Former general manager of Uchumi Supermarkets Bernard Mwangi Kibaru was Tuesday cleared of insider trading charges, exposing the legal challenge the capital market regulator has to grapple with as it tries to even the playing field for investors at the Nairobi Stock Exchange.
Mr Kibaru had been charged with two counts of insider trading — the buying or selling of a stock based on information not available to the general public — in the firm’s shares in August 2008, in the first such case brought for prosecution in the 56-year history of Kenya’s capital markets.
Chief magistrate Gilbert Mutembei ruled that the businessman, who had denied charges of instructing Drummond Investment Bank to sell 111,400 Uchumi shares on April 26, 2006 contrary to the Capital Markets Authority (CMA) Act, was not guilty on the main and alternative charges of irregular trading.
“I find the prosecution has not proved beyond any reasonable doubt that the accused exploited information not generally available to the public that Uchumi was performing poorly when he sold his shares,” he ruled.
Judgement on another related case in which former Kenya Commercial Bank chief executive Terry Davidson is alleged to have traded in Uchumi shares on the strength of information he got by virtue of the bank being a lender to the chain, is scheduled for Thursday.
Tuesday’s judgment came as the CMA released a statement revealing that seven stockbrokers, nine investment banks, two investment advisors and one fund manager have been hit by cases of fraud in the past two years.
The regulator said it has handled 153 fraud cases this year, down from 224 cases last year.
“Investigations into 68 cases have been concluded while 31 cases are pending at the law court,” the statement said. About Sh21.3 million has been recovered from 50 suspects, over 80 per cent of whom are former employees of the victim firms.
In the insider case ruling, Mr Mutembei said that although the defence had demonstrated that Uchumi’s poor performance and the pulling out of its major shareholders was a matter that had been publicised in the newspapers, the accused had not exploited such information for personal gain.
CMA classifies such transactions as use of unpublished price-sensitive information to trade in listed shares — an offence for which a first-time offender is liable to a Sh2.5 million fine, five years imprisonment or both.
Mr Kibaru through lawyer Otiende Omolo said the Press reports regarding the performance of the retail chain might have hurt the confidence of the investors. He admitted that as a senior manager in the supermarket he was in a position to access company accounts.
But the magistrate said the information memorandum of the rights issue clearly showed Uchumi was making losses and was technically insolvent.
He observed that it had been anticipated in the memorandum that Uchumi would return “to being cash-flow-positive with 18 months, achieve break-even within 30 months and achieve a modest profit within 36 months.”
“The fact that the company was making losses and was expected to continue doing so for the next 18 months was a fact known to the public. This was equally known to the accused when he bought his shares,” said the magistrate.
During the rights issue, Uchumi shares were being offered at a discounted price of Sh10 and “this is the information I relied on in buying the shares which were available to the public,” said Mr Kibaru. After the company continued experiencing losses between 2002 and 2005, the company floated the rights issue hoping to raise Sh1.2 billion by issuing 120 million ordinary shares to the public.
At the time of the rights issue, Uchumi liabilities stood at Sh2.6 billion against an asset base of Sh2.1 billion.
Mr Kibaru told the court he sold his shares two days after attending a meeting that had discussed staff rationalisation and another where managers were urged to reduce their shares.
Key prosecution witness, former Uchumi company secretary Waweru Gwandaru testified that Mr Kibaru was among the top 100 shareholders of the firm with access to key inside information on the company.
Mr Gwandaru told the court that Kibaru, as head of merchandising department used to attend the meetings of the firm’s board of directors where the turn around progress of Uchumi was discussed. He said the former manager was also privy to confidential information on the performance of the firm by virtue of having been a signatory to the company’s accounts in KCB and Nile Bank in Uganda.
The executive director of Drummond Investment Bank King’ori Gathenji testified and confirmed the bank received instructions from Kibaru to sell 111,400 Uchumi shares between May and December 2006.
Gathenji’s evidence was corroborated by that of his workmate Patricia Wanderi and the Central Depository and Settlement Corporations (CDSC) operations officer Florence Njeri Kamau.
CMA compliance officer Fredrick Murimi also testified how he was requested to carry out investigations into possible insider trading of the retail chain when it closed its doors in 2006. Upon receipt of the report from a consultancy firm on Uchumi, CMA recommended to the Attorney General the prosecution of Kibaru.
Kibaru said as seasoned stock trader, he relied on market analysis by African Alliance to dispose of his shares when the reputable analysts of the company predicted that Uchumi shares would rise to Sh33 per share after the rights issue which raised Sh850 million.
The retail chain has since recovered from financial limbo and is seeking listing at the Nairobi Stock Exchange.