SEBI disgorgement order upheld against synchronized trading scheme under Section 11B with 12% interest

Securities Appellate Tribunal, Mumbai dismissed appeals against SEBI disgorgement order. Appellants engaged in synchronized trading, reversal trading and self-trading, making unlawful gains. WTM directed joint and several payment of disgorgement amount with 12% interest. Tribunal held disgorgement under Section 11B is equitable remedy to prevent unjust enrichment, not punitive. While legitimate expenses can be deducted for net profit calculation, administrative expenses and brokerage charges are business expenses not allowable as deductions. Appellants cannot diminish profits through unconscionable expenses when entire profits result from wrongdoing.

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Issues Involved:
1. Compliance with Tribunal's directions on reversal trades and profit calculations.
2. Liability of financing noticees for disgorgement.
3. Disgorgement applicability to an appellant who incurred a loss.
4. Deduction of legitimate expenses in disgorgement calculations.

Issue-wise Detailed Analysis:

1. Compliance with Tribunal's Directions on Reversal Trades and Profit Calculations:
The appellants contended that the Tribunal's directions to provide date-wise details of reversal trades and calculations of profits were not complied with by the WTM. The Tribunal had earlier directed SEBI to provide these details and recalculate the disgorgement amount. Upon review, it was found that while the impugned order did not explicitly detail which trades matched as reversal trades, the voluminous details were provided to the appellants. The Tribunal noted that no objections were raised by the appellants regarding the reversal trades' details, thus the impugned order was not vitiated despite the lack of specific findings in the order.

2. Liability of Financing Noticees for Disgorgement:
The financing noticees argued that they should not be liable for disgorgement as they did not engage in synchronized, self, or reversal trades. However, the Tribunal had previously determined that these noticees were culpable due to their direct connection with trading entities and funding the trades, which constituted indirect access to the securities market. The financing noticees' involvement in the fraudulent scheme made them liable to jointly pay the disgorgement amount.

3. Disgorgement Applicability to an Appellant Who Incurred a Loss:
One appellant argued that since he incurred a loss, no disgorgement should be imposed on him. The Tribunal rejected this contention, emphasizing that the appellant's involvement in fraudulent trading activities violated SEBI regulations, making him liable despite the loss. The principle of joint tortfeasors was applied, holding that all involved parties are jointly and severally liable for the wrongful acts.

4. Deduction of Legitimate Expenses in Disgorgement Calculations:
The appellants argued that while calculating unlawful gains, administrative and brokerage charges should be deducted. The Tribunal upheld the WTM's decision to only allow statutory deductions, reasoning that disgorgement aims to deprive wrongdoers of their ill-gotten gains. The Tribunal referenced Section 11B of the SEBI Act, which mandates disgorgement of unlawful gains without allowing deductions for business expenses incurred during the wrongful activities. The Tribunal further cited the Income Tax Act, which disallows deductions for expenses related to illegal activities, reinforcing that administrative and brokerage charges are not legitimate expenses for deduction in disgorgement calculations.

Conclusion:
The appeals were dismissed, affirming the WTM's order to disgorge the recalculated amount of Rs. 2,69,93,016.79 along with interest. The Tribunal emphasized that disgorgement is an equitable remedy designed to prevent wrongdoers from benefiting from their unlawful actions. The decision was based on thorough legal principles, ensuring that the appellants were held accountable for their involvement in fraudulent trading activities.

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