2022 (11) TMI 1576 - Board - SEBI

Connected broker trades inflating share LTP to help insider offload stock; delay plea rejected, market ban and penalties ordered.

Delay in initiating proceedings was held not to vitiate the action because all relied-upon materials were supplied and no prejudice was shown; the request ... Fraudulent and unfair trading activities - delay in initiating the proceedings - prejudice to the Noticees - Manipulation of the scrip - facilitate the profitable offloading of shares in the market - failed to make requisite disclosures under the PIT Regulations, 2015 and SAST Regulations, 2011 - Seeking information regarding price rise in the scrip of PFL - failed to make requisite disclosures under the LODR Regulations - Imposition of penalty u/s 15HA - non-disclosure Of the details of appointment of CFO in the public domain - change in key managerial personnel - test of preponderance of probabilities - maxim actio personalis moritur cum persona - Connections among Noticees - HELD THAT:- Delay itself may not be a ground that would vitiate the instant proceedings. Since all relevant and relied upon documents were supplied to the Noticees, including the price-volume data for the investigation period, order log and trade log for the investigation period, documents relied upon for connections and relevant bank statements etc., in my view the Noticees had sufficient material to defend their case. In fact, they were able to put forth their defense in detail, as is apparent from their replies and submissions. No prejudice has been caused upon the Noticees nor have they been able to make out a case of prejudice due to the alleged delay in initiation of proceedings. Hence, the contention of the Noticees that the present proceedings are liable to be closed/ dropped on account of delay, cannot be accepted. It is to be noted here that the provisions of Sections 11(1), 11(4) and 11B of the SEBI Act vest in the quasi-judicial authority plenary power to issue wide ranging directions as it may deem fit, in the interest of securities market which cannot be crystallized and formulated before the adjudication of issues involved. - Further, the Noticees have stated that a charge of fraud requires a higher degree of proof. - A test of preponderance of probabilities applies to allegations of violation of PFUTP Regulations, 2003, with respect to dealings in the securities market. Connections between Noticee nos. 1-7 - Noticee nos. 1-7 are connected. LTP Manipulation by Noticee nos.5 and 6 - Noticee nos. 5 and 6 have denied that they were involved in the manipulation of the scrip of PFL by placing orders above the last traded price. In this regard, the SCN provides a few instances where the trades of Noticee nos. 5 and 6 contributed to the market positive LTP. Whether Noticee nos.2 and 4 benefitted from the LTP manipulation and was Noticee no.3 involved in the scheme of manipulation? - Noticee no. 3 (Abhinandan Jain) has accepted the connections set out in the SCN. Noticee no. 2 (Pulla Amresh Kumar) has also accepted that he was introduced to Noticee no.4 (Nickunj Shah) by Noticee no.3 (Abhinandan Jain) but has stated he did not know Noticee nos.5 and 6. Noticee nos. 2 and 3 have also stated that they were not involved in the scheme of manipulation. Noticee no. 2 (Pulla Amresh Kumar) has stated that his trades were not fraudulent. It is apparent that while the Noticee nos. 5 and 6 were hiking the price of the scrip by placing high buy orders, contemporaneously Noticee no. 2 was selling shares held by him at a substantial profit. Hence, Noticee no.2 benefitted from the LTP manipulation in the scrip of PFL by Noticee nos. 5 and 6. Noticee no.2 did not sell buy shares of PFL during the investigation period. In view of the same, Noticee no. 2 was part of the scheme of manipulation in the scrip of PFL and has violated Section 12A(a), (b), (c) of the SEBI Act, 1992 read with Regulation 3(a), 3(b), 3(c) and 3(d) and Regulation 4(1), 4(2)(e) of the PFUTP Regulations, 2003. Noticee no.3 has violated Section 12A(a), (b), (c) of the SEBI Act, 1992 read with Regulation 3(a), 3(b), 3(c) and 3(d) and Regulation 4(1), 4(2)(e) of the PFUTP Regulations, 2003. Disclosure violations by Noticee nos. 1 and 2 - Noticee no.2 failed to make the requisite disclosure in Form D under Regulation 13(4) and 13(4A) read with 13(5) on 16 more occasions. - SCN further alleges that the Company