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Bond dealers in Sh260m fraud

NSE staff
NSE staff monitors online trading. FILE PHOTO | NMG 

The Capital Markets Authority (CMA) is investigating two bond dealers and a businessman for illegal dealing in Treasury bonds that has earned them a Sh260 million profit.

CMA says in court documents that the dealers, David Maena of CBA Capital and Stephen Ngunje of African Investment Bank (AIB Capital), supplied businessman Rodrick Muhoro Ngugi with privileged (non-public) information on bond trades, which he used to front run the market and make dual trades in order to profit at the expense of other investors.

The markets regulator further says 80 per cent of the gains made from the 2016 and 2017 trades would then be remitted to the dealers.

The deals were financed through a bond trading credit facility Mr Ngugi had with the Bank of Africa, which the bank later suspended.

CMA says in an affidavit filed in response to a suit Mr Ngugi has file against the regulator and Bank of Africa seeking to stop the ongoing investigations into the dirty deals that the regulator discovered through a whistle blower and its surveillance systems.

“The petitioner (Ngugi) was informed that the CMA had noted a trend whereby upon execution of a dual transaction, approximately 80 per cent of the potentially irregular proceeds obtained from the transactions would subsequently be transferred to the approved dealers working for licenced brokers, who had executed the transaction yielding the irregular gain,” CMA says in its affidavit.

“Approximately Sh260 million had been derived from the dual trading and majority of the funds to the tune of Sh111 million were transferred to two dealers, namely David T. Maena of CBA Capital and Stephen Ngunje of Africa Investment Bank,” the court papers say.

The irregular trades, known as front running, arise when a crooked dealer or trader uses knowledge of customers’ orders to buy and sell to trade in their own accounts ahead of the market.

It happens when rogue dealers insert themselves or another party in a deal, to buy bonds from an investor who is selling at a lower price. Such a trader then goes on to sell the same bonds to another person at a higher price and pockets the gain, often within a day (dual trading).

Mr Ngugi has objected to the investigation arguing that he has yet to be fully appraised of the exact nature of the irregular transactions causing the CMA query.

The businessman also accuses the regulator of directing the Bank of Africa to supply it with his private and confidential financial information without his consent. He adds that as a result of the investigation, he has been denied a loan by Bank of Africa, harming his other businesses.

The CMA says in reply that investigations into the matter are yet to be concluded, and that once this is done a decision will be taken whether to charge Mr Ngugi and the dealers with market abuse.

This latest investigation echoes the 2012 bonds scandal where the head of advisory firm Tsavo Securities Fred Mweni was slapped with a 15-year ban from acting for any listed company following his involvement in the trade of fraudulent Treasury bonds worth Sh105 million.

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