At least seven stockbrokers have been cited and penalised for manipulating share prices at the Nairobi Securities Exchange (NSE), causing ordinary investors heavy losses.
The Capital Markets Authority (CMA) says in its latest statement that it has fined Standard Investment Bank (SIB) Sh758,858 for facilitating one Henry Ngati Nugi to inflate the share price of Kenya Orchards over a three-month period in 2014.
The regulator says SIB effected and thereby “facilitated numerous transactions in the Central Depository System account of an Investor who was selling Kenya Orchards shares and leading to price increases contrary to the provisions of the Capital Markets Act”.
Other brokers cited for price manipulation are Faida Investments, SBG Securities and Dyer and Blair. NIC For their part, Capital, Kingdom Securities and Sterling Capital have been reprimanded for misrepresenting information to clients in pursuit of business interests.
Kenya Orchards’ share price rose more than 20-fold, from Sh11.90 to Sh190 per unit, in three months between August and October 2014 in what the regulator attributes to manipulative trading by Mr Ngati whose trading account has been frozen.
Mr Ngati made capital gains of Sh374,926 from his ingenious trades that the regulator later retracted and retained in the investors compensation fund.
The trader invested Sh53,800 to buy 5,500 shares of the agricultural company and used the same to drive its share price by selling small lots of 100 at progressively increasing prices of between Sh11.50 and Sh190. The share is currently trading at Sh97 but there has been no trading on the counter this month.
The CMA accuses Mr Ngati of “occasioning an artificially induced market price rally, leading other participants in the market to purchase the security on the mistaken belief that the ‘inflated price’ reflected a true value of the share”.
Price manipulation usually involves playing the role of seller and buyer — creating an impression of heightened activity in a counter whose impact is to lead other people to think that something material is going to happen.
SIB has been penalised double the capital gains booked by Mr Ngati plus the commissions made from the trades.
Besides, the CMA has cited Faida Investments, SBG Securities and Dyer and Blair for operating weak online share trading facilities that lacked internal controls to identify, flag and prevent suspect orders.
The capital markets regulator accuses the brokers of being party to “a price manipulative scheme which interfered with market price formation and fair trading process whereby client transaction instructions were input without any or sufficient oversight”.
Analysts, however, queried the regulator’s price manipulation charge, arguing that the market is controlled by rules of willing buyer and seller with overvaluation of counters as a common occurrence at the Nairobi bourse.
Most investors at the NSE usually peg their investment decisions on sentimental attachment to a counter or information in the press.
The naivety of such investors exposes them to manipulation by their sophisticated counterparts who reap big while leaving the majority with shares whose value is consistently declining.
What makes it even more difficult for ordinary investors to avoid the dangers of daily trading is the fact that it is difficult and expensive to get information on listed companies, forcing them to rely on market direction whose drivers they do not understand.
Some of the listed companies do not have websites while their annual reports are shallowly distributed and contain scanty information.
Kenya Orchards’ market capitalisation rose to Sh797.8 million from Sh38.6 million at the beginning of 2014, helped by a bullish run that the CMA now says was instigated by Mr Ngati.
Kenya Orchards has not paid dividends to ordinary shareholders for nearly a decade. Instead, preference shareholders who own 50,000 preference stocks have been receiving annual dividends at Sh1.10 per share.
NIC Capital and Kingdom Securities (a subsidiary of Cooperative Bank) were cited for advising listed real estate developer Home Afrika to market its ill-fated bond as a partially secured bond that it was not.
The two are also said to have advised Home Afrika to amend the return rate for the bond to 17 per cent from 13.5 per cent that had been approve by the regulator. The change of the information memorandum was intended to make the offer more attractive to investors and drive up the uptake of the bond.
NIC Capital is said to have also told Home Afrika that an investor had subscribed Sh250 million in the bond, which was not the case.
The CMA consequently restricted NIC Capital’s licence for a period of 90 days, prohibiting it from acquiring new clients for transaction advisory services.
The increased cases of misconduct among market intermediaries saw the CMA collect Sh111.6 million in financial penalties in the year ended June 2015 up from Sh6 million the previous year.
Sterling Capital was the hardest hit, having paid a total of Sh18.6 million in penalties. Sterling paid Sh15.1 million in fines, being losses incurred by an investor who had taken part in a share buy back transaction involving Treasury bonds, which was not completed.
Sale buy back involves the sale of a Treasury bond by one investor to another with the promise of purchasing it back after a defined period.