[2016] KECMT 18 (KLR)

Muchiri v Capital Markets Authority (Appeal 1(NRB) of 2013) [2016] KECMT 18 (KLR) (7 June 2016) (Judgment)

Neutral citation: [2016] KECMT 18 (KLR)

Republic of Kenya

In the Capital Markets Tribunal

Appeal 1(NRB) of 2013

JK Kibet, Chair, L Macharia, K. Nyamweya & K. Kinyua, Members

June 7, 2016

Between

Brian Muchiri

Appellant

and

Capital Markets Authority

Respondent

Judgment

1. The Appellant, Mr. Brian Muchiri (hereinafter referred to as ‘The Appellant’) is a former Associate Director and Head of Fixed “Income Securities at Apex Africa Capital Limited, a company licensed as stock broker. Capital Markets Authority (hereinafter referred to as ‘The Respondent’ is a statutory body established under the provisions of Section 5 of the Capital Markets Authority Act Chapter 485A Laws of Kenya.The Appeal before the Tribunal is against an enforcement action of the Respondent communicated to the Appellant through the Respondent’s letter dated 20th August 2013. By the said letter the Respondent advised the Appellant that it had imposed the following sanctions:i.Disqualify him with immediate effect from appointment as Director listed Company or licensed or approved person including a Securities Exchange in the Capital Markets in Kenya for a period of seven (7) years pursuant to Section 25A (1) (c) (i) of the Capital Markets Act.ii.Disqualify him with immediate effect from being and employees of a licensed or approved person, including a Securities Exchange for a period of seven (7) years pursuant to Section 25A (1) (b) (ii) of the Capital Markets Act.

2. The reasons for the Respondent’s decision are set out in the said letter dated 20th August 2012 and they flow from a report and Resolutions of the Board of the Respondent made in May 2013 and annexed to the Respondent’s list of documents at page 40. A summary of the allegations levelled against the Appellant are contained, inter alia, in letters dated 25th February and 20th August 2013 and they include:i.That the Appellant engaged in the purchase and sale of the Fixed Income Securities (FXD1/2012/5, FXD42011/2 AND IFBI/2011/12) through a scheme to defraud or deceive the buyers of these securities through front running the same contrary to Section 31 (7) of the Capital Markets Act Cap 485A Laws of Kenya.ii.The Appellant employed a device, scheme or artifice to defraud the purchasers of the securities by taking advantage of their pending orders to close out his position at a profit based on the Purchasers quoted prices, contrary to Section 31 (7) (a) of the Capital Markets Act.iii.That he engaged in an act or practice which operated as fraud or deceit upon the purchasers of the securities, contrary to Section 31 (7) (b) of the Capital Markets Act andiv.The Appellant failed to make disclosure of his interest in the Securities to the purchasers and to Apex Africa Capital Limited knowing this to be a material fact, contrary to Section 31 (7) (c) of the Capital Markets Act.v.The Appellant had contravened the requirements of Regulation 15 (2) of the Capital Markets (Licensing) (Genera) Regulation’s 2002 which require that as a Director, Manager of floor dealer of a stockbroker or dealer to be fit and proper to hold that position.

