CMA adds extra layer of scrutiny to shield investors from fraud at bourse

Monday December 21 2020
Internet fraud.

NSE investors targeted in new wave of fraud on the securities market. PHOTO | FILE | NMG


Kenya’s Capital Markets Authority (CMA) is now taking on a more active role in stemming a rise in fraudulent activities targeting unsuspecting investors on the Nairobi Securities Exchange (NSE).

The CMA has decreed that, “In order to counter the frauds, the Capital Markets Fraud Investigation Union (CMFIU) has engaged the market intermediaries and agreed that before any transactions take place, the documents involved should be availed to CMA for scrutiny and authentication.”

The CMA says in its latest annual report for the 2018/2019 financial year says that, “The Unit (CMFIU) has maintained a gradual and significant constancy in cases reported.”

Over the past six years (2014-2019) the number of cases of fraudulent activities in the capital markets reported to the market regulator has risen by 59 per cent from 22 to 35.

A pointer is the authority’s financial penalties on unscrupulous market operators which has increased more than 12-fold from Ksh43 million ($390,909) in 2018 to Ksh555 million ($5.04 million) in 2019. This is tantamount to eroding investor confidence in a market already reeling under the weight of a fall in equity prices, collapsed corporate bond issuance and an initial public offering drought.

Collapsed stockbrokerages


The market regulator noted that during the 2018/2019 financial year, crime trends in the capital markets have moved to a higher level where fraudsters are now colluding with employees of stockbrokerages to trick investors into fraudulent disposal of shares leading to losses to investors.

Prior to the demutualisation and the eventual self-listing of the NSE in 2014 the bourse had witnessed the collapse of four stockbrokerage firms — Francis Thuo & Partners, Nyaga Stockbrokers, Discount Securities and Ngenye Kariuki Stockbrokers — in quick succession due to corporate governance issues and fraud.

During the 2018/2019 financial year, the market regulator recovered Ksh477 million ($4.33 million) following the signing of “No Contest Settlement Agreements” in the case of insider trading on the shares of the oil marketer — Kenol Kobil Plc Counter — before its eventual acquisition by the French firm Rubies Energie.

The CMA, however, generated an approval fee of Ksh131 million ($1.19 million) from the takeover deal.

The CMA also recovered Ksh82.89 million ($753,545) following signing of No Contest Settlement Agreement in cases involving unethical trading of government bonds during the period July 1, 2018, to June 30, 2019.

In February 2019 CMA fined David Tumain Ksh166.95 million ($1.51 million), being twice the amount of the benefit, which directly accrued to him from irregular trading in fixed income securities while in May 2019, Rodrick Muhoro Ngugi was fined Ksh208.3 million ($1.89 million), or two times the benefit of Ksh104.15 million ($946,818) he made from bond transactions.