It is a long tale of cases where money from clients' shares are sold
without their knowledge, where officials of the Central Depository and
Settlement Corporation (CDSC) collude with brokers to postpone updating
clients' accounts and where prices are routinely manipulated by
stockbrokers.
Nearly all institutions in the trade  including the watchman of the
industry, the Capital Markets Authority  is engaged in an elaborate
game of deception presided by a tiny elite with tentacles in almost all
segments of the business.
The forensic audit report seen by the Nation was conducted by
Pricewaterhouse Coopers and handed over to the Capital Markets
Authority in November last year.
The report is a catalogue of damaging allegations on the part of CMA,
Nairobi Stock Exchange, Treasury officials and the CDSC. According to
the report, the investing public lost Sh1.3 billion, Sh500 million more
than what the statutory managers had estimated.
By the time it was put under receivership early last year, Nyaga
Stockbrokers had about 70,000 retail and corporate investors. The
report has dealt the biggest blow so far to the reputation of the NSE,
adding injury to the already waning investor confidence in the bourse.
According to the report, Nyaga Stockbrokers would exploit loopholes in
the law to falsify its accounts and, therefore, mask its blemishes.
The forensic audit reveals that massive rip-off of investors' funds was
accomplished through unscrupulous manipulation of clients' accounts.
The auditors concluded that what happened at Nyaga Stockbrokers was a collusion by the main players to loot public resources.
The scheme, according to the report, cut across from junior officers
who received bribes to facilitate forgery and senior managers who
failed to use their positions to stop the theft.
Two managers of well-known investment banks are accused of being part
of the gravy train. In addition to the evidence of false financial
reporting, the document also sets out a careful scheme orchestrated on
individual clients' accounts.
This happened in a number of different ways depending on the suspect's
objective at the time, it says. Among the tricks used by the brokerage
firm to defraud the clients included a process referred to as
uploading of the prices. This happened in instances where clients'
shares were sold without their authorisation and then repurchased,
usually at a loss.
The role of these institutions has remained in focus, at times facing
criticism in the handling of the investors' affairs. This has also led
to resignations of some key persons in the role that raises more
suspicion in the whole affair.
But more startling in the report is the role played by two senior
investment banks whose owner-managers at time had a say in the NSE
boardroom. These powerful individuals used their positions to
perpetuate and cover up for the activities of the beleaguered
stockbroker, lending it money recklessly in what looked like a
cheque-kiting scheme.
The report recounts how when a meeting of the NSE board decided to
rescue Nyaga Stockbrokers by advancing it Sh100 million, the money
ended up being used to pay the firm's debts to these investment banks.
Apart from this, the two banks are also said to have benefited from
Sh269 million and Sh76 million from the troubled broker on diverse
dates between November 1, 2007, and March 5, 2008.
The NSE itself is heavily censured in the report. The auditors say that
interviews with officials of the bourse suggested that the managers
were overly protective of Nyaga Stockbrokers and its managers.
On the part of the CMA, the report has indicted former chief executive
Edward Ntalami. It alleges that the former CEO had knowledge of the
irregularities at the brokerage firm.
Indicating diverse dates, the auditors put Mr Ntalami on the spot for
failing to act decisively on financial irregularities committed by the
stockbroker.
Mr Ntalami resigned from the authority in December 2007 at a time when
the die had already been cast on the fall of Nyaga. Early this year,
the regulator's chairman, Prof Chege Waruinge, also resigned without
any tangible explanations. Pundits will be quick to associate his
resignation with the report, having received it in November.
The PWC report also says the CMA had, in fact, received several
complaints about the firm. However, it is yet to be proved whether or
not the regulator chose not to act.
The current chief executive, Ms Stella Kilonzo, who was then in charge
of compliance, is noted to have shared the information with her boss,
Mr Ntalami.
The forensic audit also questions the regulator's inaction, saying it
failed to guard the investors' interest at a time they needed it most.
Given the extent of the money removed, how did the company manage to
escape more serious sanctions from the CMA, the aggrieved customers and
other third parties? asks the PWC report.
News of trouble at Nyaga Stockbrokers came exactly a year after the
collapse of another stock broker, Francis Thuo and Partners, over
alleged sale of investors' shares without their authority.
Nyaga Stockbrokers was put under receivership by the market regulator
last year for failing to meet their financial obligation. The broker,
whose managing director Patrick Gakiavih sat on the board of the NSE,
went under with the investments of thousands of Kenyans.
As a founding member of the NSE, ownership of the firm exchanged hands
sometime in 1999, handing Mr Gakiavih control of the firm.
Investigations by CMA in December 2006, found that the firm was
operating in negative working capital, against a recommended minimum of
Sh1 million. It owed the CMA and the NSE Sh5 million in transaction
fees arrears.
Another CMA audit report prepared in March last year showed that the
firm had a negative net asset position of Sh225 million. Statutory
managers placed at the firm had long closed doors for claims and the
report remains the only solace for the investors.
However, the report rubs salt on the wounds of thousands as it says the
firm is massively insolvent. Today, Mr Gakiavih is fighting it out with
the CMA in court over attempts to attach his property.