Stockbroker used Sh100m loan to buy, sell fake bonds

Stockbroker Apex Securities’ former director, Brian Muchiri, took a Sh100 million loan to fund the purchase of fake bonds he sold to NIC Bank, CIC Asset Management Limited and Canon Assurance, the Capital Markets Authority (CMA) has said.

The CMA says in court documents that Mr Muchiri borrowed the Sh100 million from Bank of Africa (BoA) and bought the bonds from Manline Telecommunications Limited before using his brokerage firm to sell the securities.

CIC, NIC and Canon bought the bonds for a collective Sh81.7 million.

The claims were made in an appeal Mr Muchiri filed before the Capital Markets Tribunal, seeking to reverse the regulator’s decision to ban him from directorship or employment in any listed firm for seven years. The CMA imposed the ban in August 2013.

Mr Muchiri claims in the appeal that he purchased the three bonds innocently and that he was only granted the BoA loan due to his vast experience and merit in the investment industry.

The former Apex Securities director insists that the bonds passed strict Central Bank of Kenya (CBK) checks hence could have fooled anyone.

But the CMA says Mr Muchiri tricked end users by using Apex to sell the bonds without disclosing that the brokerage firm was trading the securities on his own behalf.

The tribunal has upheld the CMA’s decision to ban Mr Muchiri from sitting on the board of any listed firm for seven years, terming it a fair verdict.

“At all material times Mr Muchiri failed to disclose to the end purchasers his personal interest in the subject bonds contrary to Section 31 (7) of the Capital Markets Act and regulation 15 (2) of the Capital Markets licensing regulations of 2002. Mr Muchiri’s actions amounted to the prohibited practice of front-running and therefore he manifestly violated the law,” said Gad Ouma, the regulator’s lawyer.

Section 31(7) of the Capital Markets Act outlaws engagement in any fraudulent act, lying or omission of any information that would be construed as relevant by any of the parties to a securities trade.

The former Apex Securities director took the Sh100 million loan from BoA in June 2012.

Mr Muchiri claimed that he personally bought the bonds because there were no willing purchasers at the time Apex acquired them from Manline.

READ: CMA probes more brokers in bonds theft scam

The former Apex Securities boss said information about him buying the Manline bonds in his personal capacity was not relevant to the sale of the same securities to CIC, NIC and Canon Assurance.

He said that the CBK’s Anti-Fraud Investigation Department had cleared him of any wrongdoing, adding that the regulator did not afford him a fair hearing.

But the tribunal found that the CMA in 2013 informed Mr Muchiri of the allegations against him, and that it allowed him a chance to defend himself at a hearing in which the former Apex director was represented by a lawyer.

The tribunal held that the CMA had the discretion to decide how long to ban violators.

“This conduct attracts criminal sanctions in other jurisdictions. Having considered the magnitude of the offence committed by Mr Muchiri and the unethical conduct by an otherwise experienced player in the securities exchange, the tribunal is satisfied that the disqualification period of seven years is not unreasonable,” the tribunal ruled.

The CMA further held that Mr Muchiri told interested buyers that the bonds trade was “an arm’s length sale effected by Apex on behalf of an investor”.

The CMA argued that Mr Muchiri using Apex to sell bonds he owned personally amounted to front running, which is against the regulator’s rules.

The bonds Mr Muchiri bought from Manline were among several fakes traded in an elaborate scheme hatched by CBK employees in which the regulator may have lost up to Sh2.6 billion.

Commercial banks reported transactions worth Sh1.44 billion related to the fake bonds, but former Tsavo Securities director Fredrick Tsofa Mweni has since claimed that the CBK may have lost up to Sh2.6 billion.

READ: CBK staff plotted Sh2.6bn fake bonds scam, claims trader

Mr Mweni was blacklisted by the CMA in December 2012 for his alleged involvement in the sale of three fraudulent bonds worth Sh18.5 million, Sh9.5 million and Sh11.5 million.

He has been fighting the CBK in court to stop it from auctioning properties he owns in Syokimau and South C to recover Sh52.9 million the banking industry regulator says Mr Mweni gained from the fraudulent bond deals.

Mr Mweni had in suit papers filed in court in 2013 claimed that CBK staff connived with stockbrokers and investment bankers to steal government securities he was allegedly being crucified for.