The Appellant’s Case: 3. The Appellant’s case is elaborated in the Memorandum of Appeal, the statement of facts dated 6th of September 2013 and a witness statement of Zia Beja. Both the Appellant and his counsel made submission at the hearing on 19th April 2016 but for some reason which the Tribunal is unaware of, the Appellant and his Counsel did not appear on the 3rd of May 2016 when the matter had been fixed by consent for further hearing. Nevertheless, the Appellant’s case as seen in the pleadings filed and submission made, in summary is as follows:i.That based on his vast experience in investment he applied for and was granted an overdraft facility at Bank of Africa Kenya Limited in November 2010 as loan for investments with the sole purpose of investing in bonds. It was submitted that the Bank of Africa Kenya Limited considered and approved the facility based on the Appellant’s experience, merit and standing in the investment industry.ii.That in the course of investments he at times made profits and at other times loses as happens in any other investment where values of securities go up or down.iii.That as a professional investor with wide experience in the Capital Markets, his investments were always based on his own analysis, view of the market and merits or demerits of an investment at a particular point in time.iv.That in August 2012, when the bond market was particularly low, Manline Telecommunications Ltd, a longtime customer of Apex Africa, whom the Appellant had never met before, approached Apex Africa through the accountant and issued instructions to sell their bonds IFB/2012/12, FXD$/2011/12 and FXD1/2012/5. The approval as per the laid down rules and procedure in which the Central Bank of Kenya undertakes all checks and approvals of bonds intended for sale.v.That Apex Africa being one of the lowest ranked Brokers with no active bond buying clients, did not have any pending orders from any client as at the time Central Bank of Kenya approved the transactions.vi.The Appellant avers that there were no buyers, pending or expected client order at that time and he decided to buy the bonds himself with the view that they were still of attractive value if held for short- or long-term purposes as an investment.vii.That Appellant stated that it was only after Central Bank of Kenya had verified the bonds as per the usual procedure that Apex Africa traded the bonds on his behalf and that there was no way an investor (The Appellant) or broker could detect that a bond is fraudulent. He was therefore an innocent investor in the bonds.viii.That stockbrokers, investment advisors and banks regularly show their bond sale or buy positions to each other as part of their marketing efforts especially if they do not have matching order from their own clients.ix.That Tsavo Securities being among the biggest traders in the bond market and trading regularly through Kestrel Capital, regularly offers bond positions and communicates with all other brokers on a daily basis, inviting for bids and offers and that they typically do not disclose the clients nx.That at the material time the Appellant was not aware that the bonds belonged to Tsavo Securities as the selling broker Kestrel Capital could not disclose identity of their selling client.xi.That Tsavo Securities offered Apex Africa the three (3) bonds in the normal way and the email =records listing the bonds on offer reflected this fact. The Appellant states that evidence was presented to the Respondents Board but the said Board did not consider the same.xii.Apex Africa did not have any client orders at the material time, nor were any orders expected from any clients, and that since the bonds appeared reasonable based on the Appellants market perception, he innocently purchased them.xiii.The bonds were sold through Kestrel Capital who must have confirmed that he bonds were checked, verified and approved at Central Bank of Kenya as the bonds were passed as such during the strict Central Bank of Kenya approval process.xiv.The Appellant avers that he could not have caused violation that introduced substantial uncertainty to investor and market perception and the subsequent erosion of investor confidence in the market as a whole as stated in the Respondent’s letter of 20t August 201 as such anxiety was cause by events at the Central Bank of Kenya and by sellers of the bondsxv.That on or about October 2012, it emerged that some staff and Central Bank had created fake bonds which were later sold through the Nairobi Securities Exchange to the unsuspecting public and the Apex Africa had bought the bonds. The Appellant was Summoned by the Central Bank Antifraud investigation department and was found not to be culpable or responsible in any way after the explanation he gave.xvi.That the Respondent soon thereafter commenced investigation into the same transactions, in which the Appellant had been exonerated by the Central Bank Antifraud Investigation Department. The Appellant was summoned and where he fully answered all the allegations levelled against him.xvii.On 3rd July 2013, the Respondent wrote to the Appellant directing him to surrender within seven (7) days the funds (Kshs 3. 741 million) in respect of the allegedly “fraudulent” bond trading by the Appellant at Apex Capital Limited in 2012. He sought more time to pay and actually made part payment of the said sum before he made the fully payment which he was committed to; the Respondent slapped him with the decision which is the subject matter of this Appeal.xviii.The Appellant has throughout his statement of facts mentioned his innocence in regard to the trading in the bonds. He relies on the case of Royal British Bank vs Turquand (1860) 6E & B 327 for the proposition that when transacting with companies’ parties are entitled to assuming that internal company rules are complied with, even if they are not. The Appellant was an innocent investor who did not know if the bonds were fraudulent or not as the same was never at any one time disclosed to him by the Central Bank of Kenya which is the sole body that approves bonds.xix.The Appellant complains that the Committee of the Board of the Respondent never gave him an opportunity to get to know the evidence collected as that may have been uses against him. He states that he was not given an opportunity to cross examine the witness.xx.The Appellant avers that the Respondent wrongly understood and misinterpreted the Appellant’s willingness to surrender the amount of benefit accrued from the subject transaction as an admission by the Appellant of guild to wrong doing.xxi.The Appellant also opine that the decision and sanctions imposed on him by the Tribunal were excessive. In his submissions the Appellant submitted that the Respondent’s enforcement action was for the chares of Front running non-disclosure and introducing market anxiety. He submitted that there was no evidence of any impending orders and if there were any, then they should have been tabled by the Respondent.xxii.The Appellant took the Tribunal through various definitions of front running and submitted that there was no front-running and that his investments were purely speculative. He acknowledged that in the course of the trading he did not disclose his interests to Apex Africa but submitted that the non-disclosure did not necessarily mean that Apex Africa did not know the account.xxiii.The Appellant submitted further that in view of the size of the material bond, disclosure should not be an issue and that in view of the submission that there were not prior orders. The issue of non-disclosure is immaterial.

