2023 (3) TMI 1438 - AT - SEBI

SEBI's impounding order quashed for lack of evidence but trading restrictions and escrow deposit imposed

 Arshad Hussain Warsi, Maria Goretti Warsi, Iqbal Hussain Warsi, Aahuti Rasik Mistry Versus Securities and Exchange Board of India

The Securities Appellate Tribunal, Mumbai partially allowed the appeal against SEBI's ex-parte ad-interim order impounding alleged unlawful gains from ... Ex-parte ad-interim order with regard to the trades done by the appellants - orchestrated scheme to induce any unsuspecting investors to trade in the shares of the scrip in question featured in the alleged videos which were uploaded on the YouTube channels - alleged fraudulent and manipulative scheme which was violative of Section 12A of the SEBI Act read with Regulations 3 and 4 of the PFUTP Regulations - only allegation against the appellants are that they are volume creators and are connected to noticee no. 1 - HELD THAT:- Ad-interim orders can be passed in case of urgency or where it is found that the noticee is about to dispose of the property. In the absence of any finding that the appellants will defalcate the unlawful gains, the impounding order constitutes malice in law. Further, the power must be exercised with extreme care and caution and should be resorted to only as a last resort or measure. Merely by stating that the appellants may divert the unlawful gains is not based on any cogent evidence rather on surmises and conjectures and formation of unguided subjected satisfaction which is not permissible. We however find that there is an admission of the appellant Arshad Warsi that he is connected with noticee no. 1 who is alleged to have been the main player in the promoting the videos and thereby misleading the investors. Investigations are still going on and the possibility of the appellants being involved in the manipulative scheme cannot be ruled out. However, at this stage, the impugned order is bereft of any evidence against the appellants requiring passing of such strong and harsh order. However, balance of convenience is required to be considered at this stage. Considering the aforesaid following directions passed :- (i). The appellants are restrained from trading in the scrip of Sadhna during the pendency of the investigation. (ii). The appellants shall deposit 50% of the alleged unlawful gains in an escrow account with a scheduled commercial bank within 15 days from today. For the balance amount, the appellants shall give an undertaking within the same period of 15 days that they will deposit the balance amount within 30 days from the date of final order, if any, passed by the WTM. (iii). This escrow account shall be kept in an interest bearing escrow account and a lien will be created in favour of SEBI. (iv). Directions (i), (ii) and (iii) would continue to operate during the investigation. (v). The appeal is partly allowed. The impugned order in so far as it relates to the said appellant is quashed. The appeal is allowed. We however restrain the appellant from dealing in the scrip of Sadhna during the pendency of the investigations. We also direct SEBI to complete the investigation within six months and initiate appropriate proceedings, if any, against the appellants. If the investigations remain incomplete and no proceedings are initiated, it will be open to the appellants to apply for modification of our order. Any observation, findings given in this order is only tentative in nature and will not affect the investigation. Further, neither party will rely upon any observation / finding in any proceedings before any authority. In the circumstances of the case, parties shall bear their own costs. Issues Involved:1. Validity and legality of the ex-parte ad-interim order.2. Allegations of involvement in a fraudulent and manipulative scheme.3. Connection of appellants with the orchestrated scheme and other noticees.4. Applicability of principles of natural justice and procedural fairness.5. Propriety of the directions issued by the WTM.Summary:Validity and Legality of the Ex-Parte Ad-Interim Order:The appellants challenged the ex-parte ad-interim order issued by the Whole Time Member (WTM) of SEBI, arguing there was no urgency justifying such an order. They contended that the order was based on imaginary reasons and lacked cogent evidence, citing various precedents to support their position.Allegations of Involvement in a Fraudulent and Manipulative Scheme:The WTM issued the order under Sections 11(1), 11(4), and 11B of the SEBI Act, finding prima-facie violations of Section 12A of the SEBI Act and Regulations 3 and 4 of the PFUTP Regulations. The appellants were accused of being part of a pump-and-dump scheme, making illegal gains through coordinated involvement.Connection of Appellants with the Orchestrated Scheme and Other Noticees:The appellants argued they were not part of the orchestrated scheme and did not induce unsuspecting investors to trade in the shares of Sadhna. They claimed their connection with noticee no. 1 was purely professional and unrelated to the alleged scheme. The WTM, however, classified them as volume creators and profit makers.Applicability of Principles of Natural Justice and Procedural Fairness:The Tribunal noted that while SEBI has the power to pass ex-parte interim orders, such orders must be based on urgency and cogent evidence. The Tribunal found no evidence that the appellants would defalcate the unlawful gains, deeming the impounding order as malice in law. The Tribunal emphasized that such powers should be exercised with extreme care and caution.Propriety of the Directions Issued by the WTM:The Tribunal found the directions issued by the WTM against the appellants to be harsh and unwarranted. It noted the lack of evidence connecting the appellants to the fraudulent scheme and their non-involvement in the creation or distribution of misleading YouTube videos. The Tribunal set aside the directions against the appellants, restraining them from trading in the scrip of Sadhna during the investigation and requiring them to deposit 50% of the alleged unlawful gains in an escrow account.Conclusion:The Tribunal concluded that the WTM's order was passed in haste without considering essential facts. It set aside the directions against the appellants, emphasizing the need for a balanced approach and adherence to principles of natural justice. The Tribunal directed SEBI to complete the investigation within six months and initiate appropriate proceedings if necessary.