A leaked central bank letter on suspected irregular trading of the National Social Security Fund (NSSF) government bonds could derail investigations into the matter amid fears the suspects may have moved to destroy some key evidence.
Investigators at the Capital Markets Authority (CMA) admit delays in confiscating communication gadgets such as mobile phones, computers and laptops from the suspects to retrieve e-mails, texts and WhatsApp messages sent ahead of the irregular trading in the NSSF bonds.
The Central Bank of Kenya (CBK) had on August 19 asked the CMA to investigate recent bond trades under the NSSF between some brokers and market players, terming the trading carried out between May and July ‘illegal.’
A fund manager was accused of buying bonds for NSSF at prices higher than the market average and in some instances sold the government paper at lower rates and bought the same bonds at higher prices in a few days.
The CMA has cast doubts about their chances of retrieving communication between the market players involved in the NSSF bond dealings after the information of the probe leaked and possibly forced the suspects to delete communication and destroy the gadgets, said two sources in CMA’s legal and investigations unit who asked not to be named given the sensitivity of the investigations.
“The purpose of this letter is to request the CMA to review the conduct of the above-mentioned parties and share the actions taken with the Central Bank of Kenya,” says David Luusa, CBK’s Director, Financial Markets Department in the August 19 letter to the CMA.
The capital markets regulator also delayed in seeking a court warrant for search and seizure, known as Anton Pillar order in legal lingo, in the homes and offices of the suspects.
The central bank’s letter to the CMA mentioned Humphrey Wachira Gichuru and a freshly licensed investment bank by the name Pargamon Investment Bank as parties of interest in the probe.
“Let’s say there was a discussion on WhatsApp, between dealers, through their phones. With these kinds of discussions in the media they (suspects) will destroy that evidence,” said a top executive at the CMA.
“Now the issue is that we need to see what the two dealers were discussing if you have to prove that there was a collusion. When the bond is sold and bought in the market,we need to see the pre- and post trade information; how is the money flowing.”
He cited, as an example, the covert pursuit of insider trading at Kenol Kobil ahead of the Sh35 billion takeover of the company and its delisting from the Nairobi bourse.
At the time, the CMA got Anton Pillar order before confiscating the laptops, phones and computers of David Ohana, the former CEO of KenolKobil, Andre De Simone (ex-chief executive of Kestrel Capital) and Aly-Khan Satchu in simultaneous raids in their offices.
“On the NSSF case, there is a 50;50 chance of getting the communication evidence because the probe looks overt,” said George Njoroge, the CEO of East African Data Handlers—which retrieved information from e-mails, computer hard drives and WhatsApp in the successful prosecution of the Kenol Kobil case.
“Forensic investigations of this kind need to be discreet to the point that the suspects should not be aware, otherwise they would delete data and change devices,” he said.
Use of mobile forensic evidence marked a turning point in the prosecution of white-collar crimes in the country. Usually, such technology is deployed in terrorism and drug trafficking cases.
The use of technology, especially wire taps, has been employed to aid regulators in the US and Europe to successfully prosecute insider trading cases and show the inner workings of the dark web of finance professionals profiting from irregular trade.
The CMA says its data analysts are poring over market data of all trades between May and July, type of government paper, their pricing and amount of money involved in efforts to unravel trading in the NSSF bonds.
The buying of security at a price higher than the market average creates outsized profits for the parties.
When the bonds are sold at low prices and bought back at high prices it generates trading income for someone else and huge profits for the seller.
CBK Governor Kamau Thugge and CMA chief executive officer Wycliffe Shamiah have been summoned to Parliament over the suspicious NSSF bond trading.
The Finance and National Planning Committee of the National Assembly wants CBK and CMA, the country’s two regulatory institutions in the sector, to shed light on alleged impropriety in the bond transactions involving two Central Securities Depository (CSD) accounts of NSSF, those of an individual and a local commercial bank.
Molo MP Kimani Kuria, the chairman of the Finance Committee said that claims of NSSF buying bonds at a significantly higher price and selling them at a lower price are weighty and warned that those involved would be held liable if proven.
“We have started by inviting the regulatory institutions to come and tell us what they knew about the questionable transactions,” he said.
