Category Archives: Bernard Madoff

Pyramid Schemes in East Africa

Back in October 2006, I wrote two posts about pyramid schemes that had mushroomed and would eventually ‘burn’ thousands of investors in Kenya.

And the last year has revealed bigger pyramid scams in the form of Bernie Madoff and Alan Stanford, and just yesterday in the Kenya Parliament, some political leaders were un-masked as some of the master minds behind some of the collapsed Kenyan schemes.

Image of pyramid investors from another business daily newspaper article on pyramids
So what was the genesis of the schemes and how they ended? And more important, can they happen again?

Pyramids Rise
– Early investors reaped, and told others about their success – i.e. doubling, tripling or even greater returns in a few months span
– Some schemes were promoted by churches (who received tithes in return)
– Pyramids opened new offices and hired new staff all around the country
– New pyramids opened up cloning existing ones, but promoting a slightly different product/concept
– People took loans to invest in pyramids
– Peoples sold land/ shares / other assets to invest in pyramids
– Pyramid investors cut across all sectors from rural farmers to bank managers

Pyramids Peak
– Early investors reaped, but were greedy and ploughed back as much as they won
– Pyramids grew so big they overwhelmed their managers – some stopped accepting new depositors (but not new deposits which were essential to the chain)
– Banks complained they were losing deposits at a time when interest rates were very low
– With IPO’s few and far between, stockbrokers complained they were losing investors during a bull market period

Pyramids Fall
– Banks put the squeeze on pyramid schemes, by freezing these recipient accounts with the funds in them
– Pyramids without cash, tried to switch to different banks and accounts to process their funds
– Banks warned other banks and the Central Bank issued some cautionary notices on schemes
– Some pyramids tried to convert into cooperative societies
– Some schemes bad-mouthed other pyramid schemes as unstable
– When locked out of banks, pyramids moved to safe houses in residential areas where they continued to receive/pay cash
– media coverage kicked in; some angry investors complained on TV about lost money and brought media crews to the safe houses showing other angry investors
– Deposits dried up, and investors demanded their cash.
– Pyramid schemes all collapsed largely at the same time in 2007

Sifting the rubble

Could they have been prevented?
– They were unregulated: Neither the central bank, capital markets or co-operative sector regulator had over-sight over the schemes. Parliament was focused on micro-finance and anti money-laundering regulation bills.
– KYC: Schemes relied on the banking system to move around the money; and if banks applied true know your customer (KYC) principles, they’d have smelled a rat – with hundreds of people queuing in their halls to deposit funds into a single customers account

Unanswered questions
– What happens to the millions of shillings frozen in bank accounts?
– What happened to employees of these schemes? And if rogue stockbrokers were partly brought crash down by thefts from within (internal fraud /‘robbers robbing robbers’) could this also have happened at some schemes?
– Legal grey area still exists. Have any promoters being charged in court? Can any investors sue promoters for losses? The Cooperatives Ministry Task Force is looking at how to compensate investors – but is this justifiable?
– Can schemes rise again? History teaches us that pyramid/ponzi schemes will happen again and again. Maybe using mobile money transfers, or next time there’s an election. The Business Daily mentions they may have spread to neighbouring countries

Mostly Equity – Suspensions & Housing Evictions

Equity suspended: Equity Bank was briefly suspended as a Central Depository Agent by the Central Depository & Settlement Corporation (CDSC). They have smartly escaped unscathed without answering any charges owing to:
– Playing one regulator against another the. The Capital Markets Authority (CMA) immediately reversed the ban, and reinstated Equity while terming the CDSC action as being against procedure
– By invoking the ‘small investor’ Equity said that they were in trouble because they had reached out to the small investor, lending them funds to buy Safaricom shares without collateral, and some people did not like that

Lost in the story is:
– Equity split shares were supposed to start trading on April 14, but have been trading as split prices and have appreciated about 40% since the announcement
– The spat makes the CMA and CDSC look bad; by having a turf war (PDF) and fighting in public both claiming to fight for the integrity or interest of investors
– Why won’t Equity pay the minuscule amount or respond to the regulator (CDSC)?
– Comments made by the CEO at the bank AGM, bragging having the most investor accounts in the country coming back to haunt at a time when brokers are (i) broke (ii) resentful/envious
– More tales at the stockskenya forum

Equity moves in at Housing Finance: At Housing Finance, Equity is asserting its authority at the bank and Equity directors will now form 1/3 of the Housing Board of Directors, with Peter Munga (Equity chairman) Benson Wairegi (Equity vice chairman) and Babatunde Soyoye (Helios) all appointed in 2008 and who will all be ratified by Housing Finance shareholders this month.

