Is there an option for shocked investors?
With revelations of rogue brokers selling people’s shares behind their backs, many are wondering where else to put their cash. Photo/FILE
The safety of retail investors’ stocks in the equity market has once again come into sharp focus as Kenya comes to terms with a report revealing fraud involving brokers and investment firms.
Many people have been left wondering how safe their stocks are if those charged with safeguarding them can collude to rip off investors. The report is yet to be made public by the authorities concerned.
“It is startling and looks very bad if what we have read in the media is true. It begs the question of how safe our investments are. I may not have been at Nyaga, but who knows maybe my brokerage company is next,” observes Mr Eustace Ochieng, a retail investor.
The shocking contents of the forensic audit report on the fallen Nyaga Stockbrokers must have pierced through the hearts of many a retail investor.
Even more worrying is that the plight of investors has not been addressed as the effects of the revelation continue to sink in. Recently, Treasury developed cold feet after placing an alert to the effect that it would react to the report.
The NSE through chairman James Wangunyu has dismissed the findings while the Capital Markets Authority is yet to provide a substantive way forward.
The report seen by Money goes at length to describe how Nyaga Stockbrokers used its connections both at the Central Depository and Settlement Corporation (CDSC) and the Nairobi Stock Exchange to fleece investors.
It further sets out a series of laxities on the part of the capital markets regulator to act even when clear evidence had been brought against the broker.
Against all the orders, these are the institutions charged with safeguarding retailers’ investments. Therefore one wonders who to turn when these same institutions fail to perform their functions. According to the report, Nyaga using flaws within the laws failed to submit true records of its accounts to the CMA.
It is through this, that the forensic audit reveals, the massive rip-off of investor’s funds occurred. “The biggest differences are in bank accounts balance and in the clients accounts balances with the Broker Know client accounts showing a Sh1.3 billion net liability to clients and showing Sh1 billion in the accounts,” says the report.
It adds; “the management accounts submitted to Capital Markets Authority show a net receivable of Sh55 million and only Sh6 million in the bank accounts.”
Cuts across ranks
Stated in the report as a coalition to defraud the public the scheme, the report says, cuts across from junior officers who received bribes to facilitate forgery and senior managers who failed to use their position to stop the sheer theft.
The Nairobi Stock Exchange is also put on the spot for being ‘over protective of the managers at Nyaga. In addition to the evidence of false financial reporting, the audit carried out by Pricewaterhouse Coopers also spells out a carefully orchestrated scheme 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 house to defraud clients included uploading of the prices from the trade files to reflect profit. This happened in instances when client’s shares were sold without their authorisation and repurchased usually at a loss.
“Similarly, if during the period after the clients shares had been sold without authorisation any dividend was paid or payable, then an entry would be passed crediting the client with the dividends that they would otherwise have received had their shares been sold,” explains the audit.
When Money carried the story of investors with Nyaga almost one year ago, they told of their frustrations at the hands of the broker. Some of them displayed cheques that they had been issued with but bounced clearly indicating that the firm was in the red. Money caught up with them when they were lodging claims to statutory managers put in place by the CMA and NSE.
“I travelled all the way from Kisii hoping to be attended to and hopefully receive my refunds from Nyaga, however this seems not to be the case as they are only receiving claims,” complained one Miss Alice Ratemo.
Displaying a cheque allegedly issued by the stockbroker, she said all the other cheques amounting to Sh242,000 had bounced. The firm’s banker, Stanbic bank (currently CfC Stanbic) had indicated that the accounts had insufficient funds.
Investors were also to contend with paying fees charged on bouncing cheques that they were receiving. For bounced cheques presented, a fee ranging from Sh1,500 to Sh2,000 is charged by commercial banks.
“Already, I have been fined Sh6,000 for the four cheques I have received from the broker. I’m reliably informed that two more are at the bank awaiting my collection since their (Nyaga) account has no money,” said an investor who preferred we only use Karanja as his name.
Some of the cheques that were also allegedly sent to the investors were not signed hence could not be cashed. That the investors may go home with far less than what they originally put in may soon become a reality. This was first exemplified when NSE offered the stockbroker Sh100 million rescue package to “support investors who had bought shares through the firm.”
Shared cash
But according to the report, the money was allegedly shared between two investment banks. However, the two have denied the claim saying that the broker equally owed them. This begs the question as to whether they were also investors who had bought shares through the firm.
Although Mr Wangunyu, the NSE chairman has dismissed the contents of the report terming them naïve, what baffles most investors are his claims on the liability. He has been quoted in the press saying the liability is estimated at Sh300 million.
However, by the time the statutory managers were closing doors for investors to lodge claims, the liability stood at Sh800 million. That the company may find it hard to get back to business and possibly refund investors is not far from reality.
The report notes that the firm is highly insolvent and would require about Sh1.2 billion to come afloat. This compared to the Sh1.3 billion investors will be requiring from it still clouds the hopes of refunds.
But as if the Nyaga debacle is not enough, investors are still waiting for another report on Discount Securities Limited. The report already presented to the CMA by consulting firm KPMG is expected to reveal more on the firms activity said to be bordering on fraud.
Already, the NSE is on a south end drive, characterised by low investor participation. Although the trend is being linked to the global economic crisis, the contents of the report are bound to further kill investor appetite for the bourse.
