Breach of contract lands stockbroker in trouble

by Nyakundi Nyamboga

Seven years ago, National Social Security Fund (NSSF) bought a Treasury Bill — TB 1471, which would have earned it Sh256 million at its maturity on August 26, 2002. However, Central Bank of Kenya (CBK), without valid authority from NSSF, rediscounted the Bill before its maturity date.

The CBK action, according to NSFF, was in flagrant disregard of the terms of the T-Bill. It claims the bank was uncaring and negligent and this occasioned it a loss of Sh258,133,333.

NSFF, at the time of its dealings with the CBK, had engaged the services of a stockbroker, Shah Munge and Partners to advise it on how to invest the proceeds from the T-Bill.

NSSF claims the stockbroker urged it to invest the money in a Treasury Bond where it would have earned 10 per cent higher than proceeds from the T-Bill. Consequently, it issued them a cheque Sh251,505,500 to buy the Treasury Bond from an undisclosed seller. It later turned out the advice was laced with fraud and deceit. The cheque was deposited at the broker’s office account at Euro Bank. The money was never reinvested, instead some of it was used to pay overdrawn amounts the stockbroker owed the bank, among other things.

Its claim against the stockbroker is for breach of contract, breach of statutory duty, fraud and deceit.

In its defence, CBK claimed immunity — it was acting on behalf of the Government — and that it paid the money into an account NSSF held at National Bank of Kenya.

It claimed it lived true to its mandate in discounting the T-Bill, denied it owed NSSF duty of care and had acted negligently.

Shah Munge and Partners on its part denied the allegations of breach, deceit, fraud and or conversion. It refuted claims there was a contract between them. It claimed it was removed from the scene, with respect to the proceeds from the T-Bill, after Euro Bank issued NSSF with a fixed deposit slip.

Counter-claim

The broker filed a counter-claim (cross-suit) against NSSF claiming compensation of Sh501.5 million, which it said were damages incurred when it was ‘wrongly’ dragged to the Capital Markets Tribunal. CBK did not see any merit in the counter-claim. It was its case that the stockbroker was found guilty by the tribunal after a validly conducted trial and suspended from the stock market for five years. It was also fined Sh1.5 million. Criminal prosecution of the stockbroker and some of its officials were commenced.

The stockbroker, too, filed third party proceedings against Euro Bank claiming indemnity of Sh250,133,133. The ground of the claim was that the bank had failed to honour the fixed deposit slip in the name of NSSF. Euro Bank, now in liquidation, denied the claim.

NSSF, too, had sued Mr Ben Mtuweta. He denied the claim against him. However, his defence was struck out and judgement entered against him.

All the parties, except Mtuweta, testified at the trial. After listening to the evidence and analysing written submissions by lawyers for the parties, the judge absolved CBK from blame, but found the stockbroker liable.

Said the Judge: "In the end, I have come to the conclusion that Shah Munge and Partners is liable for breach of contract and conversion of the plaintiff’s money to its own use. I, therefore, find and hold that NSSF actually suffered loss of the sum of Sh258,133,133 and is entitled to judgement for the same against Shah Munge and Partners."

In a 34-page judgement, Justice Azangalala dismissed as of no basis the stockbroker’s counter-claim against NSSF. He said there was no logic informing the stockbroker’s claim since both the tribunal and the High Court had found them guilty of misconduct. He also did not find merit in the stockbroker’s bid to rope in Euro Bank to indemnify it against the claims by NSSF.

Although the court found that CBK discounted the T-Bill on invalid instructions, it did not find it liable to NSSF. Reason? NSSF waived its right to complain after it continued dealing with the proceeds CBK deposited in its designated account at the National Bank of Kenya. From the proceeds of the T- Bill, it issued a cheque in favour of Shah Munge and Partners.