Broker liability for employee-driven manipulative trades upheld under exchange responsibility rules and market abuse standards.

A stock broker was found responsible for manipulative trades executed through its branch terminal by an employee who acted as branch in-charge and terminal operator. The trades in an illiquid scrip were identified as synchronized, circular and reversal trades carried out over a long period for connected clients, showing manipulation of volume and price. The exchange rule making a member fully responsible for the acts and omissions of agents and employees prevailed over the general rule limiting employer liability for an employee's tortious act. The broker's failure to detect the pattern and the breach of the prescribed code of conduct justified the penalty under the SEBI framework.

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Issues: Whether the stock broker was liable for manipulative trades executed through its branch terminal by an employee, and whether the penalty imposed for violations of the market abuse regulations and code of conduct was justified.

Analysis: The trades in the illiquid scrip were found to be synchronized, circular and reversal trades executed over a long period for six connected clients who were part of a larger group. The employee concerned was the branch in-charge and terminal operator from whose terminal the trades were placed. The exchange rule specifically made a member fully responsible for the acts and omissions of its agents and employees, and that special rule prevailed over the general principle against employer liability for an employee's tortious act. The broker's failure to detect the activity over the relevant period and the nature of the trades established manipulation of volume and price and breach of the prescribed broker's code of conduct.

Conclusion: The broker was held liable for the employee's manipulative trading, and the penalties under the SEBI Act were upheld.

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