CMA probes banks over insider trading

The Capital Markets Authority (CMA) is investigating several banks and bond dealers for engaging in illegal transactions.

The regulator confirmed that it is looking into these cheating investors who use insider trading to gain illegally.

Insider trading is when information that is not in the public domain is shared between a small group and then used to make investment decisions such as trading in shares for profit or avoiding losses through dumping of stock.

“The authority received information on suspected front running in some government bonds transactions and investigations by the authority are still ongoing,” the CMA told Smart Company in response to our queries.

Experts warned Friday that the latest development, if authenticated, is likely to hurt investor confidence in the bond market, making it difficult for the government and corporate institutions to raise financing for infrastructure development and expansion of business.

They cautioned that insider trading is bad news for growth of the debt market that is still going through a crisis of confidence after Chase and Imperial banks collapsed with bond holders’ funds.

Only one corporate bond has been issued in the last two years against several dozen Treasury bonds, as the resolution of Sh10 billion and Sh2 billion Chase and Imperial bonds respectively pend.

“Insider trading misprices capital hurting efficient economic development; reduces returns for the poor who have no access to inside knowledge; and hides illegal or criminal money behind a wall of inflated prices or deflated costs," said Deepak Dave, a risk management expert with Nairobi-based Riverside Capital in an interview.

The Capital Markets Act (Chapter 485A) imposes a criminal offence on a person who is convicted of insider trading.

The law says insider trading has occurred when “a person who deals in listed securities or their derivatives that are price-affected in relation to the information in his possession encourages another person, whether or not that other person knows it, to deal in securities or their derivatives which are price-affected securities in relation to the information in the possession of the insider, knowing or having reasonable cause to believe that the trading would take place.”

Persons found culpable face a fine not exceeding Sh2.5 million or imprisonment for a term of two years and payment of the amount of the gain made or loss avoided.

Companies heads, on the other hand, face a fine of up to Sh5 million and payment of the amount of the gain made or loss avoided or to an imprisonment for seven years and payment of twice the amount of the gain made or loss avoided.

The Act also stipulates stiff sentences for market manipulation, false trading, rigging and fraudulently inducing trading in securities all of which falsely mislead customers.

Legal practitioners said the latest CMA probe is an acid test in the regulator’s bid to enhance accountability and safeguard the integrity of Kenya’s vibrant securities market.

“Insider trading is difficult to prove as the prosecution must prove beyond reasonable doubt that it took place and despite Kenya having robust laws against the practice, I am not aware of any successful prosecutions or convictions secured to-date in Kenya,” said Shitul Shah, a partner at Nairobi-based law firm Daly and Inamdar Advocates.

The CMA is already embroiled in another investigation into suspected insider trading in oil marketer KenolKobil’s shares ahead of last year’s announcement of a Sh35 billion takeover of the company.

Investigators are seeking to establish whether KenolKobil chief executive David Ohana tipped stock market trader Aly-Khan Satchu of the firm’s planned sale to French firm Rubis Energie before the information became public, sparking huge stock purchases that were placed through Kestrel Capital just days ahead of the deal’s announcement.

KenolKobil moved 433.8 million shares valued at Sh6.1 billion in the six days of trading to October 23, a day before the Rubis deal was made public, compared to 472,500 stocks in the week preceding the start of the share buying frenzy on October 16.

The capital markets regulator estimates that those behind the deal stand to gain more than Sh500 million in profit once they transfer the stocks to the French firm.

On Thursday last week, in a separate case that has shifted fresh spotlight on the banking sector, the Director of Public Prosecutions (DPP) Noordin Haji announced his office is reviewing files recommending charges on five banks and their officials in connection with the theft of Sh8 billion at the National Youth Service (NYS).

Mr Haji said he had received investigation files from the Directorate of Criminal Investigations (DCI) recommending criminal charges — and has formed a team to review them.

The DPP said the DCI investigations had determined that the banks — Standard Chartered Bank-Kenya, KCB, Equity Bank, Diamond Trust Bank (DTB) and Co-operative Bank — did not follow proper procedures, aiding the loss of the NYS funds.

“The Directors of Criminal Investigations (DCI) carried investigations with regards to criminal culpability and has today forwarded the investigation files relating to the said commercial banks with recommendations that the charges should be preferred against the banks, their officials, individuals and entities for concealing and facilitating, aiding, abetting and benefiting from proceeds of crime …

"I have constituted a team of senior prosecutors to independently review the respective files and make recommendations within 14 days. The decision will be communicated in due course," said Haji in a statement.

Mr Haji said the DCI probe determined that Standard Chartered Bank-Kenya received a total of Sh1.62 billion between January 2016 and April 2018, out of which Sh588.5 million was suspiciously transacted by bank officials and no report was made to the Financial Reporting Centre (FRC) as is mandatory.

KCB received a total of Sh800 million with Sh148.3 million being transacted illegally while Equity Bank received Sh886 million, out of which Sh264 million and $58,000 (about Sh5.8 million) was transacted suspiciously by officials of the bank, the DPP noted.

DTB received a total of Sh164 million out of which Sh27.9 million was suspiciously transacted while Co-operative Bank of Kenya received Sh250 million, with the DCI probe revealing that Sh25 million of the total amount was transacted illegally by the bank’s officials.