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Citizen Weekly

Sunday, 23 November 2014

BOARDROOM WARS AT CO-OP BANK



The Co-operative Bank of Kenya Limited was registered in 1965 as a Co-operative Society with 100pc shares privately being owned by ordinary Kenyans through their co-operative societies. The former longserving managing director Erastus Mureithi was to later be hounded out of office in controversial circumstances after he made the bank a mass movement banking institution that was the envy of many.
Word has it that since Mureithi’s removal, those seen to have been allied to him at the apex in management and directorship have been having sleepless nights for years after he unceremoniously left the scene to venture into politics. The pro-Mureithi faces are feeling the heat thus leading to fears boardroom wars as they fight for their survival.
As they are targeted, we have authentic information that all is not well at the financial institution. Owing to the bank’s rapid expansion and the strain in raising additional share capital from the co-operative societies to support its expansion programme, the bank’s by-laws were amended in 1996 to allow individual members of registered co-operative societies to buy its shares. As at  December 31 2006, societies held 84pc of shares in the bank, 21,884,020 shares of Sh100 each, commonly referred to as Class A shares while over 51,000 individual members held 16pc, 4,305,750 shares of Sh100 each, commonly referred to as Class B shares.
However, in April 2007, then directors who included two senior government representatives conspired and hatched a plan to acquire a huge chunk of the bank’s shares at the par value, ahead of a planned initial public offer, in anticipation of making huge profit gains after the listing of bank’s shares at the Nairobi Stock Exchange and consolidating their positions in the board.
 In a speech delivered by the chairman during the bank’s AGM held in Karen on April 28 2007 and attended by then minister for Co-operatives and other senior government officials, the delegates were informed that the bank intended to sell Class B shares to its senior managers in an effort to enhance staff retention.
Cunningly though, the chairman failed to disclose to the AGM the following material facts regarding the new shares; (a) the specific number of Class B shares that would be sold to the staff, (b) that over 50pc  of the new Class B shares would be sold to the directors (c) that the bank also intended to sell Class A shares to co-operative societies and lastly, (d) that there was an impending plan to convert the bank from a society to a company and to list the bank shares at the NSE in 2008. The AGM adopted the chairman’s speech thereby, presumably granting a blanket approval to the bank to issue and sell an undisclosed number of Class B shares to its senior staff.
On diverse dates between April 30, 2007 and June 30 2008, a total of 2,522,376 new Class A and B shares of pegged at Sh100 each that would have fetched Sh2.4 billion qt Sh9.50 each after the share split in the ratio of 1:100 in the bank’s IPO in December 2008 were allegedly irregularly sold to insiders – thus the bank’s directors, senior staff and co-operative societies associated with the directors, all for a paltry Sh252 million.
Shockingly still, not all directors paid for their shares and those who did were granted loans by the bank on special terms, contrary to Central Bank Kenya rules and regulations regarding capital. The issue is said to have split the board down the middle resulting into the current boardroom wars that are getting dirtier day in day out. Stanley Muchiri is the current group chairman. 
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Our sources say that the Directors fraudulently acquired 1,389,960 Class B shares of Sh100 each that would have hitherto fetched Sh1.32 billion at Sh9.50 each after the share split in the ratio of 1:100 in the bank’s IPO in December 2008 for a paltry Sh138million. As a result, they affected over 10 million ordinary Kenyans whose interest of Sh1.2 billion they represent in the board. It is said that the directors are now richer than the co-operative societies and individual members they represent. They also granted themselves, contrary to CBK rules and regulations, loans totaling to Sh64 million in 2007 and Sh20 million in 2008 respectively to facilitate the acquisition of the said shares.
The managing director is said to have acquired 681,121 Class B shares of Sh100 each, (that would have fetched Sh650 million at Sh9.50 each after the share split in the ratio of 1:100 in the bank’s IPO in December 2008) for a paltry Sh68 million, thereby fixing the bank and making a personal profit gain at the expense of the bank and the over 10 million ordinary Kenyans of Sh580 million.
 After only eight years at the helm of the bank, the MD Gideon Muriuki is ranked as the second highest shareholder of the bank and one of the richest Kenyans today. His shares are equivalent to 50pc of all the 1,389,960 Class B shares acquired by directors and 2pc of the entire shareholding in the bank.
