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Stockbrokers’ plan to redeem tattered image

By | February 17th 2009

By Jackson Okoth

A committee has been formed to look at possibilities of installing one back office platform for all investment banks and stockbrokers.

The new system will allow linkage between stockbrokers and the Nairobi Stock Exchange (NSE).

Investors queue to buy shares during the Safaricom offering last year. A new system would shield them against fraud by stockbrokers. Photo: File/Standard

"It will be possible to have an audit trail within the whole system, effectively sealing loopholes used by fraudsters," Mr Job Kihumba, Executive Director of Standard Investment Bank (SIB) told Financial Journal.

The move would strengthen internal systems of investment banks and stockbrokers due to a growing cases of clients suffering losses due to unauthorised trading of their shares by unscrupulous dealers.

It also comes after a damaging audit report implicating officials from the Treasury, commercial banks, CMA and NSE in the price manipulation scam at the collapsed Nyaga stockbrokers, was leaked to the media.

While brokers trace their present liquidity problems on delays by Citibank, the lead receiving bank in the Safaricom IPO transaction, they also admit that their international systems may have been overrun during this transaction.

"We are appealing for a forensic audit of Citibank records to enable us get the IPO refunds," says Kihumba, who is also the Treasurer of Kenya Association of Stockbrokers and Investment Banks (Kasib).

Brokers attribute their current liquidity problems to losses suffered during the Safaricom IPO when fraudsters invaded the system.

Kasib officials admit that the system is vulnerable "but that recent incidences could have been exaggerated, causing unnecessary panic".

Tamper-proof system

"While commercial banks face problems of ATM thefts, insurance firms have to deal with fraudulent claims as fraud hits the entire financial sector," says Kihumba.

After the market closes, information concerning all the daily trading are usually uploaded to the back office systems of individual brokers.

Unfortunately, these systems are not fully tamper proof, especially those with access to administrator codes within the brokerage firms. Apart from human error, investors’ shares usually go missing when fraudsters present fake documents when opening a CD account.

It normally takes collusion with Central Depository System Corporation (CDSC) officers for illegally obtained shares to be immobilised and then passed on to the share registrar.

It is at the registrar’s office where the identification marks of CD account holders are held. Once the order passes through the registrar, CDSC processes the rest.

"In such instances, the blame is usually on the broker while it is the registrar who is in a better position to detect this fraud," says Mr John Kirimi, MD, Sterling Investment Bank.

Key players in the industry admit that current expansions of the bourse have exposed internal weakness of many firms, especially those individually owned.

Kasib has also issued an alert to all investors to avoid issuing verbal orders to their brokers as this is against the CMA Act.

Daily movements

Cases are on the rise of clients losing their shares after giving verbal orders to brokers.

Also on the spot is the regulator. Although CMA is able to monitor daily price movements, on real time basis, it is still ill-equipped to detect fraudulent and illegal orders executed by the system.

The electronic Central Depository System, which replaced the hard copy share certificates, is only accessible to brokers.

This makes in possible for unscrupulous dealers to get into the system and trade with a client's shares while escaping detection.

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