Well Phone Securities Co Ltd's (
"Its illegal margin trading [business] caused Well Phone to accumulate its huge debt," said Ding Ke-hwa (
Margin trading is the practice of buying stock with money borrowed from a broker and the loan is collateralized by purchased stock, which is held in a margin account. Trading on margin can offer healthy investment returns, but in addition to the interest charges it's risky, especially during a bear market.
In the case of Well Phone, the securities house didn't have a license to engage in margin trading.
Following Well Phone's sudden closure late on Monday, regulators discovered that the firm had only NT$547 million in capital with another NT$6.85 billion in debts that were not included on the books. That amount includes NT$1.85 billion in bank loans and another NT$5 billion in personal loans by Well Phone executives.
Well Phone chairman Chen Chien-chi (
Chen's wife, surnamed Shih, was detained by Investigation Bureau official at CKS airport on Monday as she was attempting to leave Taiwan.
Pundits say margin trading without a license is widespread in Taiwan.
"It's a common practice for local securities companies, especially those with 30 or 40 years experience," said market analyst Dicky Dai (戴震). He said approximately a quarter of small brokerages may be involved in such practices.
* SEC regulators discovered that the firm had only NT$547 million in capital and NT$6.85 billion in debts.
* NT$1.85 billion of the firm's debt was in the form of bank loans and another NT$5 billion was owed to the company's executives.
* Well Phone chairman Chen Chien-chi reportedly embezzled over NT$70 million from the company.
Why do companies run the risk of engaging in illegal activities?
"Margin trading is highly profitable, because the annual interest charged in underground margin trading can be 18 percent or even higher. Such trading is often described as the C-level brokering," Dai said. "Decades ago, the securities regulators only allowed A-level brokers and B-level brokers to conduct securities brokerage business."
A-level trading is done by a brokerage company, while a B-level trading is done by an individual broker with no brokerage company support.
"Market players call illegal market trading providers `C-level brokers,' which means they are underground businesses," Dai said. "The practice is simple: Anyone who works in a securities company can provide short-term loans to securities investors. Sometimes it is only the broker himself or it is done with the consent of the securities company which then shares in the profit."
As to the source of the funds, Dai said that both banks and private entities engage in the practice. Investors use stock certificates as collateral, so generally speaking, the risks are relatively low ... except during a bear market like now," Dai said.
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