2023 (10) TMI 1556 - AT - SEBI

Penalty quashed; single trade not manipulation under Section 12A read with Regulations 3 and 4 PFUTP

The AT set aside the penalty, holding that a single trade by the appellant did not establish circular or synchronized trading or a misleading appearance ... Misleading appearance of the trading in the scrip through circular and synchronized trades amongst connected entities without intention of change of ownership of securities - Imposition of penalty - manipulating the volume of the scrip upwards at the Bombay Stock Exchange - violated the provisions of Section 12A of the SEBI Act read with Regulations 3 and 4 of the SEBI PFUTP Regulations” for convenience - HELD THAT:- In the absence of any connection with the other noticees coupled with the fact that the appellant had only carried out one trade on March 02, 2017 we are of the opinion, that one trade cannot lead to a conclusion of misleading appearance of trading in the scrip in question nor can it lead to a conclusion that the appellant was carrying out circular or synchronized trades since connection with other entities has not been found. Circular and synchronized trades can only happen if there is a connection with the other entities and there is a meeting of minds. In the absence of any connection, the involvement of the appellant through trading pattern cannot be the sole basis of implicating the appellant for violation of Regulations 3 and 4 of the PFUTP Regulations. Thus, we are of the view, that the appellant was not involved in circular or synchronized trading. The order imposing a penalty against the appellant cannot be sustained and is therefore quashed. The appeal is allowed in so far as the appellant is concerned. Since we have allowed the appeal the respondent is directed to refund the amount ISSUES PRESENTED AND CONSIDERED 1. Whether imposition of penalty for alleged circular and synchronized trading under Section 12A read with Regulations 3 and 4 of the PFUTP Regulations can be sustained against a noticee who: (a) traded only on a single day and (b) is not shown to be connected with other alleged co-ordinate traders. 2. Whether a solitary trade, without evidence of connection or meeting of minds with other entities, can establish a misleading appearance of trading or market manipulation constituting violation of Regulations 3 and 4 of the PFUTP Regulations. ISSUE-WISE DETAILED ANALYSIS Issue 1: Sustainment of penalty for alleged circular and synchronized trading where the noticee traded on one day and purportedly without connection to other entities Legal framework: The relevant regulatory framework comprises Section 12A of the SEBI Act and Regulations 3 and 4 of the PFUTP Regulations which prohibit fraudulent and unfair trade practices, including market manipulation, circular trading and creation of misleading appearance of trading in a scrip. Precedent Treatment: No specific precedents were cited or applied by the Tribunal in the impugned order; the Tribunal proceeded on the facts and statutory provisions. Interpretation and reasoning: The Tribunal examined the AO's finding that the appellant executed a sell order followed immediately by multiple buy orders on the same quantity and closely priced, and that the AO characterized these as manipulative, circular and synchronized trades. The Tribunal found the AO's conclusion premised on an allegation of connection with other noticees. On close scrutiny, the impugned order's own paragraph (21) did not establish a connection between the appellant and other noticees; the appellant's trading activity was confined to a single day (March 02, 2017) and comprised only the one sequence of orders. The Tribunal reasoned that circular and synchronized trading necessarily requires a nexus or meeting of minds among multiple entities; absent any demonstrable connection, isolated trading conduct cannot, by itself, constitute circular trading or synchronized trades attributable to coordinated manipulation. Ratio vs. Obiter: Ratio - A penalty for circular or synchronized trading under the PFUTP Regulations cannot be sustained against a noticee where there is no evidence of connection or meeting of minds with other alleged participants and the noticee's involvement is limited to a single isolated trading instance. Obiter - Observations on how circular trading typically manifests (i.e., repeated coordinated trades across parties) that were not necessary to dispose of any broader legal question beyond the facts at hand. Conclusions: The Tribunal concluded that the AO's imposition of penalty could not be sustained as against the appellant because the essential element of connection/coordination with other traders was not established; accordingly, the finding of circular or synchronized trading by the appellant was quashed. Issue 2: Whether a solitary trade, without evidence of connection or meeting of minds, can establish a misleading appearance of trading or manipulation under Regulations 3 and 4 Legal framework: Regulations 3 and 4 prohibit creation of a false or misleading appearance in the market and manipulative practices. The elements necessary to prove such violations include conduct that creates a misleading appearance and, in the context of circular/synchronized trading, coordination or connection among traders. Precedent Treatment: No precedential distinctions or overrulings were undertaken; the Tribunal applied statutory interpretation to the facts. Interpretation and reasoning: The Tribunal held that creating a misleading appearance through circular or synchronized trades presupposes coordinated conduct. A single trade that is not connected to others and does not form part of a pattern of coordinated transactions cannot be equated with circular trading or manipulation. The Tribunal emphasized that trading pattern alone, in isolation and on a single occasion, is insufficient to impute intent or coordinated manipulation where no nexus with other noticees is demonstrated. Ratio vs. Obiter: Ratio - Proof of misleading appearance or manipulation by circular/synchronized trading requires evidence of coordination/connection; isolated trades lacking such evidence do not satisfy the standard for penal liability under Regulations 3 and 4. Obiter - Remarks on the necessity of demonstrating 'meeting of minds' to establish coordinated market manipulation as a factual standard. Conclusions: The Tribunal concluded that the impugned finding that a single, unconnected trading instance constituted a misleading appearance and manipulation was unsustainable; therefore, the penalty imposed on that basis must be quashed. Remedial and ancillary determination Legal framework: Principles of restitution where deposit toward contested penalty has been made and the appellate forum allows relief. Interpretation and reasoning: Having quashed the penalty as against the appellant, the Tribunal directed refund of the deposit made pursuant to its earlier interim order within a stipulated time frame. Ratio vs. Obiter: Ratio - Where the appellate order allows the appeal and quashes the penalty, an interim deposit made by the appellant is refundable. Obiter - None beyond standard remedial practice. Conclusions: The appellant's deposited amount is to be refunded within four weeks as a consequential relief of allowing the appeal. Cross-references and synthesis The Tribunal linked Issue 1 and Issue 2: both issues rest on the central factual-legal proposition that circular/synchronized trading and creation of a misleading market appearance are predicated on coordinated action (connection/meeting of minds). Absence of such connection on the record renders penalty unsustainable. The Tribunal's decision is fact-specific and establishes that factual proof of nexus is essential to impose liability under Regulations 3 and 4 in cases alleging circular or synchronized trading.