The Capital Markets Authority (CMA) has moved to tighten its surveillance on what happens in the backroom offices of stock brokerage firms to protect investors from fraud.
In the latest CMA Annual Report, the Authority says its Fraud Investigation Unit has agreed with all market intermediaries that before any major transactions occur, the documents involved should be availed to the Authority for scrutiny and authentication.
The Capital Markets Fraud Investigation Unit (CMAFIU) is a specialized Unit under Criminal Investigations Branch (IB) DCI HQRS that undertakes Criminal Investigations of cases falling under the Capital Markets Authority.
Established in 2009, this Unit is involved in detecting and preventing frauds in the securities industry; investigating all seen and reported cases of fraud in the securities industry; apprehension of offenders; and acts as a liaison between CMA and other Law Enforcement Agencies.
The Authority notes that crime trends have changed to fraudsters tricking unsuspecting investors in conjunction with brokerage firms’ employees, resulting in fraudulent disposal of shares leading to losses to investors.
To counter these types of fraud, CMFIU has engaged the market intermediaries and agreed on how to stop the menace.
TRENDS & MAJOR FINANCIAL CRIME CASES
The Unit has maintained a gradual and significant constancy in cases reported. A total of 24 cases were reported in the year under review compared to 31 cases in the 2018/19 period.
Among big names nabbed by CMA include Jacob Israel Segman. The former CEO of Kenol Kobil was accused of non-compliance with regulatory requirements on Disclosure of Shareholding Information in Kenol Kobil Limited through Energy Resources Capital Limited contrary to sections of the CMA Act.
In August 2018, a Financial penalty of KSh 5 Million was issued against Segman according to various sections of the CMA Act. Segman has since filed an appeal at the Tribunal.
In February 2019, David Maena Tumaini was disqualified from holding office as a critical officer of a public listed firm and or issuer, licensee, or any approved institution of the Capital Markets Authority. This was after he was accused of irregular trading in fixed income securities contrary to sections of the CMA Act. Maena was also fined KSh 166.95 Million, twice the benefit that directly accrued him from the irregular trading.
Also punished was Rodrick Muhoro Ngugi, who was engaged in choppy trading in fixed income securities contrary to the law. According to sections of the CMA Act, in May 2019, Muhoro was restricted from conducting bond trading for ten (10) years. Muhoro was fined KSh 208 Million, equivalent to two times the benefit of KSh 104 Million which he made from the scheme in the bonds transactions.
In October 2018, a Notice to Cease and Desist was issued against Pesos Capital Markets Limited for carrying on capital markets business without holding a valid license. The firm was accused of holding themselves out as carrying on a fund manager’s business and an Online Forex Dealer in Kenya without holding a valid license issued under the Capital Markets Act.
CASH RECOVERED FROM FRAUD CASES
The Capital Markets Authority recovered a total of KSh 477 Million in the case of Insider trading in the Kenol Kobil Plc counter in the period March to May 2019.
The CMA also recovered KSh 82.89 Million following the signing of agreements in cases involving unethical trading of Fixed Income Securities from July 01, 2018, to June 30, 2019.
The Authority took action against three individuals- Andre Desimone (former CEO and Executive Director Kestrel Capital (East Africa) Limited), Aly Khan Satchu and Kunal Kamlesh Bid (both stockbroking agents of Kestrel Capital (East Africa) Limited, for involvement in the insider trading of Kenol Kobil Plc shares before the takeover announcement being publicized in October 2018.
The Authority imposed enforcement actions ranging from financial penalties, disgorgement of commissions, and disqualification from holding office as a critical officer and director of a publicly listed company and or issuer, licensee, or any other approved institution under the Capital Markets Authority.
Appeals against the enforcement actions are pending at the Capital Markets Tribunal and Court of Appeal.
During the period under review, the Authority took minor administrative actions (issuance of a warning, reprimand, or cautions) against market intermediaries arising from contraventions which were found not to be material in nature.
Examples of such contraventions include delay in settlement of market development fees by issuers, failure to ensure that financial reports submitted to the Authority match the required format, and failure to seek the Authority’s approval before making publications.
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