2023 (11) TMI 66 - AT - SEBI

Front running trading activity confirmed as fraud under PFUTP Regulations with penalties and debarment upheld

The Securities Appellate Tribunal Mumbai upheld findings of front running trading activity constituting fraud under PFUTP Regulations. The tribunal ... Front running - misuse of confidential information - synchronised trades and matching of orders as indicator of prior information - facilitation and lending of trading accounts - disgorgement and debarment as remedial measures - penalty under Section 15HB of the SEBI Act - principles of natural justice and delay - breach of interim restraint order - settlement of proceedingsFront running - misuse of confidential information - synchronised trades and matching of orders as indicator of prior information - Findings that front running by the identified front runners and by Manish Chaturvedi were established on the material on record. - HELD THAT: - The Tribunal accepted the WTM/AO analysis that trading patterns - including a high proportion of common scrip days, overwhelmingly matching percentages of shares and trades, precise price matching, and significantly higher profits on common scrip days - demonstrate trading on the basis of prior non-public information of the Sterling group. Call records and voice recordings contemporaneous with order timings, together with meticulous sample analyses of trades (including the detailed Idea/18.11.2010 tranche) corroborated the inference that Manish Chaturvedi possessed and used vital information and placed orders through the front runners, and that the front runners executed synchronised trades ahead of or in tandem with the Sterling group. The appellants did not rebut these findings before the Tribunal. On this basis the Tribunal held the fraudulent scheme of front running clearly established. [Paras 25, 26, 27, 28, 29]The finding of front running by Manish Chaturvedi and the front runners is upheld.Facilitation and lending of trading accounts - misuse of confidential information - disgorgement and debarment as remedial measures - Liability of dealers/facilitators (including Madhu Chanda, Anandilal Chanda and Anandilal Chanda HUF) for facilitating front running and deriving unlawful gains was established and the consequential directions were justified. - HELD THAT: - The WTM/AO made specific findings that the dealer at Sharekhan (Madhu Chanda) passed information about orders of Manish Chaturvedi to her husband, and that Anandilal Chanda (and his HUF) traded ahead of the clients of Sharekhan by virtue of that information. The authorities' sample analyses showed orders by Anandilal Chanda/HUF were placed seconds before or at marginally better prices than client orders, produced substantially greater profits on common scrip days and matched with Sterling group trades - consistent with use of specific information. These peculiar and synchronised trade patterns went unexplained by the appellants. The Tribunal found the WTM/AO correctly concluded that these appellants defrauded investors, obtained unlawful gains and caused loss to other investors, thereby justifying disgorgement and debarment directions. [Paras 32, 33, 34, 35, 36]The findings of facilitation, liability of Madhu and Anandilal Chanda (including HUF), and the consequential disgorgement and debarment directions are sustained.Penalty under Section 15HB of the SEBI Act - breach of interim restraint order - facilitation and lending of trading accounts - Liability of Praveen Kumar Jain for providing and lending trading accounts, contravention of an earlier restraint order, and the imposition of monetary penalty were upheld. - HELD THAT: - Praveen admitted that he provided multiple trading accounts to be used by Manish Chaturvedi and that he distributed profits to Manish after retaining commission; the Tribunal recorded that he thereby granted control of accounts enabling front running. The Tribunal further found that such lending/usage overlapped with a prior interim restraint order applicable to him, amounting to dealing in securities despite restraint. Given these admissions and the overlap of account usage with the restraint period, the Tribunal held the imposition of monetary penalty under the SEBI Act to be justified. [Paras 42, 43, 44]Praveen Kumar Jain's facilitation, breach of restraint and the penalty imposed therefor are affirmed.Principles of natural justice and delay - delay/non-supply of evidence - settlement of proceedings - Contentions of undue delay, denial of natural justice (non-supply of investigation material, inability to cross-examine, and reliance on voice recordings), and related procedural objections were rejected. - HELD THAT: - The Tribunal observed no substantive attack on merits had been advanced and noted the appellants had largely abstained from participation before the WTM/AO, failed to seek documents or take available opportunities, and in some instances had sought settlement which contributed to delay. The Tribunal accepted the authorities' explanation that collation and analysis of extensive trading data took time and found no prejudice