The senior staff members were offered 1,109,650 ordinary shares by the directors for a paltry Sh111 million for the sole aim of winning their support and co-operation thereby making personal profit gains at the expense of the bank of Sh943 million and participating fully in the dividend of Sh0.08 and Sh0.10 for every ordinary share declared in 2007 and 2008 respectively, we can authoritatively report.
According to a well-placed source in the bank, several highly connected outsiders may have acquired shares under this category. Like the directors, senior staff was granted loans, contrary to the statutory CBK guidelines that ranged between Sh1.5 million to Sh5 million to facilitate the acquisition of the said shares.
Questions are being asked why staff retention was deemed necessary on the eve of the IPO yet no staff or director had expressed desire to acquire the Class B shares before 2007. The number of the issued Class B shares in the shares’ register remained constant at 4,305,750 between 31 December 31 2001 and April 30 2007. In addition, other than the bank chairman who invested Sh100,000, all other directors including the MD and senior staff did not invest in bank shares during the IPO.
Then we have co-operative societies linked to the directors of the bank that has raised eyebrows  On diverse dates between April 30 2007 and July 31 2008, the directors acquired 22,766 new Class A shares for a trifling Sh21.6 million with the aim of gaining undue advantage over other individuals in an election of delegates and directors of the bank held in August 2008 and making a profit for their societies at the expense of the bank of Sh210 million and participating fully in the dividend of Sh0.08 and Sh0.10 for every ordinary share declared in 2007 and 2008 respectively to kill the guinea fowl. All the directors survived the elections unopposed. Thanks to the new shares and hefty handouts paid to the delegates. 
Our impeccable source at the bank said another controversy is mystery surrounding the ownership of 125,900,000 shares held in nominee accounts.  Over and above the 274,765,700 shares aforementioned, 125,900,000 shares worth Sh1.2 billion were reportedly held in six nominee accounts in four local banks as at December 31 2008, making it difficult to ascertain the ultimate shareholding of the bank. The mystery has been compounded further by the fact that the bank maintains its own shares’ register and acquired Bob Mathews Stockbrokers Ltd, now renamed Kingdom Securities to among other things, oversee the sale of its shares at the NSE.
There is total discrimination against middle and junior level members of staff which has degenerated into bad blood at the bank. It is said only a handful of staff, mainly in the top cadre, the Christian fellowship and or those close to the MD, benefitted from the shares sold at nominal price of Sh1.00, the middle and junior staff were not only denied the shares but also compelled by the MD to buy the shares through the IPO at the Sh9.50 after it had become imminent that the IPO was bound to hit the roof.
Another issue that has raised questions is the move to have internal funding of staff by the bank through the Sacco to buy its own shares. The bank introduced unsecured personal loans of up Sh1million per staff three months to the IPO and contrary to CMA rules and regulations, the bank offered additional funding to its middle and junior level staff through the Co-operative Bank Sacco. The staff members were compelled to borrow huge loans, way beyond their savings and the one third rule from the Sacco with a promise that the shares would be sold at a share premium in the secondary market to enable them clear their loans and retain a good margin. Accounts of most junior staff in the bank are overdrawn as they struggle to make ends meet after failing to realise the promised high price in a depressed stock market.
There is alleged fraudulent payment of dividends to directors and staff totaling to a whopping Sh45 million. It is said the directors and staff shamelessly participated fully in the dividend of Sh0.08 and Sh0.10 for every ordinary share declared in 2007 and 2008 despite the fact that their shares were illegally acquired, thereby occasioning a further loss to the bank of Sh20 million in 2007 and Sh25 million in 2008 in form of dividends. The MD received a massive Sh5.5 million and Sh6.8 million as dividends for 2007 and 2008 correspondingly.
Whereas Sh248,986,362 was budgeted to cater for all IPO expenses, it is interesting to note that Sh449,823,000 was actually spent onthe exercise. A massive Sh200 million was spent over and above the budgeted amount. How the money was spent remains a mystery. 
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Industry players have thus recommended action to be taken to address the problem to avert a looming crisis at the financial institution.  They want the Ethics and Anti-Corruption Commission to move in and institute a forensic audit to unmask and initiate legal action against all the beneficiaries and facilitators of the illegal shares’ scandal that has rocked the one sound financial institution.