The Appellant seeks the following orders for the Tribunal:i.The decision of the Authority in the letter dated 20th August 2013 be set asideii.The cost of this Appeal

Respondent’s Case: 4. Mr. Ouma Counsel for the Respondent began his submissions by referring to the various letters exchanged between the parties. He submitted that a letter dated 3. 7.2013, the Appellant was given an opportunity to appear before the Respondent and defend himself against he allegations made against him. It was submitted that before a decision to disqualify the Appellant was made, the Respondent’s Board of Directors considered the matters that were before the Committee including evidence in support of the allegations, representations and submissions made by the Appellant.In response to the Appeal and in addition to the submissions of counsel, the Respondent filed a statement of facts together with a list and bundle of documents.in summary, the Respondent’s defense is as follows”i.That the Appellant had contravened Section 31 (7) of the Capital Markets Act Cap 485A Laws of Kenya by engaging in the purchase and sale of the Fixed Income Securities) FXD1/2012/5, FXD4/2011/2 and IFB/2011/12) through a scheme to defraud or deceive the buyers of these securities through front-running.ii.That on or about the month of September 2012. The Appellant had opened a personal custodial account Number 0930153309 with Bank of Africa for the purpose of trading in Government bonds.iii.On of about the 29th of August 2012, the Appellant in his capacity as the Associate Head and Fixed Income Securities at Apex Africa Capital Limited received a sale order from the Directors of Manline Telecommunications Limited M/S James Wambugu and Duncan Weru to dispose off the fraudulent bonds held by M/S Manline Telecommunications Limited.iv.The Appellant conducted, facilitated and effected the aforesaid sale in his capacity as Associate Director and Head of Fixed income Securities at Apex Capital Limited without discussing his personal interest and the said sale to Apex Africa Capital Limited or at all.v.Mr. Ouma submitted that the non-disclosure of personal interest by the Appellant in the transactions, and with his position as Associate Director and Head of Fixed income Securities at Apex Capital Limited was illegal according to Section 31 (7) (g) of the Capital Markets Act, Cap 485A.vi.On diverse dates between 3oth August 2012 and 5th September 2012, the Appellant facilitated and effected the sale and transfer of the subject bonds from his said personal custodial account to three end purchasers NIC Bank, CIC Asset Management Limited and Canon Assurance Limited at a cumulative value of Kshs 81,741/= all the while wrongfully and falsely purporting that the sale was an arm’s length sake effected by Apex Africa Capital Limited on behalf of an investor yet he was the sole beneficiary and owner of the subject bonds.vii.The monies utilized by the Appellant in his purchase of the subject bonds were part of a credit facility of Kshs 100,000,000 form Bank of Africa through his aforesaid personal custodial account which credit was approved on or around 8th June 2012. viii.At all material times the Appellant also failed to disclose to the end purchasers his personal interest in the subject bonds and in his aforesaid custodial account contrary to Section 31(7) of the Capital Markets Act and Regulation 15 (2) of the Capital Markets (Licensing) (General) Regulations 2002. ix.Mr. Ouma submitted that the Appellant’s actions amounted to the prohibited practice of front-running and therefore manifestly violated the Law in the Capital Markets Act and Regulations.x.Furthermore, he stated that the Appellant was granted a fair hearing. He pointed out that in a letter dated 25th February, 2013, particulars of the allegations against the Appellant were clearly and concisely set out and that on the 11th of March 2013, the Appellant appeared before the Committee with his Advocate and he was given an opportunity to make representations and submissions in his defense against the allegations.xi.In his regard, Mr. Ouma opined that the Appellant had been granted fair heating. The Respondent prays that the Appeal be dismissed with costs.

