The liquidity crisis at the heart of Turkey’s stock market scandal has in the past week rapidly set in motion a wide-ranging financial crackdown.

Matters have quickly escalated since the crisis began in late August with events at Pusula Holding.

By September 18, the finance, justice and interior ministers had launched a coordinated blitz involving asset seizures, police raids on major brokerages, mass arrests of fund executives and the forced liquidation of 131 investment funds worth over Turkish lira (TRY) 890bn ($18bn).

In a decisive regulatory intervention, Turkey’s capital markets board SPK on September 17 appointed government-run Ziraat Bank along with private lender Isbank (Istanbul/ISCTR) to manage an orderly wind-down of the 131 frozen investment funds under seven asset management firms, namely A1 Capital, Atlas, Bulls, Hedef, Pardus, Pusula, and Tera Portfoy.

Under the mandate given to the SPK, Isbank will oversee the liquidation of funds established by Tera Portfoy. They represent nearly two-thirds of the total frozen exposure. Ziraat will, meanwhile, liquidate funds managed by the remaining six portfolio managers.

The two banks are tasked with converting the underlying assets into cash and distributing the proceeds back to investors within a three-month deadline. However, with approximately 60% of these fund portfolios locked up in illiquid and heavily inflated equity positions, market participants question how much cash can be salvaged without triggering further sell-offs in small-cap stocks.

Sweeping crackdown, more raids

As the banks took over the funds, law enforcement launched a sweeping crackdown on related companies. Justice minister Akin Gurlek (@abakingurlek) confirmed that four fund executives had been formally arrested, with 51 individuals placed under international travel bans with their asset accounts frozen. Sixteen additional suspects were arrested in Bakirkoy for social media market manipulation.

The justice ministry has also blocked 246 social media accounts accused of spreading panic with speculation.

Gurlek has not provided the names of the arrested executives or other targets.

It is interesting to note that the minister's wife Elif Gulsah Gurlek serves as an SPK board member. The establishment of any kind of fund in the country is subject to the approval of the SPK, which also oversees the activities of all financial institutions in Turkey.

Minister pushes "Ponzi" allegations, says state won't let targets "sleep"

Gurlek has also explicitly characterised the illicit activity as "Ponzi-like structures targeting citizens' savings through misleading schemes". Shortly thereafter, interior minister Mustafa Ciftci warned in a live appearance on local TV station TGRT that police operations were actively moving forward and would continue into the night, adding: "The state doesn’t forget and doesn’t let [its targets] sleep."

Late-night and early-morning raids on homes are very much a habit of the Turkish police. LGBTQ+ individuals, drug abusers, even bird watchers who were detained after they found themselves on the same road as a workers’ protest (true story) can be detained in police sweeps, literally anyone can expect a detention at any time. Wrong address cases are not at all unheard of.

On September 17, police raided the Tera Holding headquarters to detain deputy general manager Ibrahim Bekci. They also searched office premises of Destek Holding, Destek Finans (Istanbul/DSTKF), Destek Kripto and Destek Yatirim, detaining Destek chairman Altunc Kumova.

"No systemic risk"

Finance minister Mehmet Simsek has also been appearing live on TV. He said on NTV on September 18 that the crisis remained contained within a fraction of the market.

"What occurred yesterday is essentially a credit and liquidity issue limited to a small number of funds. There is no widespread systemic risk. Of the 2,038 investment funds operating in Turkey, this impacts only 131, representing about 10% to 11% of total fund assets. The broader banking and non-bank financial system remains entirely healthy," he added.

The minister also held up market indicators to back his statement, highlighting how Turkey’s credit default swaps (CDS) marginally decreased while the stress observed in the two, five and 10-year government bonds eased and core BIST-30 blue-chip equities stabilised following interventions by Turkey’s sovereign wealth Fund (TVF/TWF) and a TRY 300bn liquidity injection by the central bank.

Shares locked to the bottom

Also on September 18, the fire-sale acquisition of Pusula Holding by Tera Group collapsed entirely. In an official filing, Tera Yatırım announced that top executives Emre Tezmen and Erkan Kilimci had resigned from the board of Pusula Holding before any formal trade registry filings were finalised. The disclosure effectively confirmed that Tera has pulled out of the bailout deal, leaving Pusula’s distressed assets without a buyer.

Government-run Emlak Katilim Bank is to take over Pusula’s Katilimevim (Istanbul/KTLEV) and Birevim units.

For the second consecutive day, Tera Group stocks, namely TRHOL, TEHOL, PRZMA, MANAS, PEKGY and GIPTA, on September 18 remained locked at the lower limit of the daily price range. Hedef Group stocks, namely HDFGS, SKYLP, INFO, PSDTC, SEYKM, HUBVC, also hovered near the lower-limit thresholds.

Football club Besiktas (Istanbul/BJKAS) shares also remained within the bottom of the daily price range. The “Big Four” Istanbul outfit recently signed an extensive sponsorship, SuperApp and banking deal with Tera Yatirim.