The following actions have been recommended to establish:
a)Why bank directors were allotted 55pc of the new shares meant for staff and whether all the directors ever paid for the shares and/or whether any of them was funded internally by the bank to acquire the shares.
b)The criteria used to allot the new shares to the board members bearing in mind that 60pc of the directors’ shares went to the MD, the chairman and his vice.
c)The criteria used to allot shares to the bank’s staff bearing in mind that over 90pc of the staff were denied the golden opportunity to acquire the shares at the nominal price of Sh1.00 per share before the IPO but later compelled by the MD to buy the shares through the IPO at Sh50 per share and internally funded through unsecured personal loans and bank’s own funds channelled through the staff SACCO.
d)Why 56,328,000 additional ordinary shares had to be issued in 2008 just before the conversion of the bank in to a company limited and the IPO. Who benefitted from these shares bearing in mind that the directors and staff had presumably already benefitted from 1,936,327 shares issued in 2007.
e)The real owners of 125,900,000 shares, worth Sh1,196,050,000.00 at Sh9.50 offer price and representing 23pc of the 557,242,300 shares issued through the IPO that were reportedly held in six nominee accounts in four local banks as at December 31 2008.
f)Which societies benefitted from the 24,805,000 additional Class A shares issued in 2008 and if at all the societies are linked to the current directors of the bank.
g)How the Sh200,836,638 incurred as additional IPO expense in 2008 was spent and whether it was used to pay for shares illegally acquired by directors and others distributed to influential bank delegates and friends.
h)Whether CMA, NSE and CBK board members and staff members, like the representatives in the ministries of Co-operatives and Finance, were compromised prior to and during the IPO.
i)The role of the external Auditors, M/s Ernst and Young in concealing the fraud.
Then not spared are injustices meted out on co-operative societies by the banks management in the consolidation of Co-operative Societies’ shares.
A newly registered society, co-op holdings Co-operative Society Limited acquired, as a block, all the 76.8pc of Class A shares hitherto held by the over 3,400 co-operative societies, ostensibly to safeguard the ownership and the control of the Co-operative Bank of Kenya Limited by the Co-operative Movement in the country after the directors had fully satisfied themselves. The new society’s shareholding in the bank was diluted further to 64.56pc following the IPO in a well schemed process.
Why was the control of the Bank by co-operative societies deemed necessary only after the 17 directors had fully satisfied their motives by acquiring 138,995,700 shares, equivalent to 56pc or the 249,960,700 new shares at a meager nominal price of Sh1.00 per share, are many of the mysteries that abound.
CMA imposed a five years’ sale restriction period on all shares owned by Co-operative Societies prior to the IPO and strangely, only a two years’ sale restriction period on shares fraudulently allotted to bank directors and senior staff. This was done in total disregard of the fact that company directors and senior staff should be better placed than the poor co-operators or anyone else to know what the future holds for the bank. This also reveals the urgency and the rather obvious conspiracy between the bank directors, senior staff, CMA, NSE, and the lead transaction adviser to dispose of the 249,960,700 acquired Class B shares and to manipulate the supply of shares in NSE so as to influence the share price during and after the first two years for selfish gains, we can reveal. The bank’s MD was recently quoted in the press saying that the restriction period on co-operative societies’ shares would be extended to 10 years.
To complicate matters, the bank insists that societies wishing to dispose of their shares within the restriction period can only do so to registered societies in their respective geographical regions to safeguard the exiting number of delegate and director positions in the bank taken by their region. Consequently, the 64.56pc Co-op Bank shares held by Co-operative Societies, though listed, are actually locked out of the NSE, hence co-operative societies cannot and may never reap the enormous share premium currently being enjoyed by the individual investors and very soon by the directors and senior staff of the bank starting December 22 2010.
Already, there are many societies, especially the coffee co-operatives and weak Saccos wishing to sell their shares to clear huge Co-op Bank loans and meet other financial obligations. However, getting a registered society to buy these shares at a small share premium is a nightmare. The shares are trading for less compared to the over Sh9.00 currently being enjoyed by non-co-operative investors, including foreigners, at the NSE. The Kingdom bank is actually the key player, its original and majority shareholders who over the years have doubled as its core customers.
Levies on Transfer of Shares and Dividend paid by Co-operative Societies to the bank.
