Fund Of Controversy

It was established to assuage the pain of investors who lose money through activities of fraudulent stockbrokers. But the management of Investors Protection Fund by the Nigerian Stock Exchange has been enmeshed in controversies

By Oluokun Ayorinde

In his New Year message to workers of the Securities and Exchange Commission, SEC, its Director-General, Malam Musa Al-Faki, noted that though tremendous growth has been recorded in the Nigerian bourse in recent years, activities of some players in the capital market have continued to constitute a fly in the ointment for it. A group of the players he particularly singled out as engaging in unethical practices are brokers.

Al-Faki revealed that SEC recorded a total of 956 complaints ranging from fraudulent and unauthorised sale of clients’ shares, non-purchase of shares, non-remittance of sale proceeds and illegal conversions to falsification of clients’ accounts. He, therefore, promised that one of the major targets of SEC this year will be to rid the market of such unscrupulous players. But he stopped short of mentioning the total amount lost to such dishonest brokers by investors.

The possibility of investors losing money through dishonest stockbrokers seemed to have been anticipated by drafters of the Investments and Securities Act 1999. Thus, part X11 of the Act establishes the Investors Protection Fund, IPF. As stated in the Act, the Fund is expected to be the property of the Securities Exchange or Capital Trade Point and is to be administered by a governing board specifically set up for this purpose. On sources of funds for the IPF, Section 149 of the Act reads:

“The Investors Protection Fund shall consist of – (a) all moneys paid to the Securities Exchange or Capital Trade Point by member companies in accordance with the provisions of this decree; (b) the interest and profits from time to time accruing from the investment of the Investors Protection Fund; (c). all moneys paid to the Investors Protection Fund by a Securities Exchange or Capital Trade Point; (d) all moneys recovered by or on behalf of the Securities Exchange or Capital Trade Point in the exercise of any right action conferred by this part of this decree (e ) all moneys paid by an insurer pursuant to a contract of insurance or indemnity entered into by the Board and ( f) all other moneys lawfully paid in into the Investors Protection Fund. The funds are expected to be kept in a separate bank account pending their investment or application for the purpose it is meant for.”

On who can access from the Fund, Section 159(1) of the Act states that: “Subject to this part of this decree, an Investors Protection Fund shall be held and applied for the purpose of compensating persons who suffer pecuniary loss from any defalcation committed by a member of company or any of its directors or employees in relation to any money or other property which was entrusted to or received by a member company or any of its directors or employees whether before or after the commencement of this decree in the course of or in connection with the business of the company.” Furthermore, Section 160 (3) of the Act was explicit that “the amount which any claimant should be entitled to claim as compensation from an Investors Protection Fund shall be the amount of the actual pecuniary loss suffered by him (including reasonable cost of disbursement incidental to the making and proving of his claim) less the amount or value of all moneys or other benefits received or receivable by him from any source other than the Fund in reduction of the loss.”

The existence of the funds and the protection it offered investors from the dubious activities of the stockbrokers may, however, be one of the best kept secrets of the Nigerian capital market. Furthermore, the Nigerian Stock Exchange has not at any time published details of the funds in the account. Akintunde Asalu, the late president of the Nigerian Shareholders Solidarity Association, NSSA, had, many times, before his death queried the rationale for the existence of the Fund. He argued that he was not aware of any investor that has benefited from it.

As investigations by this magazine revealed, getting reimbursed from the Fund can as well be likened to the biblical camel trying to pass through the eye of a needle. One victim that had attempted to draw from the Fund was Boat Nigeria Limited, one of the companies defrauded in the famous case against Jenkins Investment Limited. According to details of the case available to this publication, Boat Nigeria Limited had, in January 2006, bought four million shares of First City Monument Bank, FCMB. The company subsequently deposited the shares in the Central Securities Clearing System, CSCS, through its stockbrokers, Jenkins Investment Limited and was issued a slip indicating its stock position in October 2006.

However, the company was to discover during a routine check on CSCS on 24 January 2007 that Jenkins had disposed of the shares without its mandate. Furthermore, the stock position slip earlier given it by Jenkins was also discovered to have been forged. CSCS officials also issued the company a transaction holding which further confirmed that its shares have been disposed off. Staff of Boat Nigeria Limited who visited the Lagos office of Jenkins found the office under lock. Authorities of Boat Nigeria Limited gathered at the Nigerian Stock Exchange that Jenkins had indeed been suspended as a result of its fraudulent activities. The NSE then advised the company to seek redress at the Economic and Financial Crimes Commission, EFCC. However, when several visits to EFCC did not produce the desired result, Boat returned to NSE. Specifically, the company’s lawyers wrote authorities of the NSE and SEC demanding compensation under the IPF. But in its reply, the NSE claimed it was still investigating the fraudulent activities of Jenkins Investment. Boat Nigeria Limited then took its case to the Investment and Securities Tribunal.

In an Originating Application filed by its lawyer, U.M. Yamah & Co. on 11 May 2007 against the NSE and SEC as the first and second respondents, Boat asked the tribunal to make a declaration that it was entitled to be compensated under the Investors Protection Fund and issue an order directing the respondents to compensate it for its entire lost investments being 4,000,000 units of FCMB plc shares at the prevailing rate at the time of judgment and 10 per cent interest rate until total liquidation.

While arguing the case, Boat Nigeria, through its counsel, submitted that “a close perusal of sections 151, 156, 160, 161,162 and 163 of the Investment and Securities Act 1999 showed that an investor could make a claim from the Investors Protection Fund once it is established that defalcation had occurred and the applicant made a demand against the NSE within a period of six months.” Defalcation is defined in page 174 of the ISA as “… the act of defaulting, act of embezzling, failure to meet an obligation, misappropriation of trust funds or money held in any fiduciary capacity and failure to properly account for such funds.” It, therefore, argued that defalcation had occurred and it was entitled to be compensated from the IPF. It also argued it was entitled to be compensated to the tune of N71.2 billion which was the financial value of the four million FCMB shares as at the time of the institution of the case, in accordance with the provisions of sections 165 of ISA.