failed to disclose the appointment of Chief Financial Officer of the company on April 25, 2019. The SCN states any change in key managerial personnel such as Chief Financial Officer is a material event and has to be disclosed to the stock within twenty-four hours from the occurrence of such event as per Regulation 30 of the LODR Regulations, 2015. Having failed to do so, it was alleged that Noticee no. 1 violated Regulation 30 of the LODR Regulations, 2015. The change of CFO is a non-disclosure that occurred much after the investigation period and may not have any bearing on the main thrust of the case of price-manipulation. Having noticed the non-disclosure during the investigation, it was rightly added as an allegation in the SCN. Since serious impact of the non-disclosure has not been brought out, I do not look upon it in the context of this particular case to be a serious violation attracting a separate penalty. Investigation has not brought out any connection between the other set of Noticees and Noticee nos. 8 and 9. Nor has the investigation alleged any connection between the counterparties to the impugned trades and Noticee nos. 8 and 9. Due to the lack of connection brought out in the investigation, I am not inclined to impose any penalty on the Noticee nos. 8 and 9. Noticee nos. 5 and 6, through their connected broker- Noticee no.7, executed manipulative and fraudulent trades with a view to increase the price of the scrip of PFL. Noticee no. 2, the CMD of PFL had converted warrants into shares of PFL in 2010 which were under lock in till March 2013. Noticee no. 2 sold shares making a huge profit while the price of the scrip was being manipulated by Noticee nos. 5 and 6. Noticee no.3 formed the link between Noticee no.2 and the price manipulators, i.e. Noticee nos. 5 and 6. Thus, Noticee nos. 2, 3, 5, 6 and 7 have violated Section 12A(a), (b), (c) of the SEBI Act, 1992 read with Regulations 3 (a), 3 (b), 3 (c) and 3 (d) and 4(1), 4(2) (e) of the PFUTP Regulations, 2003. Being a registered broker, Noticee no.7 has also violated Clause A (3) of Code of Conduct for Stock Brokers as specified under Schedule II read with Regulation 9(f) of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992. However, the SCN does not bring out any specific role of the Company (Noticee no. 1) in the aforesaid manipulation. Hence, the charge of violation of Regulations 3(a), 3(b), 3(c) and 3(d) and 4(1), 4(2)(e) of the PFUTP Regulations, 2003 against the Company is not established. Further, as noted above, in respect of Noticee no.4 (late Mr. Nickunj Shah), the SCN issued against him is disposed of without any directions. Noticee no.2 has made an ill-gotten gain. Hence, the same is liable to be disgorged. In view of the scheme of manipulation entered into by Noticee nos. 5, 6 and 7 so as to aid and benefit Noticee no.2 and Noticee no.3, having acted as the intermediary between them, all of them have jointly employed a fraudulent scheme in the securities market as contemplated under Regulations 3(a) to (d) and 4(1), 4(2)(e) of the PFUTP Regulations, 2003. Noticee nos. 2, 3, 5, 6 and 7 are liable to be restrained from accessing the securities market and prohibited from dealing in securities under Sections 11(1), 11(4) and 11B(1) of the SEBI Act, 1992. The amount of ill-gotten gains, to the extent, made on account of fraudulent trading in the scrip of PFL is being directed to be disgorged from Noticee no.2. There is no material on record to indicate that the Noticees have been otherwise found to have committed similar violations any time in the past, except Noticee no.5. Noticee no.5 has been found liable for a violation of the PFUTP Regulations, 2003 vide adjudication order dated June 30, 2022. As Noticees nos. 2, 3, 5, 6 and 7 have jointly committed the fraud, appropriate penalty under Section 15HA ought to be jointly imposed on them. 1. ISSUES PRESENTED AND CONSIDERED (1) Whether delay in initiation and conduct of proceedings vitiated the action on grounds of prejudice to the noticees. (2) Whether Noticees 5, 6 and 7 were inter se connected and connected to Noticee 3 and, through him, to Noticees 1 and 2. (3) Whether Noticees 5 and 6 engaged in Last Traded Price (LTP) manipulation in the scrip and thereby violated the PFUTP Regulations, 2003. (4) Whether Noticee 7, as broker of Noticees 5 and 6, facilitated the LTP manipulation and violated PFUTP Regulations, 2003 and the