The recently concluded High Court case has exposed how operations of Cytonn Investments Management Plc (CIMP) were light on investor protections while giving the promoters led by Edwin Dande wide-reaching powers.
When launching operations, Cytonn ran glitzy ads in which it invited prospective investors to be “Cytonnaires” and not just regular millionaires.
Promising annual returns of up to 18 percent with minimal risk, Cytonn drew thousands of middle-class and wealthy investors from whom it raised billions of shillings.
The company set up two vehicles whose main role was to collect cash from investors, with the money to be deployed in the real estate market.
The largest, Cytonn High Yield Solutions LLP (CHYS), managed to raise Sh11.1 billion from 3,116 debt investors.
They included Johnson Masinde and Daniel Nyakundi who pumped in an aggregate of Sh34 million.
Another entity, Cytonn Real Estate Project Notes LLP (CPN), raised Sh4.1 billion from 886 people.
The investment firm, in its marketing materials, suggested to investors that the risk of default was low and that the parent firm (CIMP) could absorb losses on their behalf.
For about three years, investors enjoyed the highest returns in the fixed-income world which Cytonn said was due to the elimination of middlemen such as banks by connecting savers with property developers directly.
Cytonn, however, went into a comprehensive default in early 2020, a move it blamed on the outbreak of the Covid-19 pandemic.
As legal battles unfolded, it emerged that Cytonn's founders had deliberately structured the business to shield the real estate assets from the investors.
In stark contrast to the marketing materials, the promoters told judges that CIMP was a distinct and separate legal entity from the cash collection vehicles CHYS and CPN.
Further, those who had invested their money were only holding loan notes that had no claims on the projects such as The Alma, Taraji, Superior Homes, Cysuites and Riverrun.
The administrator Kereto Marima who was appointed to manage CHYS and CPN in October 2021, told the court that he had been unable to recover investor funds.
It later emerged that Mr Marima had an earlier business relationship with Cytonn promoters who continued to manage the real estate projects despite the administration which has since been terminated in favour of liquidation.
To break the deadlock, Justice Alfred Mabeya said the properties, held through special purpose vehicles (SPVs), must be preserved until investors are compensated.
The judge noted that the SPVs are under the control and direction of Mr Dande and as such, “They are all ‘Cytonns’.”
“In my view, under the Common Law doctrine of tracing, the creditors would be entitled to trace their funds into these projects,” the judge said.
“Let those properties be conserved/protected awaiting the realisation of the assets of CHYS. Ruling otherwise would be to abate a possible fraud upon the Creditors.”
Justice Mabeya said the SPVs will be given a hearing to dispute the loan notes or pay the debt.