2019 (12) TMI 189 - AT - SEBI

SEBI Penalty Order Quashed on Appeal: Importance of Clear Evidence in Market Violations

Nagad Sarvar Versus Securities and Exchange Board of India, Mum.

The Tribunal allowed the appeal, quashing the penalty order imposed by SEBI. The decision was based on the lack of conclusive evidence establishing ... Multiple trades on the same day - fraudulent and unfair trade - violation of PFUTP Regulations - Self trades or wash trades are trades without any change in beneficial ownership - HELD THAT:- On many of the days the appellant has bought and sold the shares and on some of those days the quantities bought and sold also matched. However, there were also several days on which there was only either a buy trade or a sell trade. Generally, only when trades placed by the same party are matched within a short period of time it can be categorized as self trades. Here, it is on record that the appellant did not do multiple trades on the same day. There are a few days when both buy and sell orders of the same quantity were placed. Even on those days when perfect matching is noticed there is nothing on record to show that those trades were entered within a short time interval. In the absence of which, we are constrained to accept the submission of the appellant that being a day trader, on some days, he was placing orders in both the directions with substantive time gap. It is also claimed by the appellant that on some of the days he actually did take delivery and therefore the beneficial ownership also got changed. The impugned order does not indicate the timing of the alleged trades nor it goes into change in beneficial ownership nor does it bring out any element relating to how it adversely affected the market. Even though preponderance of probability is sufficient to prove PFUTP violations still fraudulent and unfair trade has to be established with some degree of confidence. Given the absence of such findings and given the undisputed fact that the appellant was a day trader we are constrained to give benefit of doubt to the appellant. However, given the facts and circumstances of the matter, we do not find any reason to award cost to the appellant though the appellant has made a high pitched demand for exemplary costs. Issues:Challenge to SEBI order imposing penalty under SEBI Act for violation of PFUTP Regulations.Analysis:The appeal challenged an order imposing a penalty under the SEBI Act for violating PFUTP Regulations by engaging in wash trades/self trades in the scrip of Vamshi Rubber Limited. The appellant was accused of executing 187 self trades involving 19727 shares in 47 days, violating Regulation 4(2)(g) of the PFUTP Regulations. The appellant, a small investor, claimed innocence, stating trades were made without intent to violate laws, in small quantities, and incurred losses. SEBI contended that repetitive self trades violate regulations, citing the Angel Broking case to emphasize penalty after establishing violations.The Tribunal reviewed the evidence and submissions, noting days with matched buy and sell trades and days with only buy or sell trades. It observed that self trades are typically trades matched within a short period by the same party, but found no evidence of multiple trades on the same day by the appellant. The Tribunal accepted the appellant's claim of placing orders in both directions with substantive time gaps, asserting that beneficial ownership changed on some days. It highlighted the lack of evidence on trade timing, beneficial ownership change, or market impact in the impugned order. While acknowledging the lower burden of proof for PFUTP violations, the Tribunal emphasized the need to establish fraudulent and unfair trade with confidence. Due to the absence of such findings and the appellant's day trading status, the Tribunal gave the benefit of the doubt to the appellant, quashing the impugned order without awarding costs.In conclusion, the Tribunal allowed the appeal, quashing the penalty order imposed by SEBI. The decision was based on the lack of conclusive evidence establishing fraudulent or unfair trade practices, giving the appellant the benefit of the doubt due to the absence of critical findings in the impugned order. The Tribunal's ruling emphasized the importance of establishing violations with confidence, especially in cases involving day traders, and highlighted the need for clear evidence of market impact and beneficial ownership changes to support penalty imposition under the PFUTP Regulations.