Co-operative Societies that are lucky to find buyers for their shares within the co-operative movement pay a transfer fee of 5pc, calculated on the sale value, to the Co-operative Bank (shares registrar department). In addition, a 13pc levy has been imposed on the dividend paid to Co-operative Societies starting from 2008, to sustain the operations of Co-op Holdings Co-op Society Ltd whose board is also chaired by the current chairman of the bank.
Other irregularities that touch on the bank in 2008 include the listing of a newly incorporated company whilst it stipulated that:
a)CMA Rules and Regulations governing listing at the NSE, which, among other requirements regulate  that for a company to be listed, it must have been in existence for at least five years prior to the date of the proposed listing and must have posted profits consistently in the last three years immediately preceding the listing.
b)Co-operative Bank of Kenya Ltd was registered in 1965 as a Co-operative Society under Cap 490 and authorised to carry out banking business under the Banking Act in 1968. On July 3 2008, the Co-operative Bank of Kenya Limited, a new corporate body was incorporated under the Companies Act (Cap 486 registration number C 23/2008) and licensed to carry out banking business under the Banking Act in the same month.
c)On August 8 2008, the entire business assets and liabilities of the “Co-operative Bank of Kenya Limited”, the co-operative society were transferred to the “Co-operative Bank of Kenya Limited”, a company, effectively converting the Co-operative Bank of Kenya Limited into a company limited by shares. Listing of the newly incorporated Co-operative Bank of Kenya Limited (the company) at the NSE on December 22 2008 was certainly in contravention of CMA rules and regulations.
d)Following the conversion into a company, the bank now falls wholly under the ministry of Finance and no longer under the ministry of Co-operative Development and Marketing. The minister for Finance should therefore explain to the public whether any due diligence on the bank was ever done before approving the listing at NSE and how the above irregularity escaped scrutiny by the Capital Market Authority, Nairobi Stock Exchange, Central Bank of Kenya and the Treasury, all falling under the  ministry of Finance.
The massive irregularities touching on the IPO are part of many corrupt and fraudulent deals that have been going on in the bank since 2002. In this regard, the minister for Finance should table a list of all Co-operative Societies that benefitted from the Sh5.2 billion granted to the bank by the GK for the coffee debt write-off in 2006, clearly indicating how much money the Coffee Societies owed to the Bank as at February 2005 and how much money was written off.
The ministry of Finance should also be able to table a list of the beneficiaries of an additional colossal sum of Sh10.4 billion that was reported as having been written off during the year 2007 in the bank’s annual report and accounts for 2007 and establish that they are indeed different from the Coffee Co-operative Societies that benefitted from the Sh5.2 billion coffee write-off in 2006 and also rule out possible misappropriation of bank funds.
Today, all sophisticated financial markets world over consider insider dealing to be a practice which must be prevented and punished. The most convincing argument for controlling insider dealing and punishing insider dealers is the adverse effect it has on market confidence.
The inside dealer does not have to work for the company for his dealing to be an offence. So a stockbroker, or merchant banker, who knows about an impending takeover offer who buys shares in the target company with the intention of making a profit, is guilty. If he gets a friend to buy the shares, he is still guilty as this falls outside the armpit of the regulating law.
Depending upon the severity of the case, insider trading penalties generally consist of a monetary penalty and jail term. In order to prosecute someone for insider trading, it must proved that the defendant had a “fiduciary duty” to the company and or intended to personally gain from buying or selling shares based upon the insider information, experts in the industry aver.
Insider trading involves participation by corporate officers, directors or employees or others in the trade of a stock based on confidential or privileged corporate information, knowing that information to be confidential, and seeking thereby to acquire profits or avoid losses on the stock market.
“Trading based on privileged access to information can demoralise investors and destabilise investment. It has utterly no place in any fairminded, law abiding economy.  It’s a chronic danger. It’s all too evident in today’s market place. And it’s a crime.  The American people, bluntly, see it as cheating,” once said the chairman of the US Securities and Exchange Commission
In September 2009, the financial regulator in UK secured its first criminal conviction against insider dealing after years of criticism that it had failed to tackle market abuse. The Financial Services Authority in London had then revealed in a statement that a solicitor and his father-in-law had been found guilty of insider dealing and sharing the proceeds in the lead-up to an acquisition.
In the case, solicitor Christopher McQuoid learnt that his employer TTP communications was about to be taken over by Motorola. Two days before the takeover was announced; McQuoid’s father-in-law James William Melbourne bought almost 154,000 shares in the company. He sold them at a later date and made a profit of almost 50,000 pounds, which he later shared with his son-in-law, the FSA reported.
