The High Court in Nairobi has upheld a Capital Markets Tribunal decision holding Dyer and Blair Investment Bank liable for a fraudulent transfer of shares owned by a deceased person three decades ago.
Affirming the regulator’s authority to enforce investor protection even decades later, the court ruled that stockbrokers owe their clients a duty of care in capital markets transactions.
The court dismissed the investment bank’s appeal and upheld an enforcement directive issued by the Capital Markets Authority (CMA) in March 2018, requiring partial compensation to the estate of the late Patricia Wanjiku.
The dispute stemmed from the irregular disposal of her KCB bank and Standard Chartered Bank of Kenya (SCBK) shares shortly after her death in 1995.
The case originated from a complaint filed in August 2013 by John Maina, the deceased’s son and estate administrator, who alleged that 150 KCB shares and 600 SCBK shares were transferred using forged documents in November 1995.
Dyer and Blair, as the broker, was mandated to facilitate the transfer of the shares and to collect the various documents required to enable the transfer. The documentation included share transfer forms, client identification and original share certificates, which would then be forwarded to the registrar for verification.
Investigations later confirmed that the signatures on the transfer forms were fraudulent, prompting regulatory action.
On March 6, 2018, the CMA ordered Dyer and Blair to compensate the estate with 50 percent of the dividends (Sh125,074) and reinstate 50 percent of the irregularly disposed securities (1,330 KCB shares and 550 SCBK shares) resulting from the 1995 sale.
The number of shares owned by an investor can grow over time even without additional investments, as listed companies can issue bonus shares or split their stock in any year.
This decision was affirmed by the tribunal in March 2024, leading Dyer and Blair to challenge it in the High Court.
The investment bank contested both the tribunal’s and the regulator’s findings, arguing that the family’s claim was time-barred since it was raised nearly 22 years after the sale.
Section 21 of the Limitation of Actions Act sets a 12-year limit from when the cause of action arises. The bank also claimed the complainant lacked legal standing and that modern regulatory duties were improperly applied to pre-existing transactions.
Additionally, it argued that registrars – not brokers – were responsible for signature verification at the time, stating that it merely processed documents and relied on registrars for authentication without access to specimen signatures.
However, the court rejected these arguments, agreeing with the tribunal that limitation periods in fraud cases begin only upon discovery of wrongdoing.
‘Those defenses were not ignored; they were assessed and rejected on the basis that, as a licensed market intermediary, the appellant owed its clients a duty of care to verify instructions and detect anomalies, particularly in fraudulent transfers,’ the court stated.
The court ruled that the complaint was validly considered after investigations in 2015 confirmed forgery.
‘The cause of action arose upon discovery of the alleged fraud, not in 1995 when the shares were transferred,’ the judge held.
Regarding Mr Maina’s legal standing, the court noted that the issue had not been raised earlier before the regulator or tribunal and could not be introduced on appeal.
It also found that evidence confirmed his authority to act for the estate, dismissing claims that the proceedings were invalid.
The court further rejected arguments about retrospective regulation, clarifying that the tribunal relied on longstanding common law duties of stockbrokers rather than applying newer rules.
References to updated regulations, it said, merely illustrated evolving standards. The judgment emphasised that brokers act as agents and must exercise reasonable care and skill.
‘The relationship between a stockbroker and a client is one of principal and agent,’ the court observed, adding that fiduciary duties existed even before formal codification.
These duties, it ruled, obligate brokers to verify instructions and flag anomalies, especially where fraud is suspected.
The court ultimately upheld the sanctions, finding no error in ordering Dyer and Blair to compensate the estate, and dismissed the appeal.