Chase Bank chairman Mohamed Zafrullah Khan (right), consults with his lawyer Cecil Miller before he appeared at a Nairobi court on June 28, 2017, in connection with conspiracy to defraud the lender of Sh1.6bn between August 28, 2019 and March 31, 2016.
Four former senior officials of Chase Bank Ltd will have to face charges brought against them by the capital markets regulator concerning the Sh1.052 billion bonus paid out to the former chairman of the collapsed lender, Mr Zafrullah Khan, information that was not disclosed to investors.
The former officials were summoned by the regulator over the publication of false and misleading financial statements, overstatement of cash balances, non-disclosure of related party loans, and failure to monitor or manage arising conflicts of interest.
Despite giving a spirited fight against the charges, the Capital Markets Tribunal dismissed the appeals filed by Mr Khan, James Mwaura (General Manager of corporate assets) Makarios Agumbi (general manager- finance), and Mr Laurent Demey, a former non-executive director of the lender.
The tribunal chaired by Mr Paul Lilan ruled that the former directors and senior officials had an obligation and were in a position to interrogate and ascertain the true position of the financial statements of the lender, cash and bank balances as well as other tangible and intangible assets. According to the Tribunal, the information would help investors in ascertaining the true financial position of Chase Bank Ltd in terms of its assets and liabilities.
“The upshot of the foregoing is that directors cannot absolve themselves of their duty by solely relying on the advice of others; they must actively engage in the examination of important matters falling under their purview, particularly those central to their core duties and reporting obligations,” Mr Lilan said in a decision endorsed by Paul Wanga and Dr Constance Gikonyo.
The Tribunal was informed that the Sh1.052 billion was paid from monies raised in a bond issued in June 2015, but the information was never disclosed to investors.
Documents filed in court reveal that the money was paid four days after the lender raised Sh4.8 billion through a Medium Term Note programme (MTN) following a public offer on June 10, 2015.
The Capital Markets Authority (CMA) says the board failed to disclose to the investors in the information memorandum contrary to the CMA Act, a factor that could attract criminal sanctions.
The former officials had questioned why the CMA took more than six years to summon them.
The Tribunal further heard that section 34A of the CMA Act provides for penal consequences of imprisonment or payment of fines in case one is found culpable of an offence, yet the nature of proceedings proposed by CMA are centralised on imposing criminal sanctions.
The former officials argued that since it is pegged on assessing their culpability and consequently taking criminal actions to remedy the alleged issues, it was wrong to subject them to parallel proceedings as there were six other ongoing matters- on the same subject- in various courts.
They argued that this amounted to double jeopardy.
The Tribunal, however, said the regulator acted legally by suing the appellants instead of instituting proceedings against the collapsed lender.
“Accordingly, this Tribunal finds that the existence of other criminal and civil cases does not prejudice the Appellants,” the Tribunal said.
On the issue of summoning the four years after the payout, the Tribunal noted that considering the complexities of the investigations and that various state agencies involved had to cooperate, it was understandable that the CMA had to wait before issuing the notice to show cause.
“Moreover, the investigations undertaken by the other government agencies were important in unearthing the gaps that the Respondent (CMA) seeks to address,” said the tribunal.
The Tribunal, however, agreed with the appellants in the case against Khan, Mwaura, and Mr Agumbi that including Dr James McFie, a director in SBM bank, in the Ad Hoc Committee proceedings to probe the matter would show bias.
The SBM bank acquired the assets of Chase Bank upon its liquidation.
“Accordingly, this Tribunal finds that including Dr McFie as a member of the ad hoc committee can lead to the imputation of lack of impartiality,” said the Tribunal.
The notice to show cause stated that the former officials breached their disclosure obligations owed to MTN investors contrary to the provisions of Section 34 (b) of the Capital Markets Act as read together with regulation 12(1) of the Capital Markets (securities) (public offers, listing, and disclosures) Regulations, 2002.
In his defence, Mr Demey revealed that the ad hoc remuneration committee approved the payment to Mr Khan, which was to be paid over five years in equal instalments.
He said the amount was to be paid over five years in equal instalments of Sh200 million starting from 2015, depending on the liquidity and profitability of the bank.
Mr Demey argued that a blanket condemnation was made against the former directors without considering their roles and actions. He submitted that the Committee should have considered issues such as him being a non-executive member. He added that the statements had been prepared per the required International Financial Reporting Standards.
Moreover, by the time the IM was published, the 2014 financial statements had not been restated by the Auditors. Additionally, CBK had approved the statements for publication, and the banking regulator did not flag any issues regarding Chase Bank’s accounting processes or books.
He said he, therefore, had no basis to doubt that the lender was compliant.
The regulator on its part said the official failed in his capacity as a board member of the bank, in undertaking the oversight duty of management of Chase Bank, hence leading to the preparation and publication of false and misleading financial statements. In addition, Mr Demey had the relevant skills and experience to be involved in the ARC since he had a background in the financial sector and relevant experience working for a financial institution.
Accordingly, he was in a position to exercise independent judgment in terms of reviewing the financial statements presented by Chase Bank’s auditors.
The Tribunal was informed that Mr Demey was a non-executive board member and a member of the audit and risk committee of CBKL and was therefore, liable for failing in oversight of CBKL management leading to the preparation of false and misleading financial statements disclosed.
“Accordingly, this Tribunal affirms the Respondent’s Ad Hoc Committee finding that the Appellant was responsible for the preparation and publication of false and misleading financial statements and material non-disclosures on the Information Memorandum,” the Tribunal ruled.
According to the Tribunal, as a director, Mr Demey did not sign off on his obligation to ensure the accuracy of the financial statements and information in the information memorandum.
In exercising the duty of care and skill he should have undertaken to test the veracity and accuracy of the financial statements.
The Tribunal at the same time quashed a Sh5 million fine imposed on Mr Ken Obimbo, saying the ad hoc committee failed to prove that he was a board member at Chase Bank and the group finance director as stated in the notice to show cause.
Mr Obimbo had submitted that he was named as a director without his knowledge and consent and that he only came to know of it when the CMA sent the NTSC in 2021.
The CMA imposed a financial penalty of Sh5 million and was also suspended from being a board member or key personnel of any issuer, licensed or approved person in the capital market in Kenya for five years.
In conclusion, the appellant submitted that he was wrongly implicated and convicted by the CMA and sought orders from this Tribunal to set aside the enforcement Decision Report as it relates to him.
The lender went into receivership in April 2016 after failing to meet its financial obligations.