Issues for determination 5. Having read the pleadings filed and listened to the elaborate submissions by the Advocated for the parties herein, the Tribunal finds the following as the issues for determination:1. Whether the Appellant was accorded a fair hearing by the Authority?2. Whether the decision of the Authority to disqualify the Appellant was arbitrary/unreasonable?3. Whether the Appellant had a duty to disclose his personal interest in the bond transactions to his employer?

Whether the Appellant was accorded a fair hearing by the Authority 6. Article 50 of the Constitution of Kenya, 2010 provides for the right to a fair hearing. It states:Every person had the right to have any dispute that can be resolved by the application of law decide in a fair and public hearing before a court or if appropriate, another independent and impartial tribunal or body.The Right to fair hearing includes the right to be presumed innocent until the contrary is proved; to be informed of the case, with sufficient detail to answer it and to have adequate time and facilities to prepare a defence.The Appellant averred that his right to a Fair hearing as encapsulated under Article 50 of the Constitution was grossly violated by the Respondent. He alleged specifically in his memorandum of Appeal that Respondent did not give him reasonable notice of the hearing in the circumstances and therefore effectively there was no fair hearing. The Appellant further averred that he was never given an opportunity to get to know what evidence was collected that may have been used against him and/or to cross examine any witness that may have given information that may have been used against the Appellant in the decision of the Tribunal.

7. In response, the Respondent’s Advocate submitted that the Appellant was accorded the opportunity to be heard. In this regard, reference was made to the Respondent’s letter to the Appellant dated 25th February 2013 in which contained the particulars of the allegations and/or suspicions concerning him and an invitation for him to appear before a Committee lawfully appointed by its Board of Directors to answer the said allegations and suspicions and make representations to show cause why enforcement actions should not be carried out or imposed upon him pursuant to Section 25 of the Capital Markets Act.

8. Mr. Ouma, Counsel for the Respondent further submitted that the Appellant received the letter dated 25thFebruary 2013 and in fact confirmed his attendance without raising an y objection whatsoever as to the date of the said hearing.It is not disputed that on the 11th March 2013, the Appellant appeared before the Respondent’s Committee accompanied by two Advocates Mr. Kennedy Ochieng and Ms. Susan Wangui. The report and resolutions of the Board od the Respondent at Paragraph 63 reproduces the submissions made by the Appellant.It is well settled Principle of Natural justice that no one should be condemned unheard.In the case of Kanda vs Government of Malayasia [1962]AC 322-337 where it was stated as follows:If the right to be heard is to be a real right is worth anything, it must carry in the accused man to know the case against him. He must know what evidence has been given and what statements have made affecting him and then he must be given an opportunity to correct and contradict them.

9. The Tribunal has considered the correspondence exchanged between the parties prior to the hearing before the Committee of the Respondent on 11th of March 2013. The Respondent’s letter dated 25th February 2013 sets out in detail the investigations carried out by the Respondent and the allegations of commission or omission attributed to the Appellant. At paragraphs 27 and 28 of the Appellant’s statement of facts, the Appellant expressly acknowledges receipt of the letter dated 25th February 2013 and acknowledges attending the hearing on 11th March 2013. At paragraph 29 he pleads that he was interrogated and answered all the allegations.Having considered the above, the Tribunal is of the view and finds that the Appellant was duly and sufficiently notified of the case against him and was afforded the opportunity to correct and contradict them. The Respondent did not therefore breach the Appellant’s right to a fair hearing.

