2020 (7) TMI 847 - Board - SEBI

Board finds Noticee 3 exonerated for identity misuse; Noticees 1,2,4-18 guilty of manipulative trading under regs 3(a)-(d), 4(1), 4(2)(a),(e); holdings frozen

Board found Noticee 3 to be a victim of identity misuse and exonerated after noting a filed FIR and lack of personal involvement. Noticees 1, 2 and 4-18 ... Noticees of indulging in manipulative and unfair trades by contributing to positive LTP in the scrip of AVIL through their abnormal trading patterns as displayed repeatedly over the period - breach of regulation 3(a),(b),(c),(d) and regulation 4(1), 4(2)(a),(e) of the SEBI (PFUTP) Regulations, 2003 - compliance with the principle of natural justice - Opportunity of personal hearing - Whether the Noticees nos. 1 to 18 are connected entities and whether the acts of the Noticees no. 1 to 18 during Patch-1 of Investigation Period have resulted in violations of the provisions of regulation 3 (a), (b), (c), (d) and regulation 4 (1) and 4 (2) (a) and (e) of SEBI (PFUTP) Regulations, 2003? HELD THAT:- The Noticee no. 3 has strongly contended that one Shri R. Munshi Bhai Patel to whom he had given his personal KYC documents in connection with getting a loan with his help, (which the Noticee never got) has misused his identity and traded in his name without his knowledge. The Noticee no. 3 has also filed FIR against the said Munshi Bhai Patel in this regard. He stated that had he been summoned by SEBI during investigation, it would have been possible to catch Munshi Bhai Patel who has defrauded him. I have carefully considered his explanation and am inclined to give credence to the explanation offered by him on the basis of fact & circumstances surrounding his matter. Therefore, notwithstanding the fact that the trades executed in his name are held by me to be not genuine and manipulative in nature, keeping his apparent non-involvement and innocence in view and the fact that he has since filed a FIR against Munshi Bhai Patel, I am persuaded to treat him as not connected to other Noticees and as a victim of a fraud committed on him and accordingly exonerate Noticee no. 3 from the charges levelled against him in the SCN. Thus, I now hold that except for Noticee no. 3, the trading behavior of Noticees nos. 1, 2 and 4 to 18 vis-à-vis the scrip of AVIL has been glaringly ill motivated, fraudulent and was intended towards manipulating the price of the shares of AVIL hence, is in violation of regulations 3 (a), (b), (c), (d) and 4 (1), 4 (2) (a), (e) of SEBI (PFUTP) Regulations, 2003. Whether the acts of the Noticee no. 19 and Noticee no. 20 during Patch-2 and Patch-3 respectively of Investigation Period have resulted in violations of the provisions of regulation 3 (a), (b), (c), (d) and regulation 4 (1) and 4 (2) (a) and (e) of SEBI (PFUTP) Regulations, 2003? Allegations against Noticees no. 19 and 20 have been made in the SCN on the basis of execution of self-trades and miniscule trades in the scrip of AVIL and no other material is made available to me to indicate that such self-trades were manipulative in nature and/or have resulted into creation of false or misleading appearance of trading in the scrip in the securities market or have been executed for manipulating the price/volume of the scrip - observe that the attending facts and circumstances of the case of Noticees no. 19 and 20 are not sufficient enough to prove the violations against them, as alleged in the SCN. The material available on record is not sufficient enough to hold that the above noted small number of self-trades executed by the Noticees no. 19 and 20 as separate professionals during different time periods, could have created artificial volume and/or manipulated the market or could have disturbed the market equilibrium in the said scrip which otherwise enjoyed a high liquidity and high volume during the said periods. Therefore, I hold that the act, conduct and trading behavior of Noticees no. 19 and 20 may not fall strictly within the ambit of regulations 3 (a), 3 (b), 3 (c), 3 (d), 4 (1), 4 (2) (a) and 4 (2) (e) of the PFUTP Regulations 2003, however, considering the volume of their trades and the modus operandi followed by Noticees no. 19 and 20 while trading in the scrip of the Company which possessed the potentiality to threat market integrity and distort the price discovery in the said scrip, justice would be met by warning the two Noticees to be extremely careful in future and observe due diligence to remain compliant with law and procedure while trading in the securities market. Further, Noticee no. 19 and Noticee no. 20 are hereby warned to be careful in future while dealing in securities market. During the period of restraint, the existing holding of securities including the holding of units of mutual funds of the Noticees shall remain frozen. ISSUES PRESENTED AND CONSIDERED 1. Whether Noticees nos. 1 to 18 were connected entities and whether their trading during Patch-1 amounted to manipulation or fraudulent/unfair trade practices in breach of regulation 3(a),(b),(c),(d) and regulation 4(1), 4(2)(a),(e) of the SEBI (PFUTP) Regulations, 2003. 