The Capital Markets Authority (CMA) has taken enforcement action against individuals in Kenya who it says has been culpable for unethical undertakings in fixed income securities in the last fear years. The move is seen as CMA’s effort to instill proffesionalism in the securities trading in the country mainly through a scheme known as ‘Front Running’.
CMA has taken enforcement action against Mr. Rodrick Muhoro, a bond trader, following conclusion of investigations with respect to allegation of irregular trading of Government Securities in 2016 and 2017.
Consequently, CMA has imposed a financial penalty of Kshs 208 Million being twice the amount of benefit Mr Muhoro received from irregular trading and banned him from conducting bonds trading for a period of 10 years.
“According to the investigations, Mr. Muhoro conspired with brokers to defraud investors in bond transactions undertaken between January 2016 and June 2017 through front running,” a press stament from CMA noted.
The statement also notes that this happened when Mr Muhoro colluded with fixed income dealers at brokerage firms through creation of artificial arbitrage opportunities, thereby realising a capital gain of Kshs104 million by taking advantage of the price differential before the client orders were executed. The gains would later be shared between Mr. Muhoro and fixed income dealers at brokerage firms in contravention of provisions of the Capital Markets Act.
Front-running is a market manipulation scheme involving an unethical and illegal trading practice in which a broker with advance knowledge of a specific market orders with price differentials of a financial security for clients earns an arbitrage profit by placing an order for their own account or a person associated with the broker in advance of the client’s orders.
The Authority will refer the matter to the Director of Pubic Prosecution for consideration of criminal investigations on market manipulation; the Asset Recovery Agency to trace and recover assets allegedly bought with illegal capital gains; and the Institute of Certified Public Accountants of Kenya for consideration of disciplinary action for professional misconduct.
The Capital Market Fraud Investigations Unit (CMFIU) was formed in May 2009 through collaboration by the Kenya Police and Capital Markets Authority (CMA) with a view of consolidating the investigations of all securities related fraud cases under one roof.
The Capital Markets Fraud Investigation Unit deals with matters which involve criminal aspects as per the examples set out above. Upon finalising investigations, the Capital Markets Fraud Investigation Unit pursues prosecution of identified suspects.
The standard of proof for sustaining successful prosecution of persons suspected of criminal offences is generally submission of proof beyond reasonable doubt by the prosecution. Penalties range from fines of up to Ksh15,000,000.00 or a jail term of up to 7 years.
Other matters involving failure to comply with the Capital Markets Regulatory Framework, for example failure to submit financial reports or breaches on rules of governance and conduct of business are handled administratively by the Authority. The Authority is empowered to investigate and undertake enforcement/regulatory action.
In respect of such breaches for a balance of probability for it to exercise its administrative mandate, the scope of actions include fines, censures and disqualifications of persons from holding positions in the industry.