caused by the timeline. Requests and objections not raised before the WTM/AO could not be entertained for the first time on appeal. The Tribunal therefore rejected the procedural/contention-of-delay and natural justice pleas. [Paras 37, 38, 39, 40, 41]Procedural objections and pleas of undue delay or breach of natural justice are dismissed.Settlement of proceedings - disgorgement and debarment as remedial measures - Effect of settlement by Sharekhan on proceedings against other noticees. - HELD THAT: - The Tribunal recorded that proceedings against Sharekhan had been settled and Sharekhan had deposited the ill-gotten gains and settlement amount as per the settlement order. That settlement did not vitiate the findings against other noticees; the WTM/AO and the Tribunal proceeded to determine and uphold liability of the other parties on the basis of the material relevant to them. [Paras 18]Settlement by Sharekhan was recorded; it did not negate or undermine the findings against other noticees.Final Conclusion: In view of the overwhelming and unrebutted material, the Tribunal upheld the WTM/AO findings of front running, facilitation and lending of trading accounts, affirmed disgorgement, debarment and monetary penalties (including the penalty under Section 15HB in respect of Praveen Kumar Jain), rejected procedural and delay-based objections, and dismissed the appeals. Issues Involved:1. Allegations of front-running trading activities by various entities.2. Role of Manish Chaturvedi and other noticees in the front-running scheme.3. SEBI's investigation and findings.4. Orders of debarment, disgorgement, and penalties imposed by WTM and AO.5. Appeals against the orders by various noticees.6. Claims of procedural lapses and natural justice by appellants.7. Admission of roles by certain appellants.8. Previous restraint orders against Praveen Kumar Jain.Summary:Issue 1: Allegations of Front-Running Trading ActivitiesThe judgment addresses ten appeals filed by 14 noticees against a common order dated December 18, 2020, passed by SEBI's Whole Time Member (WTM) and separate orders by the Adjudicating Officer (AO). The appeals were clubbed together as they emanated from a common issue of front-running trading activities.Issue 2: Role of Manish Chaturvedi and Other NoticeesManish Chaturvedi was identified as the key person perpetrating the front-running activity with the aid of other noticees, including his parents. Manish Chaturvedi was employed with the Sterling group and had access to vital trading information. He placed orders through trading accounts of various entities, facilitated by Madhu Chanda, a dealer at Sharekhan.Issue 3: SEBI's Investigation and FindingsSEBI's investigation, based on reports from NSE, revealed that front-runners had front-run entities of the Sterling group. The investigation found that trading accounts of seven entities were used for front-running, leading to unfair gains. SEBI issued ex-parte ad-interim impounding orders and show cause notices, alleging violations of the SEBI Act and PFUTP Regulations, 2003.Issue 4: Orders of Debarment, Disgorgement, and PenaltiesThe WTM and AO found the appellants guilty of front-running activities, leading to orders of debarment, disgorgement, and penalties. Various noticees were debarred for periods ranging from five to seven years and directed to disgorge unlawful gains. Penalties were imposed on different entities and individuals.Issue 5: Appeals Against the OrdersThe appellants contended against the orders on grounds of undue delay, lack of cross-examination, non-supply of investigation reports, and incorrect calculation of unlawful gains. However, the Tribunal found no merit in these contentions, noting that the appellants abstained from participating in the proceedings and did not raise objections before the WTM or AO.Issue 6: Claims of Procedural Lapses and Natural JusticeThe Tribunal rejected claims of procedural lapses and violations of natural justice, stating that the appellants had ample opportunities to participate in the proceedings but failed to do so. The delay in issuing the show cause notice was justified due to the complexity of collating data from multiple trading accounts.Issue 7: Admission of Roles by Certain AppellantsSeveral appellants, including Praveen Kumar Jain and entities like Viraj Mercantile, Josh Trading, and E-Ally Consulting, admitted their roles in the front-running scheme. They sought leniency in penalties and periods of debarment, but the Tribunal upheld the severity of their actions.Issue 8: Previous Restraint Orders Against Praveen Kumar JainPraveen Kumar Jain was found to have violated earlier restraint orders issued by SEBI in the matter of Pyramid Saimira Limited. He admitted to lending trading accounts for front-running activities and was penalized for contravening SEBI's directions.ConclusionThe Tribunal dismissed all the appeals, finding overwhelming evidence of front-running activities and procedural fairness in SEBI's actions. The orders of debarment, disgorgement, and penalties were upheld, and the appeals were dismissed with no order as to costs.