UBS spokesperson said, “This case dates back to 2006. The fund structures used by the former employees in London during the relevant period were not approved or permitted by UBS.”
In January 2007, $68 million was transferred from RNRL to Cell E’s account with a third party bank. The tribunal found that this investment, which happened in two tranches, was routed through Q. The order further added that Q was not connected to Reliance ADAG in any way, and was unaware of the transactions made through its account.
On January 3, 2007, $18 million was transferred from RNRL to Customer Q, and the same amount was transferred from Customer Q to Cell E.
The reason given by UBS staff for this transaction was that RNRL was making a joint bid along with Customer Q.
In a separate transaction on January 11, 2007, $50 million was transferred from RNRL to Customer Q. This time, the amount was “to assist in an acquisition RNRL was attempting to make”. However, the same amount was transferred onwards from Customer Q to Cell E.
It is not clear from the order why this particular transaction was routed through Customer Q. Further, Karpe’s direct involvement in these transactions is not established clearly in the order as the descriptions of these transactions point out the direct involvement of other staff working under Karpe. Karpe is being held responsible in his capacity as Desk head II.
Elsewhere, the order talks about RNRL, along with Reliance Energy and Reliance Global, using structured notes to invest in Cell E, short for the Mauritius-based structure called Pluri Emerging Companies PCC Cell E Emerging Markets Growth Fund.
According to the order, UBS staff ensured these investments were made through structured notes so that on external scrutiny it would appear that the beneficial owner of Cell E would be the bank that issued these structured notes and not Reliance Investors (referring collectively to Reliance Global, RNRL and Reliance Energy).
The notes conveyed all of the risk and reward of the shares in Cell E to Reliance Investors. However, according to the statement of case, the strict legal ownership of those shares remained with the note issuers.
Between December 4, 2006 and October 9, 2007, the Reliance Investors, together invested over $250 million in Cell E in this way. The notes were, the statement of case contends, intended to disguise the link between Reliance ADAG or the Reliance Investors and Cell E.
According to the order, the structure was arranged so that it would appear that it was the fund manager who was directing Cell E’s investments. The fund manager’s role was merely to execute the instructions of Reliance ADAG or the Reliance Investors that had been passed to the fund manager through UBS staff. “In accordance with those instructions, Cell E invested in RCom securities through FII vehicles.”
During the proceedings, it was contended by the FSA that Karpe knew the money was in fact being transferred to Cell E to fund the purchase of RCom securities, which he understood to be a breach of the Indian regulations.
However, Karpe’s counsel contended he had not been involved in setting up the fund, and his involvement in setting up Cell E in that fund had been peripheral, as his knowledge and understanding of such structures had been limited. The reality, he contends, is that the fund and Cell E within the fund had been principally set up, implemented and coordinated by another trader working with the Asia Desk II. “To the extent that he had been involved, Karpe’s case runs, he had not known that the structure breached Indian law,” the tribunal observed.
In another observation, that alludes to widespread misuse of the Sebi’s FII framework by Indian investors posing as FIIs, the tribunal recorded Karpe’s contention that the use of the FII structure for Indian resident investors was “commonplace.”
The tribunal said Karpe contended that, “What was more, the use of FII structures for Indian resident investors was commonplace within UBS and that was well known to senior management. In particular, far from it being deliberately concealed from compliance, senior management within UBS knew of the fund’s existence and moreover knew the identity of the individual behind Cell E.”
However, the tribunal did not buy this argument of Karpe. The tribunal said after going through emails related to the setting up of the fund, it was satisfied that several unsuccessful attempts were made by Karpe and his colleagues “to set up an investment structure to allow a major client, Mr Ambani, and his family companies (the Reliance Group) to invest in Indian securities in breach of the FII regulations.”