Dismantle CMA board, probe scam

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An audit of Nyaga Stockbrokers has found proof officials at Capital Markets Authority (CMA) and at least one Treasury official were aware of irregularities at the brokerage firm, some for at least four years.

The misdeeds at first included false accounting, poor cash control and misuse of client funds.

By late 2007, CMA was aware that Nyaga was selling clients’ shares without permission — basically, stealing from investors.

Despite this, the market regulator failed to stop or punish the criminal activity. Instead, CMA turned a blind eye as senior managers took hundreds of millions of shillings for their personal use, presented it with fraudulent audit reports and then resorted to desperate borrowing from fellow members of the Nairobi Stock Exchange (NSE) and even expensive loansharks to stay afloat.

Not even the 2006 collapse of the smaller Francis Thuo & Partners following similar irregularities — leading to the loss of Sh140 million in clients’ money — was enough to spur CMA to action.

The result was the direct loss of about Sh1.3 billion in clients’ money and, arguably, billions more in the value of listed shares due to a loss of trust in the integrity of capital markets.

The fraud goes beyond the billions stolen: It is a blow to the image of the capital markets.

A forensic audit of the collap-sed brokerage firm by PricewaterhouseCoopers suggests CMA and NSE officials helped Nyaga’s managers defraud the 70,000 or so clients. Employees of the firm, auditors, some three commercial banks, even rival brokerage firms all took part in the scheme.

And it didn’t end with Nyaga’s collapse: A third of the Sh100 million rescue package approved by the NSE board ended up in the pockets of shylocks and board members whose firms were propping up Nyaga. The exit of a former NSE chairman and his CMA chairman after the money was paid out raises serious questions as to what they knew.

When changes in CMA regulations were made some years ago to allow the registration of investment banks, the idea was to deepen the market. Investment banks can buy on their account, unlike stockbrokers who link buyers and sellers of securities and only earn commissions on trades.

How can CMA ensure that investment banks do not abuse their mandate by dumping shares in the names of their investors, then buying them back cheaply through their principal accounts?

Bailout Fraud

The regulator should have instituted proper record keeping of all transactions and insisted on full disclosure as laid out in Section 24, Legal Notice No 125 of 2002 of the CMA Act. To date, it is not clear how many stockbrokers have flouted this rule.

According to the PwC audit, when Nyaga was facing liquidity problems, two investment banks engaged in suspect overnight lending to the broker. And when the NSE advanced Nyaga a Sh100 million bailout, they ensured that they got paid before thousands of small investors facing financial ruin. Was this ‘bailout’ planned in cahoots with NSE managers to compensate the two? Why did the market regulator not ensure that the money provided by the NSE was applied on a pro-rata basis to settle Nyaga’s obligations?

Why did CMA agree to let two privileged NSE insiders, who were also members of its board, get cash meant to compensate investors? Was this not a fraudulent scheme to benefit a few at the expense of wide market interests?

The NSE is yet to explain what happened in the transaction and why the conflict of interest, with the same individuals involved also overseeing the bailout.

Market regulator CMA signed a joint statement on the bailout with NSE. It became complicit in the irregularities that followed from that moment.

Finance Minister Uhuru Kenyatta must act decisively and radically to restore confidence in the capital markets by dismantling the board and reconstituting an independent one not tied to the thieving cabal at the NSE.

He must institute an impartial investigation of the role of the CMA, NSE and others mentioned in the report, and take decisive action against those perceived to have a case to answer alongside Nyaga’s former bosses.

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