Manipulation scandal in Turkey: When the stock market becomes the party's coffers

For days now, the talk groups on Turkish television have been talking about nothing other than the so-called fund scandal. It is the biggest stock market scandal in recent Turkish history. Over a hundred investment funds, bundled by seven asset managers, have used illegal methods to drive individual stocks to dizzying heights, thereby making a few people close to the ruling AKP party rich and probably depriving around half a million small investors of their savings.

A spectacular winner in this game is the former family minister and close confidante of President Recep Tayyip Erdoğan, Fatma Betül Sayan Kaya. She earned around 100 million euros from the funds in just a few months. Her husband too. She has since resigned as deputy party leader but has not yet been charged.

On Monday evening, opposition leader Özgür Özel announced that the Yeni Party knew that a sitting minister had earned 200 million euros. Finance Minister Mehmet Şimşek tries to reassure people and emphasizes that the financial situation is stable overall. But Şimşek and several others are in considerable need of explanation.

The first inconsistencies had apparently been visible for months. Back in June, the international index provider MSCI (Morgan Stanley Capital International) discussed unusual price movements in small Turkish stocks. These are small freely tradable stock holdings and possible coordinated transactions in connection with certain funds. Şimşek also indicated that he saw problems, but did not act.

On August 19, the Istanbul General Prosecutor's Office sent a letter to the capital market regulator SPK. They responded promptly with new rules. Suddenly money was flowing out on a large scale, apparently from people close to the fund managers or political figures who had been warned. On September 15th, the first asset managers had to admit that they were no longer liquid and could no longer pay out investors willing to sell. Around half a million investors are now worried about their money, the first prominent fund managers have been arrested and are in custody.

Finance professor Özgür Demirtas describes the system with which the funds collected their money as a slightly modified pyramid scheme that only works as long as new investors keep adding money. Except that the transactions involved real stocks, which were artificially inflated: the funds gradually bought up stocks from small companies that were only traded freely in small quantities - here even small purchase orders can cause large price swings. In fact, the shares rose in price by more than 100 percent in some cases. This attracted more and more investors who also wanted to make money with these “super funds���.

The first of these funds were launched in 2021 and early investors actually made big profits. Shares that were initially worth 100 lira rose to as much as 2,000 lira. The affected fund assets were recently estimated at more than 18 billion US dollars. For those in the know, it was important to sell the shares again before the large number of investors realized that they had been succumbed to fraud.

Several prominent fund managers are now in custody. The public prosecutor's office is investigating market manipulation, fraud, money laundering and the formation of a criminal organization.

The opposition is now asking why these funds were allowed to continue for so long. And how could it be that after the advance of the capital market regulator in August, a number of insiders still managed to get their sheep to dry until mid-September, i.e. transferring huge profits abroad.

A look behind the scenes of the asset managers offers a lot of explosives for the government: The head of the largest asset management company, Tera, is Emre Tezmen. The growth of his funds was spectacular, with Tera shares temporarily rising by 40,000 percent. He is said to be one of the people who transferred large sums of money abroad. Tezmen is one of the so-called AKP princes. His father, Oguz Tezmen, was transport minister under Erdoğan for a while.

Anyone who belongs to such a family is not dealt with so quickly by the justice system in Türkiye. Finance Minister Şimşek also has to accept the accusation that he allowed the funds to continue running for this reason. Erdoğan is now trying to capture the outrage by guaranteeing repayment to small investors who have invested no more than 1 million lira (around 18,000 euros). However, if further entanglements of high party members or ministers become known, things could also become difficult for the president.