A city-based online forex trader has been charged with defrauding clients of Sh215.3 million, adding to his troubles following the suspension of his firm’s licence by the Capital Markets Authority (CMA).
Michael Gitonga (alias Tosh), the founder of city-based firm Trade Sense Limited, has been accused by the Capital Markets Authority (CMA) of contravening regulations that bar licensed money managers from handling clients’ funds. He was arraigned in on Wednesday.
Mr Gitonga’s charge sheet says that between April 2022 and August 2024 he handled and diverted Sh212.16 million worth of clients’ cash for his personal use and obtained an additional Sh3.14 million from three other parties by falsely pretending he would invest in forex trading on their behalf.
Under online forex trading regulations, a money manager is only allowed to oversee a portfolio on behalf of a client in return for a fee based on a percentage of the client’s funds under management.
These portfolio management services include providing an investment strategy, financial analysis and choosing the investments to be made.
Clients deposit funds directly into their online trading accounts, which they open through their online foreign exchange broker. The broker also provides the trading platform and regular client statements.
“Michael Gitonga, on diverse dates between April 28, 2022 and August 29, 2024, at an unknown place within the republic of Kenya, being a licensed money manager at Trade Sense Limited, knowingly converted for your personal use Sh212.16 million intended for online foreign exchange trading,” says the charge sheet.
The other charges show that between April 2023 and April 2024, at the Trade Sense offices in Nairobi, he obtained Sh1.3 million from an investment company known as Ingotse 95 on pretense that he would invest the funds in online forex trading on their behalf.
Similarly, he is alleged to have obtained under the same pretense Sh1.54 million from Chepkemboi Labbat between March 27 and April 12, 2024, and Sh300,000 from James Mwaura Mbugua between March 2022 and September 2024.
In Kenya, the CMA has only licensed non-dealing brokers, who do not handle trades on behalf of clients aside from providing the trading platform and accounts.
Online forex brokers are classified as either dealing or non-dealing, where the non-dealing broker does not engage in market-making activities.
Trading is either done by the client or through their nominated money manager. The money manager cannot withdraw or access the client’s cash directly.
The CMA’s decision to allow non-dealing brokers only and to restrict the access to client’s cash by money managers was informed by the risky nature of forex trading, which calls for additional investor safeguards compared to other capital market segments such as equities.
Tech-savvy Kenyans have in the past decade increasingly tapped into the global forex market through online platforms, giving rise to unregulated entities and rogue traders who take advantage of the demand.
The forex market is one of the largest, most traded and liquid financial markets in the world, with daily transactions of more than $7.5 trillion.
Following a surge in fraud cases, the CMA developed the Online Foreign Exchange Trading Regulations in 2017 to rein in the unregulated brokers and traders.
The rogue and unregulated traders dupe investors by offering huge, unsupported returns for forex investments.
On Monday, the CMA suspended Trade Sense’s licence for 90 days, saying the company had undermined its duty to protect investors and foster market confidence by failing to comply with regulatory requirements around governance, financial fidelity and anti-money laundering.
“During the 90-day suspension period, CMA will conduct a review to determine whether to lift the suspension or take further regulatory or enforcement action as may be necessary,” said the CMA in the notice of suspension.
Trade Sense lists the requirement of a minimum investment of Sh258,380 ($2,000) for retail investors and Sh1.2 million ($10,000) for corporate and high-net-worth individuals, a lock-in period of 90-days for the principal invested and a management fee of three percent prorated daily.
Before suspending the licence, the CMA said it had been engaging Trade Sense for the past two years over the breaches, suggesting that Mr Gitonga has been on the radar of the regulator for some time.
