The Capital Markets Tribunal (CMT) has dismissed an appeal by Rafiq Sharrif, a former board member of the collapsed Chase Bank Limited who sought to be cleared of any wrongdoing in his oversight role.
Mr Sharrif had faulted the Capital Markets Authority (CMA) for slapping him with a Sh2.5 million fine for his alleged role in the preparation and publication of false and misleading financial statements of the bank.
The capital markets regulator investigated Chase Bank's affairs and flagged issues such as false disclosures and failure to reveal material information in the information memorandum for investors in the institution's Sh10 billion bond programme.
The CMA approved the bank’s application for its bond issue on April 22, 2015, a move that saw the institution proceed to raise Sh4.8 billion from investors. The bond was then listed on the Nairobi Securities Exchange (NSE) on June 22, 2015.
Chase Bank was subsequently declared insolvent and placed under receivership by the Central Bank of Kenya (CBK) on April 7, 2016, and the trading of the bonds at the NSE was suspended on April 8, 2016.
“As an independent non-executive director and member of the board and Audit and Risk Committee, the Appellant (Sharrif) occupied a position of authority and was entrusted with the responsibility to anticipate, mitigate, and prevent risks to CBKL,” the tribunal chaired by Paul Lilan said.
Consequently, the tribunal said Mr Sharrif was obligated to scrutinise and approve financial statements only if satisfied that they provided a true and fair view of the company.
“This Tribunal acknowledges that directors may delegate responsibility, but ultimately, it is they who bear overall responsibility for the completeness and accuracy of the 1M. It is they who must be satisfied not only that the appropriate - verification and recording exercise is carried out but also that the right people are providing accurate answers,” Mr Lilan, Paul Wanga and Dr Constance Gikonyo said.
The tribunal said Mr Sharrif’s oversight failure was twofold, first as an independent non-executive director of Chase Bank, and secondly, as a member of the audit and risk committee.
The CMA through lawyer Justus Kiunga had submitted that in his capacity as a board member of the bank, Mr Sharrif failed to exercise oversight of the management, leading to the preparation and publication of false and misleading financial statements.
Mr Kiunga said there was an overstatement of cash and balance with the Central Bank of Kenya and an overstatement of interest income.
The CMA had also accused him of failure to disclose related party loan advances as being a shareholder of one of the companies that received Sh174,482,500, he failed to manage his conflict of interest.
The CMA also accused him of failing to disclose the bonus payment of Sh1 billion to Mr Zaffrullah Khan, a former group managing director.
Through his lawyer Samora Ochieng, Mr Sharrif said the sanctions imposed on him were illegal, unlawful and draconian.
He maintained that as a non-executive director, he fulfilled his role appropriately, adding that the bank employed accountants, auditors, and other professionals specifically to prepare and verify the financial statements, suggesting that they should be held accountable instead.
Regarding the alleged non-disclosure of a bonus to Mr Khan, Mr Sharrif said the payment had not been finalised at the time of preparation of the bond documents hence it would have been irregular to include it.
Mr Sharrif said the bank's 2015 financial statements were restated by the bank's management based on discussions with Chase Bank's long-term external auditors (Deloitte and Touche) and the CBK, without his knowledge, consultation or participation.
The tribunal said that after careful consideration of the arguments, they came to the conclusion that such inaccurate information not only misrepresented the financial health of the bank but also deliberately misled unsuspecting investors by painting an untrue and exaggerated picture.
“The Appellant ought to have known this to be inaccurate,” the tribunal said.