Whether the decision of the Respondent to disqualify the Appellant was arbitrary/unreasonable? 10. The decision of the Respondent following the hearing was communicated to the Appellant first by a letter dated 3rd July, 2013. At page 2 of the said letter, the Respondent states as follows:That in the meeting before the Committee on 11th March 2013. You confirmed that the above noted transaction as well as your conduct in connection therewith amounted to a breach of Section 31(7) of the Capital Markets Act and offered to mitigate the breach by surrendering all the benefits accruing to you from your wrongful conduct.Section 31(7) of the Capital Markets Act states as follows:No person shall directly or indirectly in connection with the purchase or sale of any security-

a.Employ any device, scheme or artifice to defraud;b.Engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person.c.Make any untrue statement of a material fact; ord.Omit to state a material fat necessary in order to make the statements made in light of the circumstance under which they were made not misleading.

11. The Appellant responded to the Respondent’s letter dated 3rd July 2013 by a letter dated 9th July 2013. In his said letter he noted the contents of the Respondent’s letter took no issue at all with the contents thereof and confirmed his commitment to comply with the Respondent’s directive.The Tribunal takes cognizance of Article 47(1) of the Constitution of Kenya, 2010 which states as follows:Every person has the right to administrative action that is expeditious, efficient lawful, reasonable and procedurally fair.

12. The Appellant submitted that the decision of the Authority is unjustifiable because the Respondent wrongly misinterpreted the Appellant’s willingness to surrender the benefit accrued from the subject transaction as an admission by the Appellant of guilt.He further submitted that the decision and sanctions of the Authority against the Appellant clearly go against the principles of Fair Administrative action and the Appellant’s legitimate expectation upon surrender of the amount of benefit accrued from the subject transaction.The Respondent submitted that the decision was just because the Appellant was not fit and proper to hold the position of Associate Director and Head of Fixed income Securities at Apex Africa Capital Limited according to the requirements of Regulation 15(2) of the Capital Markets (Licensing) (General) Regulation’s 2002. Mr. Ouma, Counsel for the Respondent further submitted that the Appellant’s actions amounted to a prohibited practice of front-running and therefore violated the Capital Market’s Act.Section 47 of eh Constitution sets out the Principles on Fair Administrative action,Parliament enacted the Fair Administrative Action Act in the year 2015. Although the legislation did not exist in 2013, the Tribunal has perused it nevertheless. The Statute provides:Where an administrative action is likely to adversely affect the rights or fundamental freedom of any person, the administrator shall give the person affected by the decision;a.Prior and adequate notice of the nature and reasons for the proposed administrative action;b.An opportunity to be heard and to make representations in that regard;c.Notice of a right to a review or internal appeal against an administrative decision, where applicable;d.A statement of reasonse.Notice of the right to legal representationf.Notice of the right to cross examineg.Information, material and evidence to be relied in making the decision or taking the administrative action.

13. The Respondent is a public body established for the purpose of promoting, regulating and facilitating the development of an orderly, fair and efficient Capital Markets in Kenya.In addition to perusing the Constitution and the Fair and Administrative Action Act 2015, the Tribunal also considered the decision of the High Court in R vs Judicial Service Commission & Another Ex parte Joyce Manyasi [2012] eKLR in which the applicant judicial review orders following her suspension from performing her official duties in judicial service. She argued inter alia that the decision was contrary to the rules of natural justice, inconsistent with the applicant’s rightful and legitimate expectations and, ex facie, unfair, and unreasonable and violated the applicant’s constitutional right to administrative action that is efficient, lawful, reasonable and procedurally fair.The court stated that the applicant had legitimate expectations of being taken through a fair administrative process whenever there is contact with the administration but the respondents had conducted themselves in a fair and legal manner towards the applicant. There was no breach of te4h applicant’s legitimate expectation to a fair administrative process