But in its defence, the NSE asked the IST to dismiss the suit with substantial cost as the Jenkins matter was then still under investigation. On its part, SEC argued it should be excused from the suit as it is not a custodian of the IPF. The tribunal, however, ruled that SEC, as the apex regulatory authority of the capital market and the responsibilities entrusted upon it for the management and disbursement of funds from the IPF, is a necessary party to the suit. In its judgment delivered on 26 September 2007, the nine-man tribunal led by Dr. Nnenna Orji, held that the fact that the NSE-owned CSCS itself confirmed that Boat Nigeria Limited’s shares were sold without authorisation by Jenkins Investment was enough fact to establish that “defalcation” as defined by the ISA had, indeed, occurred and the applicant was entitled to be compensated from the IPF. In the tribunal words: “It is germane to point out that the Investments and Securities Act has provided a safeguard to unnecessary and unauthorised dealings in investors stocks. This is amply evident in the reassuring provisions of the Act concerning the Investors Protection Fund. The claim of the applicant, therefore, succeeds for the reasons adduced above. From the provisions of the Act as stated in the foregoing, it is undoubtedly evident that it is in the place of the tribunal to determine, and of course, using the law as a guide, the extent of compensation due to the claimant on IPF.” Consequently, the tribunal ordered the NSE to pay Boat Nigeria Limited from the IPF the sum of N21.6 million, being the market value of the four million shares as at 24 January 2007 when the fraud was discovered. In addition, the NSE was ordered to pay the applicant five per cent interest from the date the fraud was uncovered till the satisfaction of the claim.

The NSE filed an appeal for stay of execution of the judgment on 29 October 2007. In an appeal filed by the law firm of Uwensuyi – Edosomwan & Co, the NSE asked for a stay of execution on the grounds that if it were to pay the total amount ordered by the tribunal to Boat Nigeria Limited as a compensation, there would not be enough left in the purse of the IPF to pay the other claimants. The NSE also said through its motion on notice that various claims arising from the defalcation by Jenkins Investment alone were about N400 million and arguing it had a duty to apportion available funds among claimants in an equitable manner to meet the competing claims of investors in cases where defalcation has been established.

Counsel to the NSE backed up the claim with a statement of account of the IPF domiciled with Stock Exchange House branch of First Bank of Nigeria plc. According to the statement, the amount standing to the four accounts of the Fund in the bank as at 30 June 2007 are: A/C 2444020002226 containing N25,998,761.01; 2444020002233, N37,769,332.61; 2444020002066, N151, 249,684 and 2444020002189, N228,478,518.69. The NSE filed an appeal which is yet to be heard.

Boat Nigeria Limited is not the only investor that has tried to access money from the IPF. In another case, Chief Livinus Ezemegbe, whose investments valued at N3.7 million was lost through Apex Securities Limited, also instituted an action at the IST against the NSE and SEC demanding compensation out of IPF. However, the NSE and SEC contended at the IST that the IPF was not operational and the applicant cannot benefit from the fund since the guidelines from drawing from it were not yet in place.

But in its judgment delivered on 13 December 2006, the IST rejected this argument. It argued it was the responsibility of the NSE and SEC to put in place guidelines for benefiting from the funds. Consequently, it ordered that the applicant be compensated from the IPF and that the NSE, in collaboration with SEC, should draw up and make public within 90 days necessary guidelines for the implementation of the IPF in line with the provisions of the ISA.

This magazine gathered that consequently, the SEC came up with what it tagged Investors Protection Rules 2007 in which it pegged the maximum amount payable to investors who suffered any form of defalcation to N200,000. As stated in the rules, “the rate of compensation and the maximum compensation payable to an investor who has suffered a loss shall be N200,000, or where the loss is less than N200,000, the investor shall be paid the full amount of the loss.” It was also indicated, though, that the amount be reviewed from time to time.

Based on the new rule, the NSE issued a cheque of only N200,000 to Ezemegbe. But the investor refused to accept the vastly reduced compensation. Ezimegbe’s lawyer also pointed out that the cheque for the N200,000 was raised on Union Bank, whereas the NSE never indicated in the appeal it filed against the judgment of Jenkins Investment that there was an account of IPF domiciled with Union Bank. Ezemegbe is back at the Appeal Tribunal where he is contesting the reduced payment.

Can the NSE on its own make laws that go against the ISA Act? No, argued Eze George Olisaemeka, a stockbroker: “The Investment and Securities Act of 1999 is the relevant law that applies to the capital market. The regulatory bodies are empowered to make rules. But such rules can only be pursuant to the enabling Act which is the ISA and not contrary to it. Therefore, the stipulation of maximum compensation of N200,000 is against express provision of section 163 of the ACT. It’s null and void because the rules of the regulatory bodies cannot override the enabling Act.” Olisaemeka, who contended that the account of IPF had never been published, also argued that if the funds in the pool had been invested, it would have yielded much more than the N400 million the NSE claimed is now in the account of IPF. Ultimately, the court will have to decide the legality or otherwise of the NSE rules.

This magazine gathered that the biggest claim yet from the fund may be the N726 million being claimed in the Ogunlesi A. Johnbosco Vs. NSE & SEC suit yet to be heard by the IST. The investor is claiming the sum of N726 million with interest at 19 per cent per annum to be paid from the IPF as compensation for the unauthorised sale of his shares also by Jenkins Investment Ltd. Would he also be paid only N200,000?

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