During the 2008 rights issue at Housing Finance, Equity also increased their ownership stake from 20% to 24.9% while sister institution British American Investments (Britak) also increased from 4.9% to 7.5%. The rights issue also saw the National Social Security Fund reduce stake from 7.8% to 6.8% as the Government of Kenya which did not take up any new shares saw its stake reduce from 7.3% to 3.6%


Free Download Githongo Book – The most talked about book in Kenya – It’s Our Turn to Eat – the Story of a Kenyan Whistle-Blower (John Githongo) by Michela Wrong will be available for download from April 10. yes you probably have a bootleg copy, but this is the real one from the publisher

– Invest in a Government of Kenya Bond to raise 10, billion shillings ($125 million), and earn a potential 10% bond return (PDF); minimum application amount is 50,000 ($625), and the offer closes 22 April. (better than Madoff?)

Maker Faire Africa (MFA), a celebration of African ingenuity, innovation and invention, will take place August 13-15 at the Ghana-India Kofi Annan Centre of Excellence in ICT in Ghana’s capital, Accra there are opportunities to sponsor the summit

Jitihada is the Kenya National Business Plan Competition – (details) (PDF) that will be launched in mid-April.

Create a Logo for an international mobile banking conference and win $200. Details here, found at @whiteafrican

Old mutual: Broker distribution manager, Mass market manager. Apply to by 17/4
National social security fund managing trustee. apply through manpower associates by 26/4
Capital Markets Authority: Assistant Manager (Legal Framework), Accountant, Assistant Manager (Investigations), Manager (ICT). D/L is 15 April

Profit Warning Friday

KQ Profit warning for Who?
Kenya Airways issued a profit warning a few days after media reports had painted a rather rosy picture of operations at the airline with increased capacity and utilization. (That’s what happens when you release operating results without any shillings or dollar attached.

The fuel price, PEV, and reduced tourism has been well known within the investment community and this did not appear to impact the price until the actual ad and media corrections were carried in the newspaper, perhaps spooking retail investors and the stock is down 22% this week. The operational figures already show that the airline is in turnaround mode and is being hammered when it has already hit the bottom. I need to attend more investor briefings. Neither announcement appeared at the Nairobi Stock Exchange (NSE) website where company quarterly announcements usually run

Profit warning at the NSE
On Thursday, the Capital Markets Authority (regulator) release a brief (copy here ) addressing issues perhaps that should have been said by the NSE. It noted that bear markets do happen (NSE declined 50% between 2000 and 2002), stockbrokers are in trouble (reduced activity, means low turnover and low commission), are restructuring (layoffs and branch closure s), and exposed (risks could arise from fraud. Nevertheless, shares are safe and better left to long-term investors!

We are not rogue this came a day after directors of Suntra Investment Bank, made a similarly candid admission of trouble ”business is so low at the moment that we are actually eating into our own funds” – one of the few times a financial institution has admitted being in difficulty, as they tried to contain damager (a single court case), but which left spooked customers flocking to transfer their shares

Executives on profit

  • Michael Joseph the CEO of Safaricom, Kenya’s most profitable company, launched an unusual rant against the government and business climate saying the first three things an investor needs in Kenya are (1) a generator (ii) a 4WD car (iii) a security firm – before they can even think about making any investment in Kenya. he said they spend 1.5 million euros on diesel and called the new universal service fund tax stupid as the mobile sector is already over-taxed
  • A man who sees no losses on the horizon is the CBK governor, who remains an eternal optimist after launching an infrastructure bond. Kenya plans to raise Kshs. 18.5 billion (~$245 million for roads, electricity generation & distribution) from investors who will pay a minimum investment of Kshs. 100,000 or ~$1,250). 12.5% interest will be paid semi-annually with principal repaid 2015, 2017, 2021. He had earlier commented that global meltdown should not have much impact because Kenya is primarily a rural agro-based economy

What else happening?

  • Kenyan knows Madoff: listed among the hundreds of fabulous fraudster Bernie Madoff’s clients is Sangare Ranch of P O Box 24 Mweiga Kenya Africa
  • Barclays Uganda counters rumours of a collapse/closure
  • Global credit rating of South Africa, previous rate triton high credit ratings of Kenyan companies with collapsed oil firm Triton downgraded to DD, Sasini’s ratings maintained at BBB+ (triple B plus) and A2 (single A two) for the long and short term respectively, and Eveready East Africa Limited downgraded to BBB+ (triple B plus) and A2 (single A two) for the long and short term respectively. Moody have downgraded Toyota today, so who’s safe
  • Fuel shortage was experienced in Nairobi – back and forth between Kenya pipeline company, ministry of energy, oil companies who all absolved themselves for any responsibility; Read more at Coldtusker
  • Who’s the Total Man at the NSE?
  • Mumias profit down 73% to 231 million at the half year on sales of 6.2 billion (down 8%)