14. The Tribunal has found earlier in this judgement that the Appellant had made admissions in regard to the breach of the Capital Markets Act. He admitted further doing his submissions that his employer was un-ware of his interest in the subject bonds. Admissions if true and clear are by far the best proof of facts admitted. Admissions in pleadings or in the course of the hearing made by7 a party are fully binding on the party that makes them and constitute a waiver of proof. They by themselves can be made the foundations of the rights of the parties.The Tribunal hold the view that the admission by the Appellant was made against his real interests therefore such an admission qualifies as evidence of the truth of its contents and possesses evidentiary force per se and does not require further proof.In line with the admission, the Tribunal finds that the appellant failed to prove any facts contrary to it and therefore the administrative action by the Authority against the Appellant was within the principles of law and mandate under the Capital Markets Act and that of Section 47 of the Constitution

Whether the Appellant had duty to disclose his personal interests in the bond transactions? 15. At the material time the Appellant had a senior position as an associate Director and head of Fixed Income securities at Apex Africa Limited. An entity licensed by the Respondent as a Stockbroker and by virtue of his role as a senior employee in Apex Africa he had the duty to disclose his personal interest in the bank of Africa account and his interests in the transactions to the three end purchasersThe tribunal is unable to agree with the Appellant’s submissions that the disclosure was immaterial. In this respect the Tribunal therefore finds that by his own admission, the Appellant committed an offence by not disclosing to his employer Apex Africa about his personal interest in the Bank of Africa account and to the three end purchasers; NIC Bank Limited, CIC Asset Management Limited and Cannon Insurance LimitedThe first sanction which was imposed upon the Appellant by the letter dated 3rd July 2013 which the Tribunal has referred to herein above was a direction to surrender the sum of ksh3,741,000/= to be paid in favor of Capital Market Authority (CMA) Investor compensation. The Appellant made part payment of that amount and did not pay the balance. The failure to pay the balance then attracted the letter dated 20th August 2013 and the sanctions contained thereof. The Tribunal has agonized on whether the period imposed of 7 years is reasonable.

16. The Appellant is an experienced player in the securities market having previously worked for Old Mutual Asset Managers, Shah Munge and Partners stoke brokers, Renaissance Capital Insurance limited, Equity Bank and Apex Africa. His working life has therefore been in the area of securitiesAt the material time he was an Associate Director and Head of fixed securities at Apex Capital limited company licensed at the securities exchange, and he was therefore in a senior position which disqualifies him from being a director for a listed company or an employee of a licensed person for a period of seven years. We have taken note of the fact that the Appellant was cooperative in not only admitting to the breach of the Act but also in agreeing to comply with the directives of the Respondent. He in fact paid half of the amount he was directed to pay. It appears however that he somehow changed his mind and did not pay the balance of the amount he had agreed to pay as a consequence of which the respondent took enforcement action

17. We are unable to find any guidance in the capital Markets act giving guidance as to the period which a party can be banned or suspended. We have examined decision in other jurisdictions. The Respondent’s conduct is no different from that of an insider trader. This conduct attracts criminal sanctions in other jurisdictions. Convictions for some white-collar crimes can result in punishments that amount to virtual life sentences, even for first-time offenders who pose little threat to public safety. Corporate accounting fraud has resulted in some of the stiffest penalties seen when the company experiences a substantial drop in its stock price after misconduct is disclosed. Trading on confidential information and non-disclosures of interest harms the integrity of the markets. In the United States of America for example Congress directed sentencing commission to revise the punishment for securities fraud to “appropriately account for the potential and actual harm to the public and the financial markets from the offences.’’

18. Having considered the magnitude of the offence admitted by the Appellant and the unethical conduct by an otherwise senior and experienced player in the securities exchange, the tribunal is satisfied that the disqualification for a period of seven years is not unreasonable.For the above reasons, the Appellants appeal is dismissed. In view of the fact that the Appellant has already been sanctioned and that he was initially cooperative, we order that each party bears his/its costsThe Tribunal commends the counsels appearing and the parties herein for their co-operations in facilitating the determinations of the Appeal.

DATED AT NAIROBI THIS 7TH DAY OF JUNE 2016Signed:Jianaro K. Kibet ChairmanDr.Laila Kandie MemberMr. Kennedy Nyamweya MemberMr. Karumba Kinyua Member