2. Whether Noticee no. 19 (Patch-2) and Noticee no. 20 (Patch-3) executed trades (including repeated tiny-quantity sells and self-trades) that amounted to manipulation or fraudulent/unfair trade practices under regulation 3(a),(b),(c),(d) and regulation 4(1), 4(2)(a),(e) of PFUTP Regulations, 2003. 3. Whether delay in issuance of the Show Cause Notice vitiates proceedings when no statutory limitation is prescribed and whether the date of SEBI's notice of alleged violation is the relevant date for assessing delay. 4. Whether burden and standard of proof in quasi-judicial SEBI proceedings permits drawing inferences from trading patterns and attendant circumstances where direct evidence of intent is absent. ISSUE-WISE DETAILED ANALYSIS Issue I - Connectedness and Manipulation by Noticees nos. 1-18 (Patch-1) Legal framework: Alleged breaches framed under regulation 3(a)-(d) and regulation 4(1), 4(2)(a),(e) of PFUTP Regulations, 2003 which prohibit fraudulent dealing, use of manipulative or deceptive devices, employment of devices/schemes to defraud and acts creating false or misleading appearance of trading or price manipulation. Precedent treatment: The Court relied upon principles from prior authoritative decisions (e.g., observations in Ketan Parekh, Rakhi Trading, Kishore R. Ajmera) that intention to defeat market mechanism may be inferred from attending circumstances such as nature, frequency, circularity of transactions, absence of real change of beneficial ownership and market conditions; and that SEBI quasi-judicial proceedings apply proof on preponderance of probabilities. Interpretation and reasoning: The Court analysed extensive trade data showing (i) 983 trades by 13 buyer entities largely in quantities of 1-2 shares executed repeatedly and often on the same trading day; (ii) presence of 49 trades where sellers were within the connected group (forming an 18-entity set of buyers and sellers); (iii) pattern of taking turns among the buyer entities over extended date ranges to effect LTP contributions; (iv) repeated placement of buy orders for minuscule quantities despite availability of larger sell quantities; and (v) existence of indicia of connection (common addresses, common email/KYC, off-market transfers, common directorship). The cumulative effect of small LTP contributions was held capable of creating a misleading appearance of price/volume and artificially elevating LTP (5.23% of total market positive LTP attributable to the group). The Court emphasised that although individual trade sizes were small, their pre-planned, coordinated and repetitive nature-as evidenced by timing, turn-taking, and match with pending sell orders-supports an inference of fraudulent intent and manipulation. The Court rejected contentions that trading in one or two shares is per se permissible and that absence of actions against counterparties entails parity-based exoneration; it held that each noticee must justify its trades and that non-prosecution of others does not absolve the accused when facts establish manipulative conduct. Ratio vs. Obiter: Ratio - Where a cluster of entities execute a uniform, turn-taking pattern of tiny-quantity trades that repeatedly match pending sell orders at rising LTPs, and where independent indicia of connection exist (common KYC/address/off-market transfers), inference of manipulation and breach of PFUTP Regulations is permissible on preponderance of probabilities. Obiter - Observations distinguishing certain earlier SAT decisions as factually inapposite to these specific trading patterns. Conclusions: The Court concluded that, except for one entity (Noticee no. 3), Noticees nos. 1, 2 and 4-18 were connected and their conduct in Patch-1 constituted manipulative and fraudulent trading in violation of regulation 3(a)-(d) and regulation 4(1), 4(2)(a),(e). Noticee no. 3 was exonerated on facts showing misuse of his identity/KYC by a third party and filing of an FIR; the Court found his non-involvement plausible and gave him benefit of doubt. Issue II - Conduct of Noticee no. 19 (Patch-2) and Noticee no. 20 (Patch-3) Legal framework: Same statutory/regulatory provisions as Issue I - regulation 3(a)-(d) and regulation 4(1), 4(2)(a),(e) of PFUTP Regulations, 2003; manipulative conduct includes acts creating misleading appearance of trading and acts amounting to price manipulation. Precedent treatment: The Court applied the same inferential approach and preponderance-of-probabilities standard as in Issue I and noted analogous precedent emphasising that intention may be inferred from pattern and circumstances