By Standard Team
Kenyans who invested in the stock market through Nyaga Stockbrokers could lose up to Sh1.3 billion, a forensic audit shows.
The audit by PricewaterhouseCoopers (PwC) questions the role of the Capital Markets Authority, two key investment banks and a former NSE Chairman in the collapse of the securities firm in 2008.
It shows how the CMA watched on the sidelines and sometimes even became a player in the loss of billions of investors’ funds.
Under the current legal framework, investors can only be compensated to a maximum of Sh50,000. By 2007, the Investor Compensation Fund of the CMA had only Sh165 million, meaning that most investors in Nyaga Stockbrokers are unlikely to see any money.
The report is so explosive, that the CMA board has refused to release it because it names several powerful investment bankers, stockbrokers and former custodians of the CMA and NSE, whom it says were central figures in the scandal, and whose roles should be investigated further.
Spinning a web of deceit, greed and market manipulation that traces its roots from the very top of the NSE and CMA boards to the trading floor of stock exchange, the audit details how investment banks worked with managers of the fallen stockbroker to defraud investors of their hard-earned cash.
Brokers placed purchase and sell orders with a view to pushing prices in either direction. They made money by trading on the margins, after engineering price swings on key shares.
Several key players
The process worked well until prices in the market started to fall, exposing some of the parties in the scheme who lacked enough funds, leading to their downfall.
One such party in the price manipulation scheme was Nyaga Stockbrokers.
The fraudulent dealings, the auditor writes, involved a host of irregular deals that were carried out under the nose of the CMA and the NSE’s surveillance unit.
The report reaches damning conclusions about a number of key players in the stock market, including a former CMA chairman who resigned recently, and a company linked to a former long-serving chairman of the NSE.
The mention of the report fuelled a sharp drop in the NSE 20 Share Index by 37.46 points, to settle at a low 2890.2 points. It highlights rampant price manipulation by rogue stockbrokers that is blamed for the market’s waning investor confidence.
Before Nyaga fell into liquidity problems, says the report, the group hatched a scheme that would ensure them a windfall, by manipulating prices at the stock market to their advantage.
When Nyaga eventually crashed, the main players — two investment banks, the NSE and the CMA — agreed on a bailout plan in which the NSE "advanced" the firm Sh100 million to compensate investors. Most of that money never reached investors, but ended up in the accounts of the two investment banks, proving that the supposed "bailout" was nothing else than a scheme to compensate the two.
By signing the "bailout" plan, the CMA also became part of the fraud perpetrated on investors.
The report shows that the regulator, deliberately or otherwise, failed to act in time, despite having received prior information about Nyaga’s deteriorating financial condition.
Chairman left post
It questions why CMA did not insist that the "bailout" funds be applied on a pro-rata basis to settle the obligations of Nyaga to its investors.
Even more damning was the fact that the same people who caused the crisis in Nyaga were also overseeing its supposed "rescue".
The former NSE chairman left his post before the matter was resolved, while the other principals also resigned one after another, leaving investors reeling under their losses.
The auditors questioned CMA’s inaction saying it failed to guard the investors’ interest at a time when they needed it most.
The report also did not spare the Treasury from the manipulation of the market. It implicates a senior treasury official, who forced the broker to enter into a deal involving Mumias Sugar Company’s secondary offering. The high-ranked official linked to the privatisation programme of the Government, was involved in the secondary offering by Mumias in 2006, which eventually failed to live up to expectations.
The same official was also involved in the Safaricom offering last year, and the subsequent fallout that triggered the current bear run on the market.
Former CMA chief executive Edward Ntalami, who resigned in December 2007, was informed of the shady deals by the brokerage firm but intervened too late.
Also implicated are senior managers at the NSE who reaped huge profits through irregular trading of accounts held at Nyaga Stockbrokers.
These included principals of two leading investment banks who blatantly used their positions at the NSE Board to offer financial assistance to the fallen broker in the form of overnight lending. It was during Mr Chris Mwebesa’s tenure as CEO of the NSE, that Sh100 million was advanced to Nyaga under the guise of a ‘rescue package’. The legality of this arrangement has since remained a grey area and the NSE has never fully explained what happened to the money. The report however states that part of this amount was paid to the two investment banks. The report also implicates employees of the Central Depository and Settlement Corporation (CDSC), whose role in the scandal involved receiving of hefty bribes to suppress delivery of CDSC statements to certain customers.
Two commercial banks consciously processed irregular endorsements of IPO refund cheques.
The auditors at Nyaga have also been accused of negligence in presenting the wrong information concerning the financial status of the firm’s accounts, by understating the liabilities.
