Capital Markets Authority (CMA) has reiterated that Cytonn Investment defaulted on investor funds and breached risk limits in a dispute where the High Court issued a stay order against its bid to limit the latter’s portfolio.

“The authority further notes the risk posed by the aforementioned products to the investing public and the inability of Cytonn Investments to meet its obligations to clients when they fall due,” CMA said in a sworn affidavit dated September 22.

Cytonn Investments received a reprieve after the High Court on Monday issued stay orders against CMA over its attempt to limit Cytonn High Yield Fund (CHYF) to 10 per cent investments into Cytonn managed projects. 

CMA had earlier asked CHYF to reduce its investments into Cytonn managed projects not regulated by CMA to a maximum of 10 per cent of CHYF, allegedly as per regulation 16 (2) of the Collective Investments Schemes regulations.

“The authority did not progress the request at the first instance and communicated its reasons for not progressing on June 3, 2020,” CMA said.

CHYF sought regulatory exemption from the applicable investments limit which require maximum investment of 10 per cent in a related parties or entities.

“The purported malicious directive dated June 3rd, 2020 and the subsequent email dated June 15, 2020 limiting the 1st Interested Party, to invest not more than 10 per cent of funds in its portfolio and subsequently freezing any investment of the funds held in SBM Bank awaiting a further directive from the Respondent be and is hereby suspended pending the hearing and determination of this application,” ruled Justice F Tuiyott on Monday.

Cytonn Investments CEO Edwin Dande says that the regulation only applies where the key governance participants in a fund, which are the fund manager, the trustee and custodian are under common shareholding, hence related.

“The Fund Manager – Cytonn, the Custodian – NatBank, and the Trustee – SBM, are not related. Consequently, the limit does not apply to the fund.

The policies of CHYF, as approved by CMA, specifically clause 7.4.11 of the Information Memorandum does not allow the fund to invest in projects not managed by Cytonn,” Dande said.

The CMA, however, said that CHYF, its promoter and sponsor requested for a review of this regulatory decision.

The Authority favourably considered the request and on August 17, 2020 granted a no-objection to CHYF to invest up to 25 per cent of its AUM in Cytonn-related entities.

Earlier decision

“Despite granting CHYF its request, the CEO of Cytonn Investment Management Plc filed a petition at the High Court challenging the earlier decision by the CMA (to limit the investment to 10 per cent).

The Authority requested him to withdraw the Petition. However, he declined. The Authority is defending this Petition in Court,” CMA said in a statement.

The directive by CMA was issued June 3, ordering the Trustee, National Bank, not to allow any investments into Cytonn affiliated loan notes until the Trustee receives a go-ahead from the CMA.

CMA says that CHYF is already in breach of the maximum investment limit of 25 per cent in related parties or entities. 

Investments by CHYF are in Cytonn unregulated entities including Cytonn High Yield Solutions and Cytonn Project Notes, which are all eventually invested in real estate controlled, managed and promoted by Cytonn and its related and affiliated parties/entities. CHYS and Cytonn Project Notes are not regulated by CMA.

CMA has already received numerous complaints from investors in CHYS who claim that CHYS has defaulted on their mature investments having declined to honour their redemption requests. The case will be heard on October 6, 2020.