when direct evidence is absent. Interpretation and reasoning: For Patch-2, the Court examined trade records showing that the implicated entity executed numerous sell trades of one share each and several self-trades, cumulatively contributing material negative LTP (10.53% of market negative LTP attributable to that entity). The entity's explanation as a jobber and that one-share trades are common were rejected because the pattern (repeated tiny sells, self-trades, and execution despite buy availability of larger quantities) indicated a pre-meditated strategy to depress LTP. For Patch-3, similar analysis applied: repeated tiny-quantity sell trades, a high number of self-trades, and the disproportionate effect on LTP supported the inference of manipulative conduct. The Court noted that negligible absolute volumes do not preclude manipulative effect when the pattern and timing show intent and effect on price discovery. Ratio vs. Obiter: Ratio - Repeated execution of tiny-quantity sells and self-trades that systematically contribute to negative LTP, especially when unexplained and inconsistent with normal market behaviour, can be held to constitute manipulation and a breach of PFUTP Regulations on preponderance of probabilities. Obiter - Reliance on certain adjudicating officer orders cited by the noticees was distinguished as factually inapplicable. Conclusions: The Court held that Noticee no. 19's trades during Patch-2 and Noticee no. 20's trades during Patch-3 amounted to manipulative and unfair trading practices in violation of regulation 3(a)-(d) and regulation 4(1), 4(2)(a),(e) of PFUTP Regulations, 2003. Delay in Initiation of Proceedings Legal framework: No statutory limitation in SEBI Act prescribing time-bar for initiating proceedings for alleged breaches of SEBI Act and regulations; relevant date for assessing delay is when SEBI came to notice of the violation. Precedent treatment: The Court referenced decisions holding that delay is not automatically fatal where there is no statutory bar and that merits and circumstances determine whether delay prejudices the accused. Interpretation and reasoning: Investigations stemmed from an income-tax reference received by SEBI in February 2015 and the SCN issued in 2017; therefore, delay contentions (7-9 years) were found misplaced because the decisive point is SEBI's notice of the violation and the facts and circumstances of the case. The Court held that the noticees failed to demonstrate prejudice from the alleged delay. Ratio vs. Obiter: Ratio - Absence of a statutory bar means delay in issuance of show cause notice does not automatically vitiate proceedings; the determining factor is when the regulator became aware of the alleged breach and whether delay causes demonstrable prejudice. Conclusions: The Court rejected the noticees' plea of fatal delay in issuance of the SCN. Standard and Burden of Proof in SEBI Quasi-Judicial Proceedings Legal framework: Quasi-judicial standard is preponderance of probabilities; intent may be inferred from totality of circumstances when direct evidence is unavailable. Precedent treatment: Cited authorities endorsing inferential reasoning from trading patterns, frequency, circularity and attendant circumstances to establish manipulative intent. Interpretation and reasoning: The Court applied the preponderance standard to the cumulative trading data and circumstantial evidence (connections, turn-taking pattern, timing relative to pending sell orders, self-trades), finding that inference of manipulative intent was reasonable and supported by materials on record. The Court emphasized that the noticees bore the onus to provide acceptable market-prudent justifications for the atypical trading conduct and failed to do so. Ratio vs. Obiter: Ratio - In SEBI proceedings the adjudicator may infer intention to manipulate from cumulative circumstantial evidence, and the absence of direct evidence does not preclude finding of violation where a coherent pattern establishes intent on the balance of probabilities. Conclusions: The Court confirmed applicability of the preponderance standard and upheld drawing inferences from the documented trading patterns to find violations. Relief/Disposition-related Findings (selective factual conclusions relevant to liability) 1. Noticees nos. 1, 2 and 4-18: Held connected and liable for manipulation/fraudulent/unfair trading in Patch-1 in breach of regulation 3(a)-(d) and regulation 4(1), 4(2)(a),(e). 2. Noticee no. 3: Exonerated on facts indicating misuse of identity/KYC by a third party and the filing of an FIR; treated as not connected to the group. 3. Noticee no. 19 (Patch-2) and Noticee no. 20 (Patch-3): Held liable for manipulative practices (repeated tiny-quantity sells and self-trades contributing to negative LTP) in breach of regulation 3(a)-(d) and regulation 4(1), 4(2)(a),(e).