The High Court has upheld the decision of the Capital Markets Authority (CMA) to limit investments by Cytonn-affiliated funds, dealing a blow to CEO Edwin Dande’s attempt to overturn the regulator’s restrictions.
In her judgment, Justice Helene Namisi dismissed Mr Dande’s petition challenging CMA’s June 2020 directive that capped investments by Cytonn Asset Managers and Cytonn High Yield Fund at 10 percent of their portfolios in Cytonn-related projects.
The court found that the case had been filed prematurely, bypassing the initial required appeal to the Capital Markets Tribunal.
Justice Namisi ruled that Mr Dande should have appealed to the CMA Tribunal first before approaching the court.
The dispute centred on the technical interpretation of financial regulations, with Justice Namisi saying this would be best handled by specialists at the tribunal.
The court also found that the petitioner had failed to demonstrate exceptional circumstances that would justify bypassing administrative remedies.
“The tribunal, being a specialised body of capital markets experts, is the most appropriate forum to first determine this regulatory issue,” Justice Namisi stated, emphasising that courts should not “leapfrog” proper procedures for technical financial matters.
She explained that, since the tribunal’s powers under Section 35A of the Capital Markets Act are extensive, a court order to set aside the directive would have the same practical effect as quashing the directive in question.
She said that the Act provides the petitioner with the primary relief sought.
“The core of this dispute is the correct interpretation of Regulation 16(2). This is a technical question of financial regulation. The tribunal, being a specialised body composed of experts in capital markets law and finances, is not only a suitable forum, but is also the most appropriate forum to determine this issue in the first instance,” said the judge.
The judge upheld CMA’s argument that the petitioner had not exhausted the available internal administrative remedies and that the petitioner had not demonstrated any exceptional circumstances to bypass the exhaustion doctrine.
Citing investor protection concerns, CMA told the court that the Cytonn entities owed investors Sh5.7 billion, with investigations ongoing by CMA’s Fraud Investigation Unit and Directorate of Criminal Investigations, though these have been challenged in court.
“Cytonn affiliated companies have been in continuous violation of the Capital Markets Act and enabling regulations unable to pay back their investors and are currently being investigated by the Capital Markets Authority Fraud Investigation unit, under the Director of Criminal Investigations,” said the CMA, adding that Mr Dande had separately sued to stop these investigations.
The regulator maintained that its actions were taken in good faith to protect investors and to align with regulatory guidelines.
The CMA also told the judge that public interest weighed against the curtailing its powers, given that the regulator provides important services, and that a suspending its decisions could create a void.
Mr Dande filed the petition in 2020, alleging that CMA engaged in “persistent harassment” of Cytonn. He added that CMA applied regulations inconsistently across market players.
The contested restrictions were issued just eight months after the regulator approved the fund operations.
However, CMA denied these allegations, maintaining that its actions protected investors and maintained market integrity.
Mr Dande argued that the restrictions were based on erroneous interpretations of the Capital Markets Act and the Capital Markets (Collective Investment Schemes) Regulations 2001. He claimed that CMA rarely targeted other players in the market “with its constant harassment”, a claim that the authority denied.
The petitioner challenged the administrative action by the regulator for its alleged irregularity, illegality and discriminative nature.
The Cytonn High Yield Fund was established in 2018, with Cytonn Asset Managers acting as fund manager, the National Bank of Kenya as trustee, and Standard Chartered Bank of Kenya as custodian.
Following CMA approval in February 2019, the fund began operating in October of that year, but faced investment restrictions eight months later.
Mr Dande said the purpose of the entity was investing in Cytonn’s own projects.
In June 2020, Cytonn Asset Managers received correspondence from National Bank of Kenya referencing a letter from the CMA stating that the trustee should await further clearance from the CMA before investing any funds.
Mr Dande argued that these directives were illegal and violated various rights enshrined in the Bill of Rights in the Constitution.
However, the court found that the logical and proper judicial sequence was to allow the tribunal to first determine the non-constitutional question of the regulations’ meaning.
Justice Namisi warned against “improper constitutionalisation of ordinary regulatory disputes,” emphasising that courts should only intervene after specialised tribunals have ruled on technical matters.
“To permit the petitioner to leapfrog this essential step would be to invite this court to make premature, possibly unnecessary, constitutional declarations. This would not only be an inefficient use of judicial resources, it would also risk the improper constitutionalisation of ordinary regulatory disputes,” she said.
