Capital Markets Authority
High Court
SEC
Securities and Exchange Commission
United States

Meaningful deterrent to securities fraud a priority

The bigger risk is that investors will lose faith in the securities market if it is demonstrated that there is no meaningful deterrent to corporate fraud.

That the High Court has once again slapped the Capital Markets Authority (CMA) on the face by quashing the regulator’s enforcement actions against individuals accused of securities fraud and other malpractices speaks to some very serious legal problem. In nearly all the cases thrown out, the problem has been with the regulator’s understanding of his mandate or principles of law as was in the latest case, where the CMA was found to have violated the principle of natural justice that prevents any single individual or entity from acting as investigator, prosecutor, judge and executor in one case.The High Court deemed such action inappropriate and effectively quashed penalties against former Uchumi Supermarket chief financial officer Chadwick Okumu who the CMA had found to have been part of a management team that misappropriated the retailer’s funds. The CMA insists that the law allows it to investigate and impose penalties, including fines on individuals and companies found guilty of misconduct.

Individuals facing regulatory action have been quick to challenge CMA’s decisions in court and walked out with favourable rulings that effectively mean the regulator is powerless. Certainly there is a conflict between what the law allows the CMA to do and judges’ interpretation of individual rights that must be resolved.The regulator has argued in court that the law gives it administrative powers to investigate any complaints of breach of its regulations and to impose enforcement action as appropriate. It further argues that such actions do not constitute usurpation of the courts’ powers to impose penal sanctions in criminal cases.It is worth noting that CMA’s processes and actions are similar to those of regulatory agencies in other markets.The Securities and Exchange Commission (SEC) of the United States, for instance, made judgments and orders totalling more than $3.7 billion (Sh370 billion) in disgorgement and penalties last year.If CMA’s mandate cannot be protected, then the regulator faces the prospect of giving up or burning taxpayers’ cash in court cases that it is losing. The bigger risk is that investors will lose faith in the securities market if it is demonstrated that there is no meaningful deterrent to corporate fraud.

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