Trans-National lost Sh200m in fraudulent bond trading

Trans-National Bank lost Sh200 million in a fraudulent bond transaction that blacklisted bond dealer Fred Mweni’s firm took to the market, it has been revealed.

The identity of the victims of the fraudulent bond trade was finally revealed in a petition filed by Tsavo Securities – the firm that Mr Mweni run – seeking to block the Capital Markets Authority from making a ruling that would require the dealer to pay the bank Sh200 million.

The court documents show that Trans-National approached Tsavo Securities in October 2012, to facilitate a bond Sale Buy Back (SBB) transaction on its behalf.

SBBs involve the sale in secondary market of government treasury bonds by one bank to another with a promise to buy it back in the future.  Commercial banks often use SBBS as a tool for the management of liquidity.

Tsavo Securities says in its petition that the transaction was concluded on October 9 of that year but was not successful.

The dealer argues that at the time of the transaction, the financial services sector regulator, the Central Bank of Kenya (CBK) had not come up with any procedures and legal frameworks governing it making any effort to legally penalize the dealer a nullity.

The failed transaction was among the six worth Sh1.44 billion that commercial banks reported to the CBK and the Capital Markets Authority (CMA) as having backfired.

The questionable bond dealings took place between October 18 and December 31, 2012 and the CBK said all the cases involved transactions by brokers who did not have valid agreements with the owners and were concluded via e-mail.

Some of the transactions were also considered fraudulent because they had not been authorised by the signatories of the CDS accounts where the bonds were held.

It has emerged that Trans-National Bank’s failed bond deal was one of the reasons that the CMA threw out and blacklisted the then well-known investment advisor securities market.

The CMA has in the past accused Mr Mweni of blocking investigations into the bonds scam by refusing to disclose transaction details of two other suspected deals it executed.

Mr Mweni has argued that he could not disclose confidential client information to a third party.

The CBK then introduced a rule requiring all transactions to be handled through a new Swift Message MT599 system in November 2012 to regulate the bonds trade.

To be considered valid the MT599 message should at the minimum contain security name, quantity, price or price limits, duration or validity of instructions and names of two authorized signatories of the CDS account.

Robert Gachathi, the general manager of Tsavo Securities, says in court documents that the firm had appeared before the CMA for a hearing on the botched transaction.

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Investigations undertaken by the authority and whose report Mr Gachathi had been invited to comment on had established that Tsavo had contravened provisions of the capital markets regulatory framework.

At the second hearing, the regulator wanted the firm to show cause why a penalty should not be imposed on it in relation to interest applied for the period it had failed to settle the SBB transaction.

“The CMA has made a determination on the issue and has concluded that the firm has contravened sections of the  Capital Markets Act and further in the event that Trans-National Bank reports to them of any loss incurred with respect to the transaction  that the firm  shall be liable for the same,” Tsavo says in its affidavit.

The firm through lawyer George Kithi moved to court seeking to stop the regulator from imposing the Sh200 million fine on it.

Tsavo argues that at the time the failed transaction was undertaken, there was no legislation governing it leaving the regulator with no powers to hear the matter or penalise it.

“It is also worth noting that the regulation which the authority seeks to rely on to justify the exercise of its authority to hear and determine the matter regulates the conduct of stockbrokers and the same does not apply to the petitioner as the petitioner was at the material time a licensed investment adviser and not a stockbroker,” the firm said in court documents.

High Court judge Mumbi Ngugi has issued temporary orders blocking the regulator from taking any adverse action against Tsavo Securities in respect to the matter pending determination or further orders of the court.

Trans-National, is Kenya’s 35th largest with 39,000 deposit accounts and a market share of 0.2 per cent.

Banks often trade in bonds as a way of hiding their losses from shareholders. The ‘bought’ bonds are categorised as held to maturity or available for sale and thus future losses would be passed through the balance sheet leaving profits unaffected.

The matter will be mentioned on May 29.