Deliberate suspicious trading ignorance by brokers to attract penalty

 Brief of the case:

• The core question of law arising in this group of appeals being similar and the facts involved being largely identical, all the appeals which were heard analogously are being decided by this common order.
• We have chosen to analyse the case of SEBI vs. M/s Rajendra Jayantilal Shah which was also disposed by this order itself in which appeal is bearing the No. Civil Appeal No. 252 of 2014.
• The Hon’ble Supreme Court in the case of SEBI vs. M/s Rajendra Jayantilal Shah held that the broker and sub-broker would be liable to face proceedings under FUTP regulations due to their deliberate ignorance of constant suspicious trading transactions executed on the behalf of clients.
• In the present case, the brokers executed transaction on behalf of their clients in illiquid scrip in short span of time that too for a long period of time. This all indicates that the brokers ignored the wrong doings deliberately. Therefore, liable to fact penalty proceedings under FUTP regulations.
  

Facts of the case:

• The respondents sub-broker M/s Rajendra Jayantilal Shah were alleged to have synchronized trades in respect of a huge number of shares of Adani Export Limited during the period 09.07.2004 to 14.01.2005 and 08.08.2005 to 09.09.2005. During the course of the said investigation, it was observed that the Noticee was one of the sub brokers who had traded substantially in the scrip of AEL during the first period for the said client.
• The sub-broker, for the said client, has allegedly executed synchronized trades for 1,17,601 shares of AEL during the period from July 9, 2004 to July 27, 2004. The said client also entered into structured trades wherein he reversed the trades with particular clients of other brokers. It was observed that during the period between July 28, 2004 to January 14, 2005 the said client is alleged to have entered synchronized trading for buying 66,20,117 shares and selling 67,44,545 shares.
• SEBI observed that the volume of trading in the illiquid scrip was very high and the sequence of the buy and sell orders being in quick succession of time, the respondent sub- broker was held guilty of contravening Regulations 4(1), 4(2)(a), 4(2)(b), 4(2)(e), 4(2)(g) and 4(2)(n) of the FUTP Regulations, 1995 and also the provisions of the Code of Conduct Regulations, 1992.
• Accordingly, monetary penalty of Rs.9,00,000/- for violation of FUTP Regulations, 2003 and Rs.1,00,000/- for violation of the Code of Conduct Regulations have been imposed.
• On appeal to Securities Appellate Tribunal (SAT) , it held that the allegations of fraud under the FUTP Regulations, 2003 can be established only on the basis of clear, unambiguous and unimpeachable evidence which is not available in the instant case. Accordingly, all the charges framed by SEBI and resultant penalty was removed.
• Aggrieved by such an order of SAT, SEBI is in appeal before the Supreme Court.
  

Held by Hon’ble Supreme Court:

• Supreme court appreciated that the conclusion regarding the existence of manipulative trading practices has to be drawn from various things and aspects like volume of the trade effected; the period of persistence in trading in the particular scrip; the particulars of the buy and sell orders, volume thereof, the proximity of time between the two orders and such other relevant factors.
• In the present case, the volume of trading in the illiquid scrip (Adani Exports Ltd.) in question was huge coupled with the fact that transactions were made within a span of 0 to 60 seconds.
• Further, the broker himself has initiated the sale of a particular quantity of the scrip on any particular day and at the end of the day approximately equal number of shares of that scrip being bought back. Further, such trading in same fashion continued for a couple of months.

• The broker & sub-broker failed to take due care in handling such transactions which very clearly indicate that something is not right. This not only disclose negligence and lack of due care and caution but would also demonstrate a deliberate intention to indulge in trading beyond the forbidden limits thereby attracting the provisions of the FUTP Regulations.
• In result the order of SAT was set aside and SEBI’s order levying penalty was restored.