The Capital Markets Authority (CMA) has received the green light to pursue the directors of collapsed Imperial Bank over the Sh2 billion corporate bond that the lender issued a month before it was placed in receivership.
The Supreme Court agreed with the regulator that it has rights to investigate circumstances under which the bank proceeded with the bond despite insider knowledge it was in trouble.
Imperial Bank was placed under receivership in October 2015 after the board of the privately owned lender alerted authorities to suspected malpractices.
The Supreme Court said the CMA has powers to investigate and take enforcement actions against directors of an entity under its watch for deliberately or negligently providing incorrect information to the regulator.
“The petitioners’ appeal is allowed to the extent that the respondent may proceed with its enforcement proceedings against the petitioners through its delegated authority under Section 11A(1) and or Section 14(1) of the CMA Act,” Justices David Maraga (chief justice), Mohamed Ibrahim, Smokin Wanjala, Njoki Ndung’u and Isaac Lenaola said.
If the CMA finds the eight directors culpable of failing the bank, it may impose financial penalties as well as blacklist each of them from holding a similar position in any listed company.
The directors moved to the Supreme Court after the Court of Appeal allowed the CMA to continue with its regulatory mandate as the licensing, investigative and enforcement agency.
The eight directors, including Alnashir Popat, Omurembe Iyadi, Jinit Shah, Anwar Hajee and Hanif Somji, argued that Section 11(3)(cc) & (h) of the CMA Act is unconstitutional, because it allows the regulator overlapping roles. The CMA went after the directors on grounds they abetted fraud and breached the fiduciary duty to depositors.
Imperial Bank went under with the Sh2 billion in bonds, whose sale to the public had been cleared by the CMA, leaving investors bruised.
The directors challenged the investigation and enforcement arguing that CMA officers were involved in investigations before asking them to respond to seven allegations within 14 days.
They said appearing before a panel of CMA officers and subsequent enforcement proceedings would make the regulator the accuser, investigator, prosecutor and judge at the same time.
The High Court had stopped the process saying there existed a possibility of bias on the part of the regulator.
The Court of Appeal overturned the decision and gave the regulator the nod, but the directors escalated the matter to the Supreme Court.
An audit of the bank’s activities later revealed that the bank’s former managing director Abdulmalek Janmohamed had been running a scheme of fraudulent disbursements resulting in losses running into billions of shillings.
The directors reckon that the late Janmohamed and chief finance officer James Kaburu were privy to the application and together with various external transaction advisers handled all the correspondence regarding the bond issue.
Court documents show that the theft was engineered by Mr Janmohamed, through fraudulent withdrawals hidden from the bank’s reporting system through software manipulation and some transactions written down on chits of paper.
This led to the loss of more than Sh34 billion in 13 years. The funds were invested in prime real estate, luxury apartments and assorted firms.