Synchronized and circular trading by a broker can amount to aiding manipulation, but penalty may be moderated on proportionality grounds.

Permitting a client to execute synchronized, circular and self trades, together with allied compliance lapses, was treated as conduct amounting to violation of the SEBI Act and the PFUTP and Stock Brokers Regulations because the volume and pattern of trades were such that the broker could not have failed to notice their manipulative nature. The Tribunal treated this as more than a mere failure of due diligence and as aiding fraudulent and manipulative trading. While the finding of violation was upheld, the penalty was reconsidered on the basis that the broker had not engaged in proprietary trading and that comparable matters had attracted a less severe regulatory response; the three-month suspension was set aside and replaced with a six-month bar on accepting fresh clients.

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Issues: Whether the stock broker, by permitting a client to execute synchronized, circular and self trades, and by committing allied compliance lapses, was liable for violation of the SEBI Act and the PFUTP and Stock Brokers Regulations; and whether the penalty of suspension of registration for three months was disproportionate and liable to be modified.

Analysis: The broker's client executed a large number of synchronized, circular and self trades in a short period, and the volume and pattern of trading were such that the broker could not have failed to notice the manipulative nature of the transactions. The conduct was treated as going beyond mere lack of due diligence and as aiding fraudulent and manipulative trades. At the same time, the Tribunal noted that the broker had not indulged in proprietary trading and that similar matters involving other entities had attracted a less severe regulatory response, which showed that the penalty required reconsideration.

Conclusion: The finding of violation was upheld, but the suspension of the certificate of registration for three months was set aside and replaced by a direction that the broker shall not accept any fresh clients for six months.

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