How NSSF allowed stockbroker to gamble with workers’ savings

Sunday October 19 2008
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Sh1.4 billion exposure... Police on guard as investors with accounts at Discount Securities Ltd invade the broker’s offices at International Life House last week demanding the refund of their money. Now it appears that hapless workers’ savings are also at risk, with outstanding share certificates worth $20 million not having been transferred to NSSF. Photo/JOSEPH MATHENGE

The fine details of the dodgy dealings between the National Social Security Fund and the troubled Discount Securities Ltd that have left the worker’s body exposed to a potential loss of a whopping Ksh1.4 billion can now be revealed.

Documents seen by The EastAfrican show that the two parties were transacting through an opaque arrangement where monies and shares bought on NSSF’s behalf would be deposited in multiple numbered accounts that were only infrequently reconciled.

What emerges from scrutinising the paper trail is an arrangement that would start by the NSSF writing an open cheque to Discount Securities Ltd with instructions to buy shares on its behalf.

Why the NSSF agreed to give the broker an open cheque — and the leeway to keep the shares in its own name for protracted periods — is one of the biggest riddles in this complex game of deception.

All large investment funds of the NSSF’s standing and size transact through custodians — mainly large and reputable commercial banks who are the ones that keep the money. Stockbrokers don’t touch the money they handle on behalf large fund managers.

Yet in the case of Discount Securities Ltd, shares purchased on behalf of the NSSF would be deposited in the names of some 82 specially created nominee accounts belonging to Discount Securities Ltd.


Apparently, the NSSF was not aware that these 82 nominee accounts existed until investigations were mounted early this year.

Also puzzling is the reason why Discount Securities Ltd opened such a large number of accounts specifically to deal with orders from NSSF.

On paper, the arrangement of dealing through nominee accounts can be justified on the grounds that it gives the broker the time and latitude to process certificates. Several brokers will agree that the practice is common.

However, it is difficult to defend why the NSSF, which deals in large volumes all the time, has continued to resist migrating to the more transparent transactions conducted through the Central Depository System.

By continuing to deal with the stockbroker through paper certificates, the NSSF — perhaps unwittingly — had created a perfect environment for dodgy dealings.

This arrangement is what made it possible for the stockbroker to hold share certificates belonging to the NSSF for as long as it wanted.

The risk the NSSF faces right now is that if it turns out the broker lost some of the money in speculative activity, the workers’ body is unlikely to recover it.

Just how widespread this type of dealing was in NSSF’s relations with other brokers is difficult to say at this stage.

But internal documents and correspondence from the NSSF seen by The EastAfrican show that Discount Securities was just one of seven brokers who were authorised to buy and sell shares on behalf of the Fund.

The others were Dyer & Blair Investment Bank Ltd, CFC Financial Services Ltd, Apex Investment Bank Ltd, Kestrel Capital East Africa Ltd, Suntra Investment Bank Ltd, and Standard Investment Ltd.

According to records, Discount started purchasing shares on the NSSF’s behalf in August 2004.

The agreement was that it would furnish the Fund with regular account statements with details of the shares purchased and dividends received.

Discount was also supposed to produce regular information and statements on the number of shares it had registered at every point in time.

Under the arrangement, such statements would be sent to the NSSF on a monthly basis for auditing.

It is not clear when problems started. But the correspondence shows that the NSSF only came to learn about the 82 nominee accounts much later in the day.

In May and after months of exchanges, the management of NSSF was shocked to learn that contrary to what had been agreed, the 82 nominee accounts did not reflect ownership of the said shares by the NSSF.

Apparently, the arrangement was that the nominee accounts would be in the names of both Discount and NSSF, with the broker being given the power of attorney to sign cheques on behalf of the client.

It was at this point that it became clear to the NSSF’s management that the institution was thoroughly exposed.

Since the 82 nominee accounts did not reflect ownership of the shares by the NSSF, there was nothing to stop Discount from selling the shares to a third party.

Early last year, the management of NSSF started smelling a rat when they realised that Discount was taking too long to remit share certificates purchased on their behalf.

It is after they started exerting pressure on the broker that they realised that something had gone terribly wrong.

On May 22, 2007, under sustained pressure, Discount produced the statements for the 82 nominee accounts.

The revelations were shocking. First, it emerged that certificates for shares bought on behalf of the NSSF as far back as 2005 had not been transferred to the NSSF.

At a meeting held between NSSF and Discount on July 18 this year, chaired by former managing director Rachel Lumbasyo, three important decisions were arrived at:

First, that Discount Securities transfer all shares bought for the Fund in the year 2006/07 to new nominee accounts in the names of both the NSSF and the broker.

Second, that all shares bought between 2003 and 2005 be immediately surrendered to the relevant registrars for issuance of share certificates.

Third, that for the purposes of monitoring the progress of transferring the shares, monthly reports and statements be released to the NSSF.

Two weeks ago, when the Capital Markets Authority moved to appoint new managers for Discount Securities Ltd, citing “governance problems,” the NSSF board and management realised that they were out on a limb.

An investigation was hurriedly set in motion to determine the depth of the exposure to Discount Securities.

It emerged that as at October 1 this year, Discount owed the NSSF Ksh13.5 million ($192,857)in unpaid dividends. Moreover, the outstanding share certificates amount to Ksh1.4 billion ($20 million) — all of which the Fund could lose.

On Wednesday last week, the chair of the NSSF, Jane Mwangi, put out a statement saying the board had “observed with concern” the happenings at Discount Securities Ltd.

She announced the decision of the board to interdict several top managers of the fund. The following day, Labour Minister John Munyes announced that he had fired the whole board over the Discount saga.

He said external auditors would be called in to determine the full extent of the exposure and determine culpability of both the management and the board.

Neither the scope of the investigations nor the terms of reference had been announced as we went to press.

But it is clear that one of the areas for investigations will be the reasons why the NSSF management was for so long content with an arrangement under which they could not even insist on rudimentary monitoring of the shares which Discount was purchasing on their behalf.

Discount Securities was established in 1995. It has three branches in Nairobi and about 20 branches throughout the country.

CMA’s move to take over its management came eight months after it placed the broker on the watch list.

Last week, the CMA said in a statement that it had intervened in order to strenghen the corporate governance of the company and to ensure business continuity.

The regulator explained that it had to move on Discount Securities to protect the interests of capital markets and the investing public in Kenya.

The CMA said a representative of audit firm KPMG would be incorporated as the new executive director.