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

The Securities Appellate Tribunal, Mumbai partially allowed the appeal against SEBI's ex-parte ad-interim order impounding alleged unlawful gains from manipulative trading schemes. The Tribunal found the impounding order lacked cogent evidence and was based on surmises, constituting malice in law. However, considering ongoing investigations and one appellant's admitted connection to the main accused, the Tribunal imposed modified directions: restraining appellants from trading in the relevant scrip during investigation, requiring deposit of 50% alleged unlawful gains in escrow account within 15 days, and directing SEBI to complete investigation within six months. The original impounding order was quashed but trading restrictions remained during pendency of investigations.

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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.

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