Tiny elite at NSE fleece investors

The Nairobi Stock Exchange is in a total mess. That is the stark message from a forensic audit report on the troubled Nyaga Stockbrokers, now under statutory management.

It is a long tale of cases where money from clients’ shares are sold without their knowledge, where officials of the Central Depository and Settlement Corporation (CDSC) collude with brokers to postpone updating clients’ accounts and where prices are routinely manipulated by stockbrokers.

Nearly all institutions in the trade — including the watchman of the industry, the Capital Markets Authority — is engaged in an elaborate game of deception presided by a tiny elite with tentacles in almost all segments of the business.

The forensic audit report seen by the Nation was conducted by Pricewaterhouse Coopers and handed over to the Capital Markets Authority in November last year.

The report is a catalogue of damaging allegations on the part of CMA, Nairobi Stock Exchange, Treasury officials and the CDSC. According to the report, the investing public lost Sh1.3 billion, Sh500 million more than what the statutory managers had estimated.

By the time it was put under receivership early last year, Nyaga Stockbrokers had about 70,000 retail and corporate investors. The report has dealt the biggest blow so far to the reputation of the NSE, adding injury to the already waning investor confidence in the bourse.

According to the report, Nyaga Stockbrokers would exploit loopholes in the law to falsify its accounts and, therefore, mask its blemishes.

The forensic audit reveals that massive rip-off of investors’ funds was accomplished through unscrupulous manipulation of clients’ accounts.

The auditors concluded that what happened at Nyaga Stockbrokers was a collusion by the main players to loot public resources.
The scheme, according to the report, cut across from junior officers who received bribes to facilitate forgery and senior managers who failed to use their positions to stop the theft.

Two managers of well-known investment banks are accused of being part of the gravy train. In addition to the evidence of false financial reporting, the document also sets out a careful scheme orchestrated on individual clients’ accounts.

“This happened in a number of different ways depending on the suspect’s objective at the time,” it says. Among the tricks used by the brokerage firm to defraud the clients included a process referred to as “uploading of the prices”. This happened in instances where clients’ shares were sold without their authorisation and then repurchased, usually at a loss.

The role of these institutions has remained in focus, at times facing criticism in the handling of the investors’ affairs. This has also led to resignations of some key persons in the role that raises more suspicion in the whole affair.

But more startling in the report is the role played by two senior investment banks whose owner-managers at time had a say in the NSE boardroom. These powerful individuals used their positions to perpetuate and cover up for the activities of the beleaguered stockbroker, lending it money recklessly in what looked like a cheque-kiting scheme.

The report recounts how when a meeting of the NSE board decided to rescue Nyaga Stockbrokers by advancing it Sh100 million, the money ended up being used to pay the firm’s debts to these investment banks.

Apart from this, the two banks are also said to have benefited from Sh269 million and Sh76 million from the troubled broker on diverse dates between November 1, 2007, and March 5, 2008.

The NSE itself is heavily censured in the report. The auditors say that interviews with officials of the bourse suggested that the managers were overly protective of Nyaga Stockbrokers and its managers.

On the part of the CMA, the report has indicted former chief executive Edward Ntalami. It alleges that the former CEO had knowledge of the irregularities at the brokerage firm.

Indicating diverse dates, the auditors put Mr Ntalami on the spot for failing to act decisively on financial irregularities committed by the stockbroker.

Mr Ntalami resigned from the authority in December 2007 at a time when the die had already been cast on the fall of Nyaga. Early this year, the regulator’s chairman, Prof Chege Waruinge, also resigned without any tangible explanations. Pundits will be quick to associate his resignation with the report, having received it in November.

The PWC report also says the CMA had, in fact, received several complaints about the firm. However, it is yet to be proved whether or not the regulator chose not to act.

The current chief executive, Ms Stella Kilonzo, who was then in charge of compliance, is noted to have shared the information with her boss, Mr Ntalami.

The forensic audit also questions the regulator’s inaction, saying it failed to guard the investors’ interest at a time they needed it most.
“Given the extent of the money removed, how did the company manage to escape more serious sanctions from the CMA, the aggrieved customers and other third parties?” asks the PWC report.

News of trouble at Nyaga Stockbrokers came exactly a year after the collapse of another stock broker, Francis Thuo and Partners, over alleged sale of investors’ shares without their authority.

Nyaga Stockbrokers was put under receivership by the market regulator last year for failing to meet their financial obligation. The broker, whose managing director Patrick Gakiavih sat on the board of the NSE, went under with the investments of thousands of Kenyans.

As a founding member of the NSE, ownership of the firm exchanged hands sometime in 1999, handing Mr Gakiavih control of the firm.

Investigations by CMA in December 2006, found that the firm was operating in negative working capital, against a recommended minimum of Sh1 million. It owed the CMA and the NSE Sh5 million in transaction fees arrears.

Another CMA audit report prepared in March last year showed that the firm had a negative net asset position of Sh225 million. Statutory managers placed at the firm had long closed doors for claims and the report remains the only solace for the investors.

However, the report rubs salt on the wounds of thousands as it says the firm is massively insolvent. Today, Mr Gakiavih is fighting it out with the CMA in court over attempts to attach his property.