Webber Wentzel, the South African audit firm that was hired to look into the affairs of troubled motor dealer CMC, has launched a scathing attack on the capital markets regulator CMA for illegally suspending the company’s shares from trading at the Nairobi Securities Exchange. In a report that was handed over to the Capital Markets Authority (CMA) in February and made public last week, Webber auditors say the regulator did not follow the law in making the decision that was not in the best interest of investors. “In our considered opinion the suspension of an issuer’s securities initiated by the CMA should only be done after a preliminary investigation of the circumstances which may demand the protection of investors,” the report says.

Webber auditors further say that before suspending any shares from trading at the stock market, the regulator should invite the company whose shares it intends to suspend to make a presentation explaining why such action should not be taken, but CMA never gave CMC that opportunity.

CMA has neither communicated to investors when it will lift the suspension nor issued a road map to the resumption of trading of the stocks.

Webber’s findings effectively offer CMC shareholders a firm legal footing to sue the regulator for taking illegal action that has cost them millions of shillings in lost trading opportunities since the shares were suspended from the market.

It marks a turning point for the regulator which hired the auditors and whose handling of the CMC saga has in recent weeks come under the spotlight.

CMA initially suspended CMC shares for seven trading days beginning September 16, eight days after lead shareholder Peter Muthoka was replaced as chairman. The CMA had argued that the suspension was meant to sustain investor confidence in the capital markets and give the CMC Holdings’ directors an opportunity to resolve the outstanding issues.

But the regulator has extended the suspension several times, arguing that the action is intended to protect investors from massive share price erosion. This has denied investors an opportunity to liquidate their investments, besides missing out on potential capital gains. Foreign investors –who actively trade their stocks portfolio — have been the hardest hit by the share freeze.

Peter Muthoka, the former CMC chairman, through his logistics firm Andy Forwarders, was one of the major buyers of the firm’s shares last year, accumulating 75.2 million shares between January and the date of suspension. Paul Ndung’u, another major shareholder, sold 12.5 million of the company’s shares in a similar period. Increased demand for the shares had sparked fears of insider trading, but the Webber says the transactions were above board.

In subsequent extensions of the trading ban, CMA said the conflict and fraud allegations were complex and would require a full forensic investigation. According to Webber, however, the suspension should only have been done after initial investigations had been conducted and a trading ban found to be in the best interest of investors.

The regulator –like ordinary investors—first learnt about the troubles at CMC in press reports on the boardroom coups at the firm as two factions accused each other of serious fraud. In their recommendations, the auditors want the CMA to issue a clear road map to the lifting of the suspension, including stringent conditions to be imposed on CMC directors.

The Webber report has also recommended that all the money and investment portfolios in the offshore accounts since 1978 to date be repatriated to the company after the full list of beneficiaries is documented.

It further says that CMC directors should be made to commit to freezing their shares for a defined period even after the resumption of trading, a move that would affect directors Joel Kibe, Paul Ndung’u, Charles Njonjo, Ashok Shah, and Andrew Hamilton. All directors connected to the illegal off-shore accounts – where a premium on vehicle imports was used to pay certain directors and employees - should be disqualified as directors immediately. This means that former attorney-general Njonjo, who has been identified as a party to one of the off-shore accounts, must leave the board.

Two other directors long-serving chairman Jeremiah Kiereini and former CEO Martin Forster, also linked to the Jersey accounts, were forced out of the company’s board in March last year leaving only Mr Njonjo to reckon with the findings. Webber also recommends that CMC suspends Andy’s contracts and the directors representing the interests of the logistics firm to quit.

The two conditions have, however, been technically met after CMC chief executive Bill Lay last year terminated Andy’s contracts. Mr Muthoka and Mr Joseph Kivai were last month voted out of the board in a recent coup that has attracted legal action and is before court.

CMC is also required to commit to assist the authorities in criminal prosecutions of directors who may face charges.

conduct of its affairs,” CMA chief executive officer Stella Kilonzo said at the time.

The regulator has extended the suspension several times, claiming the need to protect investors from massive share price erosion.

This has denied investors an opportunity to liquidate their investments, besides denying them potential capital gains. Foreign investors—who actively trade their stocks portfolio—have been the hardest hit by the share freeze.

In the two weeks to the suspension, the shares had appreciated from Sh12 per share to a high of Sh13.5 —a level last seen in June 2010.

Trading in the two-week period was dominated by block trades amounting to three million shares. Mr Muthoka, through his logistics firm Andy Forwarders, was one of the major buyers of the firm’s shares last year, accumulating 75.2 million shares between January and the date of suspension. Mr Paul Ndung’u, another major shareholder, sold 12.5 million of the company’s shares in a similar period. CMA has neither communicated to investors when it will lift the suspension nor issued a road map to the resumption of trading of the stocks.

Increased demand for the shares had sparked fears of insider trading, but the Webber and another forensic audit report by PriceWaterhousecoopers (PwC) have said the transactions were above board.

In subsequent extensions of the trading ban, CMA said the conflict and fraud allegations were complex and would require a full forensic investigation.

According to Webber, however, the suspension should only have been done after initial investigations had been conducted and a trading ban found to be in the best interest of investors.

CMA, however, argues that trading in the shares before the completion of the investigations would be speculative and dilute the holding of small investors whose stakes could be snapped up by large investors on the cheap. The regulator—like ordinary investors—first learnt about the troubles at CMC after the Press reported about the boardroom coups at the firm as two factions accused each other of serious fraud. This raised many questions than answers among the investing public. Mr Muthoka has been accused of overcharging CMC through his logistics firm Andy Forwarders to a tune of Sh2 billion over five years, an accusation he has refuted.

Webber now wants CMA to issue a road map to the lifting of the suspension, including stringent conditions to be imposed on CMC directors. Webber wants all the money and investment portfolios in the off-shore accounts since 1978 to date to be repatriated to the company after the full list of beneficiaries is documented.

CMC directors are to commit to freezing their shares for a defined period even after the resumption of trading, a move that would affect directors Joel Kibe, Paul Ndung’u, Charles Njonjo, Ashok Shah, and Andrew Hamilton.

All directors connected to the illegal off-shore accounts—where a premium on vehicle imports was used to pay certain directors and employees —should be disqualified as directors immediately.

This second requirement means that Njonjo, who has been identified as a party to one of the off-shore accounts, has to resign from the board.

Former long-serving chairman Jeremiah Kiereini and former CEO Martin Forster were forced out of the company’s board in March last year.

Webber also recommends that CMC suspends Andy’s contracts and the directors representing the interests of the logistics firm to quit. The two conditions have however been technically met after CMC’s chief executive Bill Lay last year terminated Andy’s contracts, with Mr Muthoka and Mr Joseph Kivai being voted out of the company’s board in a recent coup.

Webber recommends that NSE should enact new rules that will prohibit directors from trading in their company’s shares for a closed period defined as falling between the end of the applicable reporting period and the announcement of results for that period.

CMC is also required to commit to assist the authorities in criminal prosecutions of directors who may face charges.