The Central Bank of Kenya headquarters in Nairobi. A blacklisted dealer has implicated some of the regulator’s employees in a fake bonds scam in court documents. FILE
What you need to know:
Blacklisted bonds dealer Fredrick Mweni claims in an affidavit filed in court that the CBK lost the colossal amount in a scam involving its staff, an unspecified number of brokers and investment firms.
Mr Mweni's claims are contained in a document he has filed in support of a case in which he is challenging the the decision by the CMA to suspend him from holding directorship in any listed company.
Central Bank of Kenya employees hatched an elaborate fake bonds trading scheme in which the Treasury may have lost up to Sh2.6 billion, a Nairobi court has been told.
Blacklisted bonds dealer Fredrick Mweni claims in an affidavit filed in court that the CBK lost the colossal amount in a scam involving its staff, an unspecified number of brokers and investment firms.
Mr Mweni’s claims are contained in a document he has filed in support of a case in which he is challenging the the decision by the Capital Markets Authority (CMA) to suspend him from holding directorship in any listed company.
“The sum total in respect to which the Central Bank lays claim as to questioned bonds created by itself or internally by its staff unprocedurally and sold to the market is about Sh2.6 billion,” says Mr Mweni. “All the investors in these transactions were affected by the Central Bank’s own infidelity and impropriety.”
It remains to be seen how the case, whose magnitude is now close to other mega public finance scams such as Goldenberg and Anglo-Leasing, will unfold.
CMA blacklisted Mr Mweni, a former managing director of Tsavo Securities, on December 21 last year on grounds that he was blocking investigations into a multi-million-shilling fake bonds trading scandal.
Mr Mweni was entangled in the fake bonds trading scandal for his alleged involvement in three bonds worth Sh18.5 million, Sh9.5 million and Sh11.5 million.
But the trader claims that in suspending him, while leaving all the other brokers and investors involved in the scandal to continue operating, CMA’s actions were discriminatory against him.
“The action of the respondent [CMA] was biased in that it singled me out for punishment,” the petitioner says.
Mr Mweni is entangled in a web of cases emanating from the stolen bonds. Two cases he has filed against the regulators are pending before the High Court. The third case is before the magistrate’s court and involves his brother Bokole Mweni, who is facing a criminal charge.
The list of brokers and investors named in the court document to have handled the fake bonds includes Kestrel Capital, Apex Africa Capital, Kingdom Securities and Afrika Investment Bank.
Court documents show that Kestrel handled bonds on behalf of Tsavo Securities while the other three firms handled bonds on behalf of Manline Communications, which is accused of involvement in the sale of separate Sh105 million worth of fake bonds.
A director of Manline communications is facing criminal charges at the magistrate’s court alongside Bokole Mweni and Moses Muregi. Mr Muregi, a Central Bank employee, is accused of creating the fake bonds.
Mr Mweni has since moved to the High Court in a separate case seeking orders stopping the criminal proceedings and investigations against him by Bank Fraud and Investigations Unit (BFIU).
In his application to High Court for the discontinuation of the criminal charge, Mr Mweni says he has entered an agreement with the Central Bank to pay for all the lost bonds associated with Tsavo Securities amounting to Sh39.5 million.
Mr Mweni says his company, Tsavo Securities, entered an agreement with the Central Bank on December 13 last year in which it agreed to pay back the Sh39.5 million. The Central Bank was to in turn withdraw the criminal charges against Tsavo Securities, its directors and also unfreeze its bank accounts.
Mr Mweni has, however, distanced himself from the bonds scandal in his latest affidavit, saying that as an investor at all times he acted through brokers and that the creation of bonds and authorisation of the same can only be done by the Central Bank.
The trader says he legally acquired the bonds from the market and not directly from Central Bank and that his company was duped by one Mr John Thagana who sold him the stolen bonds.
“Mr Thagana approached Tsavo Securities and initiated the transactions, how the company got duped and I issued the respondent [CMA] with all relevant information they sought including phone contacts and text messages,” he says.
Prof Njuguna Ndung’u, the CBK governor, told the Business Daily that he was not in a position to respond to questions on the subject, which is pending before court.
Mr Mweni was suspended from holding directorship in any CMA licensee for allegedly refusing to cooperate in the investigations that were being conducted by the regulator.
The court papers reveal that CMA is demanding information on transactions relating to the trading of the three bonds from Mr Mweni.
The regulator also asked Mr Mweni to disclose the authorised signatories to accounts used to trade the bonds between July 30 and September 30, and copies of Tsavo Securities’ bank statements for the same period.
The regulator also wanted a summary of all bonds that Tsavo Securities owned as at August 31 last year and all bonds transacted by the company in the same month and commissions earned from the trades. The company is also required to provide a copy of the executed agency agreement with Kestrel Capital stockbrokers.
Mr Mweni now claims that he was never given enough time to respond to the queries raised by CMA and that the regulator lacked the legal standing when it requested for the information.
“The respondent’s purported notice to show cause is not one in law, it is illegal and has no powers envisaged to culminate to or warning to punish me as the respondent purported to do,” he says.
CMA quoted Section 13 (1) of the Capital Markets Act, which empowers it to demand “any person to furnish to the authority or to the authorised person, within such period as is specified in the notice, all such returns or information as specified in such notice.”
Prior to his suspension, Mr Mweni is known to have wielded huge influence in the bonds market even though he merely operated an investment advisory firm that does not have direct access to the bond dealing system and can only go through stockbrokers.
As part of the investigation, CMA is understood to have questioned a number of stockbrokers but the details of the investigations by CMA remain a closely guarded secret.
When news of the investigations broke last year, it plunged the Nairobi Securities Exchange into a new cloud of uncertainty as a number of financial institutions, including banks, were said to have been caught on the wrong end of the fraudulent deals.
The scam is said to be centred on a peculiar method of trading Treasury bonds that commercial banks and stockbrokers have been using in recent years.
Known in capital markets jargon as sale-buy-back (SBBs), the transactions involve the sale of a Treasury bond by one bank to another, with the promise of buying it back in future.
CMA has recommended a ban on all SBB transactions on grounds that they pose a risk to the financial system since it lacked practical rules that govern the transactions.
