Ratio Magazine :: The Inside Track to East Africa’s Economies - Kenya: Dyer & Blair Investment Bank Accused of Underpaying Investment Returns

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Kenya: Dyer & Blair Investment Bank Accused of Underpaying Investment Returns

Wednesday, 24 September 2008

John Kungu Kiarie, a former director of the Kenya Commercial Bank (KCB), who was engaged in a court case with the bank over alleged embezzlement of KES100m from KCB, has now taken Dyer and Blair to court over allegedly underpaying returns on his investment in what could be a precedent-setting case.

John Kungu Kiarie, a former director of the Kenya Commercial Bank (KCB), won the criminal case against KCB and was found not guilty of having skimmed the KES100m from the bank, but is now involved in a new, precedent-setting court case over alleged miscalculation of interest to money he deposited with Dyer and Blair Investment company in 2003. Dyer and Blair is part-owned by influential business man Jimmnah Mbaru who is also former chairman of the Nairobi Stock Exchange (NSE).

The case, currently at the Milimani Commercial courts will be coming up for hearing on 9 October 2008, when another interested party intends to be enjoined in the proceedings, claiming that the money in contention is money that was stolen from KCB and which he had deposited in KCB while a customer in KCB and while Mr. Kungu was a Director at KCB.

Irrespective of the history of the case, it is a potentially precedent-setting judicial issue that a Kenyan investor has taken to court an investment bank questioning the returns on his investment. It could also open the flood gates for investors who feel that they have got a raw deal on their investments, so that the repercussions of the case could affect the entire investment banking industry.

The case goes back to April 2003 when Mr. Kungu entered into an agreement with Dyer and Blair under which he would deposit up to KES100m. The investment bank was then supposed, for a commission, to invest the money in shares or fixed deposits, treasury bonds or bills as it would deem fit, after which Kungu was entitled to be paid on demand the KES 100m and any interest earned less the bank’s commission. According to court papers, Mr. Kungu claims that that it was an implied term of the agreement that his funds were to be invested by the investment bank prudently in a financial institution to attract the best returns possible.

Mr. Kungu could, however, not deposit the full KES100m as agreed, and only invested KES91.5m with Dyer and Blair for a period of one year, renewable by consent of both parties. In April 2005, Mr. Kungu then claimed that in pursuance of an order given by the court in the criminal case against KCB, he requested Dyer and Blair to release KES24m. The money was released without interest and, according to Mr. Kungu, no explanation was given of how much interest had been earned as a result of the investment in 2003.

In October 2007, in pursuance again of a court order in the criminal case, Mr. Kungu again requested Dyer and Blair and Stanbic Bank, where some of the money had been deposited by Dyer and Blair, to release the balance of the remaining investment ofKES67.5m plus accrued interest, and further to give him a full statement of his accounts.

The former director of KCB stated that Dyer and Blair released to him the principal sum of KES 67.5m “with a purported interest of KES2,296,559.75,” but refused to either give him a full statement of accounts or explain the basis for the nominal interest paid despite several requests. “In projection of the expanded growth, had the funds been invested in a mixed fund for the entire period as implied in the agreement (i.e. interest bearing deposits, T bills and bonds as well as equities), the value should have been KES465.5m after deducting the principal plus nominal interest paid,” claimed Mr. Kungu in papers filed in court.

Using calculations from Zimele Asset Management, another investment bank, whom he commissioned to tabulate the interest he got, Mr. Kungu argued that the KES465.5m was after the KES24m was taken out and the balance reinvested for eight months in the year. Accordingly, Mr. Kungu claims that had he not withdrawn the KES24m, he would have been entitled to KES533.151m. He is now, however, demanding KES465.5m at an interest rate of 16% per annum calculated on a daily balance from 21 October 2007.

Dyer and Blair have refuted all these claims and argue that the criminal case against Mr. Kungu barred them from investing the money as the court had issued a freezing order on the money and terms and dismissed the case as scandalous and frivolous.

If the court allows the interested party to get on board the case, new developments in this ground breaking case will be followed closely not only by investment banks and commercial lawyers, but by KCB too, who will be interested to see if their former client does get any money from its former director that the bank dragged to court.

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