INSIDER TRADING IN KENYA: WHO PROTECTS THE OUTSIDER ...
INSIDER TRADING IN KENYA: WHO PROTECTS THE OUTSIDER? Bwaya Buluma What is insider trading? The Capital Markets Act (Cap....
INSIDER TRADING IN KENYA: WHO PROTECTS THE OUTSIDER?
What is insider trading? The Capital Markets Act (Cap.485A), under Section 32A (1), provides that: No insider shall:
(a) either on his own behalf or on behalf of any other person, deal in securities of a company listed on any stock exchange on the basis of any unpublished price sensitive information; or (b) communicate any unpublished price sensitive information to any person, with or without his request for such information, except as required in the ordinary course of business or under any law; (c) counsel or procure any other person to deal in securities of any company on the basis of unpublished price sensitive information.
Section 32A (2) goes further to criminalize such acts, stating that any insider who deals in securities in contravention of subsection (1) shall be guilty of insider trading. Therefore, insider trading constitutes the dealing in securities of a listed company on the basis of unpublished price sensitive information. The term insider refers to those who by virtue of either duty or shareholding in the company have access to sensitive information in regard to the function and profitability, or otherwise, of the company. In this hat we have, among others, directors, lawyers, accountants/auditors, and the majority shareholders. Conspicuously missing from this circle of confidence is the retail investor, otherwise known as the mwananchi, who through a concert of aggressive advertising and a flurry of IPOs is the Johnny-come-lately who though allowed within feet of the banquet table can only make do with wafts and crumbs.
It should, however, be noted that there does exist a category of insider trading that is considered legal. This is whereby the above-mentioned corporate insiders trade in their
own securities and report the same to the regulatory authorities, having done so within the confines of all governing laws and regulations. This distant cousin of the illegal insider trading covered under Section 32A (1) of the Capital Markets Act (Cap.485A) seldom comes to town.
Insider trading in Kenya The Nairobi Stock Exchange started out in 1954 as an exclusive club where stocks were traded over coffee and deals sealed with a handshake. The weekly coffee at the Stanley Hotel may be long gone, but the handshakes and loud backslapping persist only that they are muted in the boardrooms of those of the old school tie network. So it is that a stockbrokerage was given a clean bill of health by the Capital Markets Authority when it was hemorrhaging on all fronts, the Nyaga Stock Brokers debacle left a nasty taste in the mouth. It didn’t help matters that it came in the miserly company of the fall of Francis Thuo Stock Brokers.
However, when it comes to insider trading in Kenya nothing beats the shenanigans that brought a national behemoth to its knees. In 2006, Kenya woke up to the shocker that the Uchumi chain of supermarkets was on the verge of collapse. Shock gave way to dismay as it emerged that a cabal within the directorship of Uchumi had played the fall of the retail chain to their favor as they hurriedly traded in their shares and turned a handsome profit long before the retail chain got hopelessly derailed and hurtled down to the train wreck it became. Details also emerged of how majority shareholders had been supplying the chain with goods at grossly inflated prices. The retail investor (The Outsider) was left holding much devalued stock that had only months prior been a sure buy & hold. In the ensuing public uproar and subsequent government bailout of a national institution of more than thirty years standing, justice stood to be served and recourse was had to the law through the courts. This saw the bringing of charges for conspiracy to defraud against the former directors of Uchumi (Cr.900/08 Republic v. Christopher John Kirubi & 13 Others.) This was followed by the more specific charge of insider trading being brought against a former chief executive of Kenya Commercial Bank (Cr.1338/08 Republic v. Terrence Davidson.) Both cases are currently before the courts. The questions to be asked
amid all the cases brought forward are: (a) whether the successful prosecution of these cases will be a deterrent in an environment where such deals are the order of the day and the market regulators are complicit and only make feeble attempts to close the barn door after the horses have bolted, and (b) what happens to the retail investors who most likely lost their life savings in the whole affair? In regard to the second question, the events subsequent to the fall of Nyaga Stock Brokers offer little solace; investors will have to contend with a maximum of Kshs. 50,000 each regardless of the amounts they lost.
How to protect the outsider The retail investor (the outsider) has often been left holding an empty purse which he is obliged to fill with tears upon watching a lifetime of blood, sweat, and tears that comprised his investment go up in smoke. After decades, nay, centuries of watching the big boys walk away unscathed and facing nothing more than the obligatory slap on the wrist by regulatory agencies, the move worldwide is to draft and enforce legislation that will better protect the outsider.