April 2 2009 - Hong Kong
Insider trading was made a criminal offence in 2003 and carries a maximum penalty of 10 years in jail and a 10 million Hong Kong dollar fine. A former banker and his girlfriend have became the first people in Hong Kong to be jailed for insider share trading on April 2 2009.  Ma Hon-Yeung, a former BNP Paribas vice president, was sent to prison for 26 months and fined 230,000 Hong Kong dollars ($29,500), while his girlfriend, Ivy Lo was imprisoned for 12 months and fined 210,000 Hong Kong dollars, the South China Morning Post reported then.  The fines were equal to the profit they made from the illegal dealing in shares of Egana Jewellery and Pearls before it was privatised three years ago.
Judge Patrick Li said then said:  “Insider dealing is serious dishonest conduct. To maintain our position as an international financial centre, it is important to eliminate insider dealing and to reinforce the transparency of the markets. Ma worked on the planned privatisation of Egana in 2006 and within days of knowing about the deal, tipped off his girlfriend and three relatives about buying shares in the company before the deal was announced,” the court heard. The three family members - brother Sammy Ma, sister-in-law Cordelia Tso and nephew Ronald Ma - were sentenced to 200 hours of community service and a combined 457,000-Hong Kong dollar fine.
Back home, a former Kenya Commercial Bank managing director, Terry Davidson, is being charged with insider trading in Uchumi Supermarket shares. Davidson faced four counts of insider trading in the supermarket retail chain, and is accused of instructing Suntra Investment Bank to buy for him 664,899 Uchumi shares worth about Sh9.5 million on December 2 2005. He faced a similar charge of allegedly instructing the same stockbroker to sell 300,000 shares worth about Sh5 million on May 9 2006- days before the retail chain collapsed under substantial debts owned to banks and suppliers. The state alleged that Davidson traded in the retail chain’s shares based on information that was non-public and contrary to the CMA regulations.
A day before the collapse of Uchumi chain of super markets in Kenya in 2006, a well known net worth investor disposed of a huge chunk of the firm’s shares. The next day, the firm was declared bankrupt and was suspended from trading in the Nairobi Stock Exchange. Allegations of insider trading in the NSE were simply brushed off. This is not an isolated case though. Many cases of insider involvement have gone unmentioned, the most recent being the Co-operative Bank IPO.
Abnormal stock price changes have been common phenomena in the NSE, with CFC Bank, East African Cables Ltd, and Equity Bank being some of the most recent victims. In most offences, CMA (the watchdog) only act after the mischief has been done, like in the case of the recently collapsed stock brokerage firms Francis Thuo and Nyaga Stock Brokers.
Industry players say that it is time to put an end to this menace that sidelines many small investors. The responsibility of taking action against inside trading offenders does not only rest with the CMA but also the investors.
 Any investor, with knowledge of other investors who are using insider trading to gain over others has a moral duty to report this to the authorities. In fact, keeping quiet over it will be an obstruction to justice and could land one in jail. In this regard, a total of Sh2.7 billion is believed to have been lost through insider trading.
Sale of the 274,766,000 shares and payment of dividend for the same to the directors, members of staff, Co-operative Societies and others ought to be frozen pending investigations to forestall the anticipated profit gains by a few extremely greedy and ruthless individuals to save the co-operators and other shareholders.
The entire board of directors and the board of management of the Co-operative Bank should be dissolved immediately and the current directors barred from holding any elective post.
There are demand by key players in the sector that the CEOs and senior staff of the Capital Market Authority and Nairobi Stock Exchange and others be sanctioned and have the Co-operative Bank IPO  be investigated.
They are also demanding that the lead adviser, Dyer and Blair Investment Bank be suspended from the Nairobi Stock Exchange forthwith pending investigations on their involvement in the scandal and possibly charged with aiding and/or colluding with others to rob the public of Sh2.6 billion.
There are also asking the government to rein in by immediately deregistering of Co-op Holdings Co-operative Society Limited to free the 3,805 co-operative shareholders from continued manipulation and exploitation by a few greedy individuals within and outside the bank to restore their right to freely participate in the Stock Exchange. The punitive five years sales restriction period imposed on Co-operative Societies by CMA should also be removed immediately in order for the societies to accrue the full benefits of listing, analysts say.