2019 (5) TMI 977 - AT - SEBI

Supreme Court upholds SEBI penalties for front running and fraudulent trading activities.

The Supreme Court affirmed penalties imposed by SEBI on individuals involved in front running and fraudulent trading activities. The appellant's liability ... Fraudulent activities in the securities market - profits earned through this illegal trading activity - Execution of the scrips or any manipulation of the price of the scrips - HELD THAT:- The appellant was integral part of this collusive trading as he was one of the channels through which sensitive information was passed on to KB and is equally responsible for front running. Even though there is no conclusive proof as regard the contents of communication between DP and the appellant, nonetheless an irresistible inference can be drawn that sensitive information regarding forthcoming trades of Passport was passed on by DP to KB and the appellant. The proximity of time when the mobile calls were made between DP and AB and the trading of the shares at the time when Passport was also placing the orders leads to an irresistible conclusion of the involvement of the appellant as part of the front running. The modus operandi was such that DP was in constant touch with KB and the appellant and was passing on the sensitive information which was being utilized by KB from his trading activity. The appellant is the beneficiary of the profits from the trading activities done by KB. We find that the profit received by KB was transferred to Bhoomi Industries in which the appellant was a partner. We further find that the same amount was again transferred to the personal account of the appellant. Thus an irresistible conclusion can be drawn that the profits earned through this illegal trading activity by KB was shared with the appellant. In this regard, a vague reply was given by the appellant to the extent that the fund received by the appellant from Bhoomi Industries could have been in the nature of loan or repayment or withdrawal from capital account. No details were furnished in this regard and, therefore, an irresistible conclusion drawn by the Adjudicating Officer that there was a sharing of profits cannot be faulted. The standard of proof is preponderance of probability and the proof of manipulation always depends on the inferences drawn from a host of circumstances. A finding has to be arrived at from the pattern of trading. The cumulative analysis determines the modus operandi which can lead to an inference regarding the conduct of the parties while manipulating the securities market and thereby arrive at a conclusion of manipulation. Circumstantial evidence could be sufficient to raise a presumption with regard to the existence of a fact which is sought to be proved. A transaction has been executed with the intention to manipulate the market or defraud its mechanism will depend on the intention of the parties which could be inferred from the attending circumstances since direct evidence in such cases are not available. As held in SEBI vs. Kanaiyalal Baldevbhai Patel [2017 (9) TMI 1269 - SUPREME COURT] held that it is between inducement and criminal law and the wider meaning thereof under the SEBI Act is that to make inducement an offence. The intention behind the representation or misrepresentation of facts must be dishonest whereas in the latter category of cases the element of dishonesty needs not be present or proved. Further in the latter category of cases (under SEBI Act) a mere inference rather than proof that the person induced would have acted in a manner that he did for the inducement was sufficient. The element of dishonesty or bad faith in the making of inducement was not required. In the light of the above, the decisions cited by the learned counsel for the appellant is distinguishable and are not applicable in the facts and circumstances of the present case. It is clear that the information passed on by DP induced the appellant to connive with his brother KB. The sharing of the profits leaves no manner of doubt that KB and the appellant had acted in connivance with DP to encash the benefit of the information parted with by DP. The appellant was not only part of the front runner but was involved in the fraud committed by DP and had aided and abetted the same. Issues Involved:1. Allegations of front running and fraudulent trading activities.2. Imposition of penalties by SEBI.3. Appeal and subsequent Supreme Court judgment.4. Involvement and liability of the appellant in the fraudulent activities.5. Arguments presented by both sides.6. Analysis and conclusion by the Tribunal.Detailed Analysis:1. Allegations of Front Running and Fraudulent Trading Activities:SEBI conducted an investigation into the trading activities of an individual trader (KB) and Passport India Investment (Mauritius) Ltd. (Passport) from January 2007 to March 2009. It was found that KB was placing orders ahead of those placed by Passport, facilitated by DP, the portfolio manager of Passport and cousin to KB and the appellant (AB). The investigation revealed that KB earned a profit of Rs. 1,56,32,364.01/- from these trades. Consequently, an ex-parte interim order dated 28/05/2009 was issued by SEBI restraining the appellant and others from dealing in securities.2. Imposition of Penalties by SEBI:A show-cause notice dated 28/02/2011 was issued alleging synchronized trades between KB and Passport. The Adjudicating Officer found the appellant and others guilty of violating Regulation 3(a), (b), (c), and (d) of the FUTP Regulations, 2003, and imposed a monetary penalty under Section 15HA of the SEBI Act, 1992. Penalties of Rs. 5 crore each were imposed on DP and KB, and Rs. 1 crore on the appellant.3. Appeal and Subsequent Supreme Court Judgment:The Tribunal initially allowed the appeals, stating that the appellant and others were not intermediaries and thus not liable under the FUTP Regulations, 2003. SEBI appealed to the Supreme Court, which directed the Tribunal to re-evaluate the appellant's liability. The Supreme Court affirmed the penalties on KB and Passport, explaining the concept of front running and its recognition under Regulation 4(2)(q) of the FUTP Regulations, 2003.4. Involvement and Liability of the Appellant in the Fraudulent Activities:The Supreme Court found that the appellant and KB acted in connivance with DP, utilizing sensitive information for trading. The Tribunal re-evaluated the case and found substantial evidence of the appellant’s involvement. The appellant and KB lived together, and the landline used for trading was registered in the appellant’s name. Call records showed frequent communication between DP, the appellant, and KB during trading hours, suggesting the passing of sensitive information.5. Arguments Presented by Both Sides:The appellant argued that he was not involved in securities trading and that mere use of his telephone did not implicate him. He contended that SEBI lacked substantial evidence and that there was no proof of intentional aiding or abetting. The respondent (SEBI) argued that the circumstantial evidence and the relationship between the parties strongly indicated the appellant’s involvement. They highlighted the frequent calls during trading and the transfer of profits to the appellant as evidence of his participation in the fraudulent activities.6. Analysis and Conclusion by the Tribunal:The Tribunal found that the appellant was closely associated with KB and DP, and the high frequency of calls during trading hours indicated the passing of sensitive information. The trading patterns and timing further supported the conclusion of collusive trading. The Tribunal also noted that the appellant benefited from the profits of the trades. Citing Supreme Court precedents, the Tribunal held that circumstantial evidence and preponderance of probability were sufficient to establish the appellant’s involvement. The appeal was dismissed, and the penalties were upheld.Conclusion:The Tribunal concluded that the appellant was an integral part of the fraudulent trading activities, having aided and abetted the front running scheme orchestrated by DP. The appeal was dismissed, affirming the penalties imposed by SEBI.