Stock Broker Regulations. (5) Whether Noticee 2 benefitted from the LTP manipulation by Noticees 5 and 6 and was part of the manipulative scheme; and whether Noticee 3 acted as an intermediary between Noticee 2 and the manipulators so as to violate the PFUTP Regulations, 2003. (6) Whether Noticee 4 was part of, or benefitted from, the alleged scheme of manipulation so as to be liable under PFUTP Regulations, 2003. (7) Whether the Company (Noticee 1) was liable under PFUTP Regulations, 2003, and whether it violated disclosure obligations under the LODR Regulations, 2015. (8) Whether Noticee 2 violated disclosure requirements under the PIT Regulations, 1992 and the SAST Regulations, 2011. (9) Whether Noticees 8 and 9 independently engaged in LTP manipulation such as to incur liability under PFUTP Regulations, 2003. (10) Consequential directions, disgorgement and monetary penalties to be imposed on noticees found in violation. 2. ISSUE-WISE DETAILED ANALYSIS Issue (1): Alleged delay and prejudice Legal framework discussed: SEBI Act, 1992; reliance on SAT decisions including Ravi Mohan, HB Stockholdings, Pooja Vinay Jain; Supreme Court in Collector of Central Excise v. Bhagsons Paint Industry (India). Interpretation and reasoning: The Court noted there is no statutory limitation period in the SEBI Act barring proceedings after a particular time. Delay per se is not fatal; prejudice must be shown. Investigation involved multiple entities and extensive data collection, with changes in investigating authorities and later redistribution of quasi-judicial work. All relied documents (price-volume data, order/trade logs, connection documents, bank statements, investigation report) were supplied, and the noticees filed detailed replies without specifying any concrete prejudice. Conclusion: Delay did not cause prejudice and does not vitiate the proceedings; objection rejected. Issue (2): Connections among Noticees 5, 6, 7 and with Noticees 2 and 3 Interpretation and reasoning: - Noticee 6 (through its Karta) and the director of Noticee 5 were co-directors in two companies and, along with the spouse of the director of Noticee 5, together held 53.09% of Noticee 7, establishing close connection between 5, 6 and 7; these connections were not denied. - Bank records showed substantial RTGS transfers from the individuals behind Noticees 5 and 6 to Noticee 3; Noticee 3 admitted these as consideration for sale of shares of another company, thereby confirming personal and financial connection. - Noticee 3 was an Independent Director of the Company; Noticee 2 was its CMD and holder of 11,50,000 warrants, of which 4,50,000 were transferred to Noticee 4 on Noticee 3's introduction. These facts were admitted. Conclusion: Noticees 5, 6 and 7 were connected to each other; Noticee 3 was connected with Noticees 5 and 6 and, as director of the Company, thereby linked the manipulators (5 and 6) with Noticee 2 and the Company; inter se connectivity is established. Issue (3): LTP manipulation by Noticees 5 and 6 under PFUTP Regulations, 2003 Legal framework discussed: Section 12A(a), (b), (c) of the SEBI Act; Regulations 3(a)-(d), 4(1), 4(2)(e) of PFUTP Regulations, 2003; standard of proof clarified with reference to SEBI v. Kishore R. Ajmera (preponderance of probabilities); SAT decisions including BP Comtrade Pvt. Ltd. and Amaresh Pathak. Interpretation and reasoning: - The scrip was illiquid during substantial parts of the investigation period and exhibited sharp price rise during Patch 3 (Jan 13-May 19, 2014). - Detailed order and trade log instances for various dates showed Noticees 5 and 6 repeatedly placing buy orders: * at prices significantly higher than prevailing LTP (often Rs. 10-50 or more above), * with very small quantities (frequently 1-50 shares), * when other market participants were placing orders at or below LTP, and * in circumstances where existing sell orders were available at lower prices. - These orders resulted in repeated positive LTP impacts, cumulatively contributing materially to market positive LTP. - Noticees 5 and 6 offered only generic explanations of 'investment logic' and absence of collusion with counterparties, without any cogent rationale for consistently paying substantial premiums for tiny quantities in an illiquid scrip. - The Court relied on SAT in BP Comtrade to hold that repeated trades at irrational prices, even without proven buyer-seller collusion, indicate