How CMA failed CMC's minority shareholders in time of need

By Standard Team

The Capital Markets Authority's role in CMC Holdings has exposed the deep flaws in relationship between the vehicle marketer's board and Chief executive, and interpretation of CMA's role as a regulator.

Central to this is CMA Chairman, Mr Kungu Gatabaki, who has taken centre stage in the CMC saga by overshadowing the one person on whom the CMA Act bestows executive authority ¨C Chief Executive Officer Stella Kilonzo.

Four years ago, our Tuesday business pullout, The Financial Journal, raised questions about the ability of CMA to instill discipline in market players following the corruption and fraud that led to the collapse of two brokerages in 2007 and 2008. Not surprisingly, this did not go down well with the regulator.

How CMA failed CMC's minority shareholders in time of need

But the demise of the brokerages triggered apathy among retail investors, thousands of whom lost their investments. It is significant to note that recent moves by CMA to clean up the market through strengthening of regulatory guidelines for market participants, among other initiatives, were implemented after former Central Bank Governor Micah Cheserem became its chairman in 2009.

Cheserem has since been appointed to the Commission for Revenue Allocation in a similar capacity. His successor, Gatabaki, appears to have emasculated Mrs Kilonzo's position to the extent that communication regarding the CMC Holdings affair is addressed to him, and not the CMA CEO in whom the law vests executive authority.

At some point CMA ceased being a neutral arbiter in the CMC matter, and became a player, even appointing directly to CMC Holdings, which is a private company, three directors.

Copies of signed letters in our possession between CMC Holdings Chairman Joel Kibe and Gatabaki raise the possibility that CMA's rapid retreat with regard to establishing an interim board at the troubled company was either a serious lapse of judgement on the part of Gatabaki and Kilonzo, or a capitulation to some of the invisible forces intent on blocking implementation of a forensic audit by PricewaterhouseCoopers (PwC).

That audit exposed serious conflict of interest involving former CMC Holdings Chairman Peter Muthoka and his company (see separate story), Andy Forwarders Services Limited for allegedly overcharging CMC for its services, and recommended that Muthoka be investigated for possible criminal wrongdoing.

The CMC Holdings board has since cancelled the logistics contract held by Andy Forwarders for over a decade, following Muthoka's ouster as Chairman, but he remains an executive director by virtue of his commanding shareholding.

A separate forensic investigation of CMC Holdings commissioned by CMA has also unearthed evidence that long-serving director and former Chairman Jeremiah Kiereini, former CEO Martin Forster and director PK Jani are signatories to secret offshore accounts to which CMC Holdings funds were diverted.

It now emerges that following meetings on February 21 and 22, CMA Board and CMC agreed to an interim board of seven nominees picked by CMC's Board and three appointed by CMA to restore faith in the firm's corporate governance structures among its investors, financiers, and partners.

Gatabaki wrote to Kibe on February 27, giving the names of CMA's nominees Zehrabanu Janmohammed, Joshua Okumbe and Susan Wakhungu-Githuku.

Two weeks later, however, CMA appeared to backtrack on the agreement and rejected the deal claiming CMC Board was not unanimous in backing the proposed interim board.

This did not go down well with Kibe who fired back a letter on March 14, expressing his "surprise" at the turn of events.

In the letter, Kibe pointed out that CMA's waffling over the matter was suspect since all the directors, including Muthoka and Kivai were aware of the purpose of the February meetings' objectives, but later "inexplicably refused to co-operate in implementing the CMA directive, and insisted that CMA had no powers to pursue the establishment of an Interim Board."

The Standard has since established CMA rushed into the deal without due regard to the law, and then used the two directors as an escape hatch to cover for its incompetence.

Several things stand out in this regard: First, CMC is a publicly listed, limited liability company, whose fiduciary responsibility is exclusive to its shareholders.

By nominating directors to an interim board, CMA was infringing on the rights of shareholders to elect their directors, and opening itself up to lawsuits.

Why did CMA purport to name directors of a publicly listed company? Who gave CMA the names? These are the questions the regulator is yet to answer.

Secondly, CMC Holdings is not under receivership, and so CMA's role in the matter should have been advisory rather than direct meddling in board affairs. This includes vetting the nominees to ensure they fit the bill and proper criteria of directorship of a listed company.

By backtracking on what was at best a suspect deal, CMA ultimately appeared to alter the balance in favour of Muthoka and Mr Joseph Kivai who represented Andy Forwarders in CMC board ¨C with regard to the proposed interim board, potentially dealing it a deathblow.

But even more significantly, the regulator's apparent "confusion" has sent the signal to capital markets investors and other players that its directives are not firm and can be altered at a whim.

A recent investigation by Parliament of the fall of the shilling initially blamed Central Bank Governor Njuguna Ndung'u for sending mixed signals to the market. CMA now appears to have fallen into the same trap.

Writes Kibe to Gatabaki: "By contradicting a directive you had issued, after it is complied with, CMA is sending the wrong message regarding the sanctity of its directives. With respect, your letter seriously erodes the confidence with which your directives are taken by public companies."