2012 (5) TMI 774 - AT - Companies Law

Tribunal overturns penalty, no price influence or connivance found

The Tribunal set aside the penalty imposed on the sub-broker for violations of regulations under the Securities and Exchange Board of India Act. The ... Reversal/circular trades as market manipulation - artificial volumes - connivance/meeting of minds - role and responsibility of a sub-broker - due diligence and code of conduct for sub-brokersReversal/circular trades as market manipulation - connivance/meeting of minds - artificial volumes - Whether the appellant was guilty of executing reversal/circular trades that resulted in artificial volumes in the scrip and thereby violated the FUTP Regulations - HELD THAT: - The Tribunal examined the transaction record for the investigation period and the adjudicating officer's conclusion. The AO had earlier exonerated the appellant on charges of creating new high prices and of connivance with counter-parties, while holding that reversal/circular trades caused artificial volumes. The Tribunal emphasises that a sub-broker acts on client directions and cannot be treated as a co-conspirator absent evidence of connection or knowledge of fraudulent conduct. The AO's finding of repeated reversal over the period was not supported as a demonstrable, systematic pattern implicating the appellant: the appellant produced trade-level analysis showing matching on only a limited number of days and explanations that orders were placed in the normal course on an anonymous screen-based market. In these circumstances the necessary nexus/meeting of minds between the appellant and other parties to establish reversal/circular trade manipulation was not proved. Accordingly, the Tribunal does not uphold the AO's finding that the appellant was party to reversal/circular trades constituting manipulation.Charge of reversal/circular trades resulting in artificial volumes not established; finding of manipulation under FUTP Regulations set aside.Due diligence and code of conduct for sub-brokers - role and responsibility of a sub-broker - Whether the appellant failed to comply with the code of conduct for sub-brokers and thus breached standards of integrity and fairness - HELD THAT: - The AO found non-compliance with the brokers' code of conduct on the basis that alleged fraudulent transactions occurred repeatedly over time. The Tribunal has rejected the premise that such a pattern was established in relation to the appellant and has accepted that the appellant had taken reasonable precautions and had no alert or material indicating he knew of fraudulent activity. Given that culpability for failure to exercise due diligence presupposes a proven pattern of wrongful trades or knowledge of the client's fraudulent scheme, which is lacking here, the Tribunal finds that the AO's conclusion on breach of the code of conduct cannot be sustained.Allegation of non-compliance with the sub-brokers' code of conduct not established; finding set aside.Final Conclusion: The adjudicating officer's order imposing penalties for reversal/circular trades and for breach of the sub-broker code is set aside; the appeal is allowed and no costs are ordered. Issues Involved:1. Imposition of penalty u/s 15HA and 15HB of the Securities and Exchange Board of India Act, 1992.2. Violation of regulations 3 and 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003.3. Violation of Regulation 15(1)(b) relating to the code of conduct for sub-brokers specified in Schedule II of the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulation, 1992.Summary:1. Imposition of Penalty u/s 15HA and 15HB:The appellant, a sub-broker, was penalized ` 5 lac for violating regulations 3 and 4 of the FUTP Regulations and the code of conduct for sub-brokers. The adjudicating officer imposed ` 3,50,000 for FUTP violations and ` 1,50,000 for code of conduct violations.2. Violation of FUTP Regulations:The investigation into the scrip of Rich Capital & Financial Services Limited revealed sharp price rises and heavy trading volumes. The appellant was accused of contributing to new high prices, trading at prices higher than the last traded price, and executing reversal/circular trades. The adjudicating officer found the appellant guilty of executing reversal/circular trades, leading to manipulation of the scrip. However, the appellant was absolved of any role in contributing to the price rise and placing orders above the last traded price.3. Violation of Code of Conduct for Sub-Brokers:The appellant's counsel argued that the adjudicating officer's findings were contradictory, as the appellant was found not involved in any connection with the client and counter parties. The appellant contended that the alleged reversal trades were insignificant and did not indicate deliberate manipulation. The adjudicating officer's decision was challenged on the grounds that the data relied upon was incorrect and the volume of trades was too insignificant to raise suspicion.Adjudicating Officer's Findings:The adjudicating officer concluded that the appellant's trades did not impact the price of the scrip and there was no substantive evidence of manipulation. The appellant was exonerated of influencing the price of the scrip and any connection with the counter parties. However, the appellant was found guilty of executing reversal/circular trades.Tribunal's Analysis:The Tribunal found that the adjudicating officer did not establish a pattern of reversal trades indicating fraudulent involvement. The appellant's role as a sub-broker was to place orders as per the client's directions, and there was no evidence of connivance with the client. The Tribunal noted that the appellant's transactions were not systematically manipulative and the adjudicating officer failed to establish a nexus between the parties.Conclusion:The Tribunal set aside the adjudicating officer's order, finding that the appellant had taken reasonable precautions to avoid malpractices and was not a party to reversal/circular trades. The appeal was allowed, and no costs were imposed.