Cytonn in tight spot as CEO faces fraud charges, investor refunds

And days later, a bench of three judges of the Court of Appeal ruled that Cytonn boss Edwin Harold Dande alongside three others were culpable of fraud when serving their former employer, British American Asset Managers.

The outcome of both matters could have significant sway on the fortunes of Cytonn Group, which is already battling poor investor confidence in the face of protracted controversy that has even attracted the eye of the capital markets regulator.

On March 2, 2022, and March 4, 2022, investors in Cytonn High Yields Solutions (CHYS) LLP and Cytonn Real Estate Project Notes LLP(CPN) will give their verdict on the future of the funds—amid the likelihood of a push for refunds, which could spell a financial doom for the company.

Although the firm says restructuring gives the funds room to recover and return value to investors, many see the fund is on its way to liquidation ending the cycle of anger and dashed hopes for investors who pumped billions of shillings into Cytonn’s many funds in hope of above-market returns.

The two funds were placed under the administration of Kereto Marima by High Court Judge Alfred Mabeya in October last year following an application by Mr Dande.

In its plea, Cytonn claimed that it acted following a resolution by the CHYS investors’ board that the investments be put under a special manager instead of liquidating them.

The firm alleged that economic shocks of Covid-19, regulatory attacks, and bad publicity were the cause of the funds falling into liquidity strain.

“Following the onset of Covid-19, the funds experienced liquidity strains that were further aggravated by negative publicity and sustained regulatory attacks. In the circumstances the board concluded that administration was the best option to provide an enabling environment to restructure the funds and return value to investors,” Cytonn said in a statement.

The asset manager had promised double-digit returns in the unregulated funds, attracting more than 3,500 retail investors. Cytonn’s two troubled funds, CHYS and CPN, were invested in real estate properties mostly in Nairobi.

Matters, however, took a turn for the worst after the company bumped into liquidity challenges in its CHYS and CPN, failing to pay investors more than Sh13.5 billion upon maturity.

Several investors sued Cytonn for contract breach and raised issues over operations of the two funds.

These duo has been the centre of a battle with the Capital Markets Authority (CMA) over the fear of their collapse before they were voluntarily put under administration with billions of shillings of clients’ money stuck in the funds since 2019 when the firm technically started defaulting and blaming Covid pandemic.

Apart from the troubled funds, Mr Dande faces the prospects of a jail term, a hefty fine, or both over suspect dealings at his former employer, Britam which could have consequences on the future of Cytonn.

Last week the Court of Appeal sanctioned charges brought against Mr Dande (ex-Britam director) and three others; Elizabeth Nkukuu (senior portfolio manager), Shiv Arora (assistant company secretary), and Patricia Njeri (head of legal services) over claims of making unauthorised payment of more than Sh1 billion from Britam over eight years ago.

The quartet will now face charges after the Court of Appeal dismissed their plea to stop the trial, saying the money was refunded.

A bench of three judges of the Appellate Court ruled that the former senior employees admitted that they authorised the remittances and had subsequently agreed to reimburse the millions, in a bid to settle the dispute.

“Prima facie therefore, there was evidence of the commission of the offence. As to whether the evidence was sufficient to find a conviction is for the trial court,” Justices Asike Makhandia, Mumbi Ngugi, and Pauline Nyamweya said.

The judges also dismissed claims that the Director of Public Prosecutions (DPP) Noordin Haji bowed to pressure from Britam to prosecute them, saying there was no evidence to support the claims.

“Apart from making that bold assertion, the appellants provided no evidence to prove the allegation. It is not enough for a party to make wild allegations and leave it to court to surmise. Nor was there evidence that the 1st respondent (DPP) instituted the criminal proceedings in a bid to pressurise the appellants to settle claims instituted against them by the 3rd respondent (Britam),” the judges said.

The four now face two counts of theft by a servant after allegedly authorising payments of more than Sh1.1 billion from Britam, an offence they allegedly committed between July and September 2014 from the firm’s real estate fund.

They had defended themselves saying Britam was unhappy after they resigned from the company in droves and the claims were a way of ruining their blossoming careers and growing business, which they found immediately.

They argued that first, Britam filed various suits against them claiming that they had conspired and transferred colossal sums of money on account of investing in Acorn Group, a real estate company.

They argued that all the payments were made per the governance process which included various board approvals and that there was no loss as such because the money was refunded.

Britam opposed the appeal saying that they conspired to carry out activities that had not been approved by the company and subsequent investigations undertaken by the DCI, revealed that they engaged in fraudulent, irregular, and unauthorised withdrawal of funds and executed contracts that were adverse to the underwriter.

The funds had been transferred to Acorn Properties Ltd, Acorn Investments Ltd, and Acorn Group Ltd.

The former employer argued that their acts were criminal, hence the lodging of a formal complaint with the DCI, who upon investigations, ascertained that sufficient evidence existed to justify their prosecution and the DPP preferred the charges against them.

Although Mr Dande and others maintained that all the payments were made per the governance process, which included various board approvals and there was no fraud as alleged, High Court judge John Mativo dismissed the case in 2017 prompting them to move to the Court of Appeal.

According to the investigations, payments were generated by Mr Arora, reviewed by Ms Nkukuu, and approved by Mr Dande. And the move to resign from Britam was calculated to frustrate investigations.

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