The Capital Markets Authority (CMA) has fined a former CBA Capital executive a total of Sh166.9 million for engaging in insider trading in Treasury bonds between 2016 and 2017.
CMA said Tuesday in a statement that Mr David Maena, formerly of CBA Capital, has been found guilty of dealing 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 financial penalty is twice the amount of benefit that Mr Maena received from the irregular trading in the fixed income securities that CMA said amounted to Sh83.4 million.
“The Board of the Capital Markets Authority (CMA) has taken enforcement action against David Tumaini Maena, following conclusion of investigations with respect to allegations of irregular trading of Government securities in 2016 and 2017,” the CMA said.
The regulator said that following investigations, it had established the presence of a scheme where fixed income dealers at investment banks, asset management firms and brokerage firms colluded with individual bond facility holders in bank custodial accounts to trade bonds ahead of orders placed by non-suspecting investing clients (also known as front-running a client) for gain. It did not name the other involved agencies nor indicate whether they would also be fined.
CMA said the illegal trades were done through creation of artificial arbitrage opportunities based on privileged knowledge of customer orders.
“The investigation further established that the gains arising from these trades would be shared between fixed income dealers and the bond facility owners in contravention of the capital markets legal and regulatory framework,” CMA said.
According to CMA, Mr Maena, “a key player in the scheme” used his position as a dealer in Government securities to obtain illegal gains amounting to Sh83,475,000 by trading ahead of his clients’ accounts in bond transactions that he facilitated as a broker in 2016 and 2017.
“Mr Maena was given a chance to rebut the investigation findings but failed to do so,” said CMA.
Business Daily established Tuesday that Mr Maena has since quit CBA Capital.
“He quit last year,” a customer care executive told the Business Daily on phone when we called.
In addition to the fine, the CMA said Mr Maena has been disqualified from holding office “as a key officer of a public listed company and or issuer, licensee or any approved institution of the Capital Markets Authority” for a period of 10 years.
CMA said it had referred Mr Maena to the Director of Public Prosecution (DPP) Mr Noordin Haji to consider criminal investigations on the market manipulation as well as to the Asset Recovery Agency (ARA) to trace assets allegedly bought with the illegal capital gains by Mr Maema.
The regulator also wants the Institute of Certified Investment and Financial Analysts (ICIFA) to consider disciplinary action against Mr Maena for “professional misconduct.”
“The Authority is empowered under the Capital Markets Act to recover illegal gains which a person makes through illegal conduct which is contrary to the Capital Markets Act and regulations applicable in the capital markets sector,” said CMA.
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).
The CMA is conducting 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.
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.