CMA explains why action was taken against broker

Stockbroker Ngenye Kariuki and Company was put under statutory management for having an overdrawn clients’ bank account but the broker was not engaged in illegal sale of investors’ shares, the market regulator has revealed.

Ngenye’s financial base had weakened and the firm was finding it difficult to make payments to clients who sold their shares but efforts to get strategic partners to inject new capital into the business had not been successful since mid last year.

These factors, as well as weak governance and internal controls, forced the Capital Markets Authority (CMA) to take over management of the firm to protect the interest of 88,000 investors who had bought shares through the firm, new statutory manager Wycliffe Shamiah said in a Press briefing on Friday.

“We want to make sure the company addresses these issues so that if possible it comes back into operation,” said Mr Shamiah. “It is however not possible to tell how fast that happens at this stage.”

Mr Shamiah declined to reveal the extent of the brokerage firm’s financial weaknesses only promising “to give more updates soon” after delving further into the firm’s accounts.

Since the management’s takeover Mr Kariuki has maintained that he was not involved in unauthorised sale of clients’ shares, a practice that was said to have been the major undoing of three other stockbrokers who collapsed over the last three years.

Stockbrokers are ordinarily required to maintain two separate bank accounts, one that holds cash that belongs to clients and the other an office account for banking earnings.

Although Ngenye Kariuki may not have been involved in the irregular sale of investors’ shares without their consent, his clients’ account was overdrawn, in breach of CMA’s compliance requirements.

Mr Shamiah said both the clients’ and the office accounts were showing negative balances, while CMA rules allow brokers to overdraw only the office account up to an equivalent of 10 per cent of the paid up capital.

The CMA is also said to have slapped a fine of Sh10 million on Ngenye and other stockbrokers for maintaining overdrawn bank accounts last year.

Ngenye has admitted that his firm had negative bank balances which he attributed to fraudulent investor refund claims that hit brokers during the Safaricom initial public offering (IPO) in June 2008- whose reconciliation is yet to be finalised.

He has, however, petitioned CMA to allow for a reopening of his firm arguing that his bankers have already agreed to restructure the loan overdrafts.

K-Rep Bank’s chief operating advisor, Mr Albert Ruturi, has said the lender is willing to lift liability of an estimated Sh90 million from the company and transfer it to Mr Kariuki and his wife, who are named as the two directors of the company.

The Kenya Association of Stockbrokers and Investment Banks (Kasib) has stepped up calls for fresh reconciliations of refund claims and a forensic audit of the Safaricom IPO warning that it had pushed many other brokers into a liquidity crisis.

“Kasib reiterates that an independent forensic audit of all stakeholders that were involved in the Safaricom IPO be conducted urgently and immediately.”