The United States Treasury Department, no doubt spurred on by back-to-back shambles on Wall Street with the most recent stink having been raised by the Bernard Madoff Investment Securities affair, recently drafted the Investor Protection Act of 2009 whose sole purpose is to increase the authority of the Securities and Exchange Commission (SEC) to protect retail investors. Key powers that are sought to be vested on the SEC are inter alia:
Authority to draft and enforce rules to harmonize the fiduciary duty standards for brokers, dealers, and investment advisers and to clarify that any investment advice should be in the interests of the investor rather than the broker, dealer, or investment adviser.
Prohibit sales practices and compensation schemes by brokers, dealers and investment advisers that are contrary to investors’ interests.
Giving the regulator more vicious teeth is one way to protect the outsider. However, this is only viable in jurisdictions where the regulator already has bite. In our own jurisdiction it would be well to first begin by putting in place regulations that ensure that the regulator doesn’t cuddle with the wolves. This was brought out during the Nyaga Stock Brokers debacle where it emerged that the people sitting on the boards of various market regulators were at the same time owners of brokerage and investment bank outfits that engaged in dubious practices at the expense of the retail trader.
In the United Kingdom the governing law is the Financial Services and Marketing Act 2000. The offence is termed market abuse and is provided for under Part VIII, Sections 118 - 131. The rather unique thing is the power vested on the regulatory authority to impose penalties. Under Section 123 (1) the Authority if satisfied that a person is or has engaged in market abuse it may impose on him a penalty of such amount as it considers appropriate. The beauty in imposing such broad parameters in terms of penalty is that it ensures the insiders get to give up much of their ill gotten gains which most of the times are so astronomical as to far outstrip maximum mandatory penalties specified in legislation, if any. This is to be contrasted against the provisions of our own Section 33 (12) (a) of the Capital Markets Act (Cap.485A) which provides a penalty, on a first offence, in the case of a body corporate of a fine not exceeding Kshs. 5,000,000 and in the case of any other person, including a director or officer of a body corporate, to a fine not exceeding Kshs.2, 500,000 or to imprisonment for a term not exceeding five years or to both. On subsequent conviction; in the case of a body corporate, to a fine not exceeding Kshs. 10,000,000 and in the case of any other person to affine not exceeding Kshs. 5,000,000 or to imprisonment for a term not exceeding seven years or both. Taking the case of Uchumi alone where the directors made away with approximately the sum of Kshs. 147, 000,000, then you realize that the fines prescribed under the Act are nothing more than a mere slap on the wrist. Of course this pales vastly in comparison to the approximately Kshs.1, 300,000,000 that investors lost when Nyaga Stock Brokers went bust.
Conclusion The market regulator, The Capital Markets Authority, has began to show some signs of life in a bid to better regulate the market, especially in the wake of the Nyaga Stock Brokers fraud. In a bid to stamp its authority over the market it launched some changes to The Capital Markets (Licensing Requirements) (General) Regulations 2002 vide Legal Notice No.99 of 2009. Key amendments were, inter alia:
Raising the required minimum paid up share capital for all stockbrokers to the sum of Kshs. 50,000,000. However, this becomes effective on January 1, 2011. The aim is to ensure that stockbrokers are adequately capitalized.
Requiring all stockbrokers and dealers to prepare monthly reports and accounts within 15 days of the end of each calendar month which are to be made available to the Authority at such times as the Authority may request. The same is required of all investment advisers and fund managers.
Raising the minimum paid up share capital of all investment banks to the sum of Kshs. 250,000,000. Effective January 1, 2011. This is to ensure sufficient capitalization of the investment banks.
Requiring collective investment schemes, stockbrokers, dealers, fund managers, and investment banks to publish in at least 2 daily newspapers of national circulation:
Half-year un-audited financial statements within two months after the end of the first half of the financial year; and
Full-year audited financial statements within three months after the end of the financial year.
This is meant to ensure adequate transparency and access to information for the individual investors to be able to make an informed decision about the firm they would like to invest through.
This is all very good and proper, hopefully it marks to serve as the stepping stone upon which the Capital Markets Authority shall ensure a level playing field in the market, not
one that is skewed to the disadvantage of the retail investor. The prosecution of those involved in cases of insider trading as exemplified in the cases mentioned hereinabove is also a step in the right direction since it shows that there is keenness to enforce the law and bring those involved in insider trading to book. Steps covered mark the beginning of the journey; hopefully it shall be seen to completion.
Nevertheless, along with the raft of sound amendments that have been promulgated by the Authority there is one which is a tad ominous in regard to the protection of the outsider. This came vide Legal Notice No. 72 of 2009, which amended Regulation 70 thus: ‘by amendment to Regulation 70: The net loss to an investor payable from the investor compensation fund shall be subject to a maximum of fifty thousand shillings.’ Most investors put at least twice that into the market and this they do from hard earned savings; the blood, sweat and tears of a lifetime!