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Finance Ministry, Investment Funds war rages on

When Peter Staněk took office as the new Finance Ministry State Secretary earlier this year, he ceremoniously buried the hatchet between investment funds and the ministry. But now it seems that the new tribe leader cannot resist a battle cry either.
The ministry is suing investment funds that transformed into ordinary joint stock companies to escape the heavy hand of Staněk's predecessor, Jozef Magula. In at least 25 petitions signed by Staněk, the ministry demands that courts nullify the transformations and all legal acts based on them, accusing the funds of directly breaking the Investment Companies and Investment Funds Act.
The Slovak Spectator obtained a copy of one such a lawsuit. Based on information from investment funds, all of them are the same except for names and some other particular data.

When Peter Staněk took office as the new Finance Ministry State Secretary earlier this year, he ceremoniously buried the hatchet between investment funds and the ministry. But now it seems that the new tribe leader cannot resist a battle cry either.

The ministry is suing investment funds that transformed into ordinary joint stock companies to escape the heavy hand of Staněk's predecessor, Jozef Magula. In at least 25 petitions signed by Staněk, the ministry demands that courts nullify the transformations and all legal acts based on them, accusing the funds of directly breaking the Investment Companies and Investment Funds Act.

The Slovak Spectator obtained a copy of one such a lawsuit. Based on information from investment funds, all of them are the same except for names and some other particular data.

Unfortunately for Staněk, the courts do not seem to buy his arguments. According to Rudolf Lachkovič, the Chairman of the Association of the Investment Companies and Funds (AISF), the Finance Ministry has already lost its first case against Slov Coupon invest fund. "The court essentially ruled that the ministry is not legally qualified to take Slov Coupon Invest to court and did not even look into the case," Lachkovič said.

When The Slovak Spectator tried to obtain the government's view, Staněk could not find time to comment on the matter. Jozef Mach, the ministry's spokesman, did not feel competent and Dušan Koledzai, the head of the Capital Markets Department, was abroad.

Moreover, Lachkovič pointed out, courts already flashed a green light to the transformations. "All changes were entered into company registers by [respective] register courts," he said. "It means that independent courts endorsed what had happened."

In the lawsuits, however, the ministry attacks register courts for doing so and alleges that they did not observe their obligation stipulated by law "to examine whether requirements set by law to make an entry are fulfilled."

But the courts failed to react to ministerial letters crying foul even though the law "allows the court to begin proceedings without a petition, if they should put into accord real state of affairs and an entry in Companies Register."

Hatchet dug out

Although investment funds in Slovakia are joint-stock companies, they have to observe the special Investment Companies And Investment Funds Act (ZISIF). The act defines the Finance Ministry as the regulatory body supervising investment funds and gives it special powers to make and break including the right to "approve bylaws of an investment fund and any eventual changes thereof."

When Magula came into office in December 1994, he did not hesitate to use these powers and promptly closed an investment company Prvá Slovenská Investičná Spoločnosť (PSIS).

"People from PSIS were acknowledged by the community not only as the best in their field, they also had a high moral credit," Lachkovič said. "They had one of the highest returns and did not build stately mansions with marble stairs as some other companies did."

Although Magula cited a gross misuse of funds as the reason for his act, he eventually lost all but one suit at the Slovak Supreme Court. In the meantime, PSIS shareholders left the playing field and dissolved the company.

The following amendment of ZISIF defined investment companies and funds as portfolio investors and did not allow them to own more than 10% of any company. Most of the funds were founded before the first wave of the voucher privatization and were aimed to exercise ownership rights and participate in the management of companies they had shares in.

Funds strike back

On September 14, 1995, the Parliament bound the cabinet to prepare a law on strategic funds which could really own companies. A year passed and nothing happened. That is when most funds decided it was time to change the rules of the game.

"There were two paths fund managers could take," Lachkovič explained. "Either to 'tunnel' their funds from within - and let us not fool ourselves, some did exactly that - or to use a loophole in ZISIF and escape."

ZISIF forbids transformation of an investment funds into an ordinary joint-stock company and changing its business. What it does not forbid, however, is a fusion with an ordinary joint-stock company.

Fund managers knew they were using a loophole. Eduard Šebo, a vice-president of Harvardská Investičná Spoločnosť, said at the time of its transformation, "The whole process is quite controversial. The funds are just using what the law allows them to do; what they do is legally all right."

The ministry furiously disagreed. "A 'voluntary' change of business of an investment company by its General Meeting via transformation into 'an ordinary company' bound only by the Commercial Code and not by ZISIF is not possible and acceptable as this act in its content and purpose breaks both ZISIF as a whole and its individual clauses," the lawsuit stated.

Driven by welfare

Both the ministry and the AISF claim that the welfare of investors drives their actions. Staněk's petition said that the only way to protect the small guy is to reverse everything and to force the runaway funds back into the ministry's flock.

According to Šebo, the whole process cannot be stopped by any legal action. Lachkovič added that if it is and the funds lose, the most probable outcome will be that all of them will be 'tunneled' and all of the shareholders' value will be lost. "That is the reason why the AISF provides the funds with legal counsel," he said. "We want to help the capital market that is crumbling."

When the transformation process began in the fall of 1996, Magula vowed to fight it. He did not have the time and the lawsuits are signed by his successor who otherwise harvests a lot of praise for cooperation with the self-regulatory bodies like the AISF.

"Our cooperation is very good," Lachkovič conceded, but stuck to his guns concerning the matter. "The ministry has to take the funds to court if it wants to achieve anything," he said. "The hatchet is buried. [But] even if everything goes well and the things we are preparing together with the ministry work out, the positive results will not begin to show before the year 2000."

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