Cytonn Investments Plc, a leading asset management firm, had a sound idea.
The plan was to acquire properties which would be developed by Cytonn and its partners and then sold to purchasers. The proceeds from these transactions, including rental income from the properties, would be paid back to investors who had bought the real estate notes.
The firm then created two unregulated financial products, the Cytonn High Yield Solutions(CHYS), and the Cytonn Real Estate Project Notes(CPN).
Thereafter, the firm pooled the cash collected and pumped them into these milliard Special Purpose Vehicles(SPVs), designed to develop the properties.
Even without supervision from any relevant regulatory bodies, including the Capital Markets Authority, investors found the handsome 18% return and the allure of exclusivity and huge dividends, simply irresistible. Therefore, caution or due diligence was thrown out of the window.
Investors soon began pumping in money.
When cracks begun to appear on Cytonn’s plan
Then the unexpected happened. The COVID-19 pandemic struck hard, leading to lockdowns that restricted movement and outdoor activities, to curb spread of the virus.
The pandemic triggered a significant disruption on the firm’s ongoing real estate projects, leading to work disruptions, delays and stalling of projects beyond the stipulated completion timelines.
Investors holding the Cytonn real estate notes went into a panic mode. Cytonn Investors who needed to liquidate and exit, could not do so. In the ensuing melee, some fleeing investors ran to Capital Markets Authority(CMA), only to find the regulator’s door firmly shut.
CMA clarified that the two financial products, the Cytonn High Yield Solutions(CHYS) and the Cytonn Real Estate Project Notes(CPN), were not under its watch. Even worse. Cytonn, which got these distraught investors into the mess in the first place, was now insisting on getting them out of it.
With its real estate pipeline leaking, Cytonn went into overdrive and chose to fight off anyone who dared point fingers, including its own investors.
Creditors and aggrieved investors then took the matter to court seeking for liquidation of the two financial products. In one of the cases, one Margaret Mary Njuguna, a retiree, sued Cytonn Investments Plc for a refund after pumping her life savings into an unregulated Cytonn product. The Court awarded her KSh 41.4million against Cytonn.
The High Court dismissed Cytonn’s application to set aside the liquidation petition by investors, with an official receiver appointed to recover assets and distribute them to those affected. It also threw out Cytonn’s debt settlement plan.
Cytonn then proceeded to the Court of Appeal, to challenge the liquidation order. Following on its recent ruling by the Appellate Court, this brings to a close the 5-year dispute between Cytonn and the Official receiver that upheld an earlier High Court verdict. The Courts have thus ordered for liquidation of Cytonn High Yield Solutions(CHYS)and Cytonn Real Estate Project Notes (CPN), and investor funds recovered.
Also coming to an end is the epic legal battle that played out both within the courts as well as on social media platforms as anxious public witnessed an ugly spat between promoters and owners of Cytonn against angry and impatient investors, regulators, parliamentary watchdogs, media and investment practitioners, with the Courts and appointed liquidator watching on the sidelines.
On 6th January 2023, Cytonn High Yields Solution was placed in liquidation and the Official Receiver appointed as the liquidator. What transpired thereafter is the filing of a myriad of applications for various orders.
On 16th June 2023, the Court directed that all pending applications be heard together and be determined in one ruling.
Cytonn Court Battles and Final Verdict
After this, the firm lodged close to 18 applications to petition the liquidation order, at the Appellate Court. Cytonn, meanwhile, also scrambled a Debt Settlement Plan, which creditors, other partners and investors opposed, including the Court appointed liquidator who outrightly rejected it.
After battling in Court for close to five years, Cytonn has finally lost all the 18 appeals lodged at the Court of Appeal, opening the door for the liquidation of CHYS and CPN.
Now, the long and lengthy liquidation process and tracing of funds estimated at KSh 13 billion belonging to some 3,000 investors, money that it allegedly sunk into its unregulated Special Purpose Vehicles(SPVs), has begun.
The Courts established that Cytonn had set up a milliard of SPVs. It was then receiving monies from the public, through its unregulated financial products, and then channelling these funds into the SPVs.
It was established, through affidavits filed in court, that Cytonn through its unregulated CHYS and CPN products, were both holding deposits or investments from the public in excess of KSh13 billion.
Filings in court show that these funds had been ‘lent’ to the SPVs who had in turn purchased the properties that they were developing.
There were no securities whatsoever that were offered for these ‘lendings’. This was probably because the ‘Companies and these SPVs were not only related, but belonged to the same promoters.
In its ruling on January 6th 2023, the High Court found that the two entities, now facing liquidation, were involved in a scheme which was akin to a fraud, such that, their promoters, who were the same promoters or were closely related to the SPVs, intended to keep the investors away from their monies by pumping the investors’ money into SPVs in which the promoters were in control of.
They would, in the event these entities collapsed, as they eventually did, claim that the SPVs were separate entities from Cytonn and therefore laugh all the way to the bank, leaving stranded investors languishing in perpetuated loss.
It is for this reason that the High Court invoked the doctrine of tracing and preserved these properties so as not to defeat the rightful claims of the creditors by the clever dealings of the promoters of the two entities and the related SPVs.
It is also against this background that the Court ordered the two Companies liquidated and the said properties preserved pending the proof that these properties were acquired by the monies advanced by the Companies to these SPVs.
The Court said it would not countenance a well-orchestrated scheme of fraud, based on the intangible doctrine of separate legal personality of these Cytonn linked outfits, to defeat the lawful and constitutional rights and claims of the creditors of these entities.
The Court further directed that the liquidation order binds all, including the SPVs. It observed that those who had claims in the preserved properties would have an opportunity of showing that the said properties were not acquired by the proceeds of the monies advanced by the firm’s entities under liquidation. Such proof was not provided to the court.
According to investment insiders, the legal battle between the firm and its investors offers valuable lessons for practitioners. Over the past years, Cytonn mounted an intense social media campaign aimed at discrediting the High Court process. It raises the question: Should a litigant engage in a vigorous social media narrative and counter-narrative when they lack moral high ground in litigation? In jurisdictions like the USA and UK, regulators and investigators take the protection of investors seriously.
The jury is still out. Were the two unregulated financial products run by this Investment firm, now subject of liquidation procedures following an Appellate Court ruling, clever schemes designed to source money from the public for investment in shady dealings.
Or was this a case of innovation running ahead of regulatory bodies that had gone fast asleep, leaving clueless investors driven by on their own greed for the promised astronomical returns, to their own devices.
“Investing in unregulated Cytonn products created room for fraudulent deals. The Asset Management firm also took development loans secured with investors’ deposits, while on the ground, there was no work being done. Cytonn failed to adhere to the rules that enable liquidity for investors,” said Dedan Maina, a Certified Financial Analyst.
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