manipulative intent when judged on probabilities; Amaresh Pathak was cited to clarify that establishing direct collusion is not a sine qua non for price manipulation. - Quantitatively, during Patch 3: Noticee 5's trades had a net positive LTP impact of Rs. 205.20 (Rs. 297.20 positive, Rs. 92 negative), contributing 4.53% of total market positive LTP; Noticee 6's trades had a net positive LTP impact of Rs. 122.05 (Rs. 233.65 positive, Rs. 111.60 negative), contributing 3.56% of market positive LTP. Together they contributed 8.09% of total market positive LTP. - Arguments based on the presence of trades at or below LTP or the existence of delivery-based settlement were treated as attempts to deflect from the core pattern of repeated above-LTP small-quantity trades with high price variance. Conclusion: Noticees 5 and 6 engaged in a continuous pattern of placing small-quantity buy orders at prices significantly above LTP, thereby artificially raising the scrip price and manipulating LTP. They violated Section 12A(a), (b), (c) of the SEBI Act, 1992 and Regulations 3(a)-(d), 4(1), 4(2)(e) of the PFUTP Regulations, 2003. Issue (4): Role of Noticee 7 as broker and facilitation of manipulation Legal framework discussed: Same PFUTP provisions as above; Clause A(3) of the Code of Conduct for Stock Brokers under Schedule II read with Regulation 9(f) of the Stock Broker Regulations, 1992. Interpretation and reasoning: - Noticee 7 was the broker through whom Noticees 5 and 6 routed their trades and had high broker concentration on the sell side (18.92%) during the investigation period. - Ownership and control links (designated director and majority shareholding by persons behind Noticees 5 and 6) established that Noticee 7 was not at arm's length from its clients. - The persistent pattern of client orders at steep premiums to LTP in an illiquid scrip should have alerted a diligent broker not involved in the scheme; allowing such orders to continue was treated as facilitation. Conclusion: Noticee 7 facilitated the manipulative trades of Noticees 5 and 6 and was part of the scheme to manipulate the scrip price. It violated Section 12A(a), (b), (c) of the SEBI Act, Regulations 3(a)-(d), 4(1), 4(2)(e) of PFUTP Regulations, 2003, and Clause A(3) of the Stock Broker Code of Conduct. Issue (5): Role of Noticees 2 and 3 in the scheme; benefit to Noticee 2 Legal framework discussed: Section 12A(a), (b), (c) of the SEBI Act; Regulations 3(a)-(d), 4(1), 4(2)(e) of PFUTP Regulations, 2003. Interpretation and reasoning as to Noticee 3: - Noticee 3 was an Independent Director of the Company and professionally and financially connected to the individuals controlling Noticees 5 and 6 (as shown by admitted share-sale and fund-transfer transactions). - Noticee 3 introduced Noticee 2 to Noticee 4 for transfer of convertible warrants and their conversion into shares. - Noticee 3 thereby acted as a link between Noticee 2 (desirous of monetising shares) and Noticees 5 and 6 (who manipulated the price), facilitating profitable offloading by Noticee 2. Interpretation and reasoning as to Noticee 2: - Noticee 2 held 11,50,000 warrants (converted to shares in 2010, subject to 3-year lock-in). During Patch 3, when Noticees 5 and 6 were inflating LTP, Noticee 2 sold 14,554 shares at a VWAP of Rs. 589.08; he also sold shares in Patch 4 at VWAP Rs. 573.53. - The Court accepted that Noticee 2 sold at a profit but adjusted the ill-gotten gains computation: as the LTP manipulation is attributed to Patch 3, the baseline price was taken as the closing price at the end of Patch 2 (Rs. 508). The difference between actual proceeds from Patch 3 sales and hypothetical proceeds at Rs. 508 was computed as Rs. 9,61,722 and treated as ill-gotten gain. - Gains from Patch 4 were not treated as ill-gotten, as no manipulation was established for that period. - Noticee 2 did not purchase shares during the investigation period; contemporaneous sales during the period of artificial price elevation by connected entities, coupled with the established linkage via Noticee 3, led to an inference on preponderance that he was part of the manipulative scheme. Conclusion: - Noticee 2 benefitted from the LTP manipulation and was part of the fraudulent scheme in the scrip. He violated Section 12A(a), (b), (c) and Regulations 3(a)-(d), 4(1), 4(2)(e) of the PFUTP Regulations, 2003; he is liable to disgorge Rs. 9,61,722 as ill-gotten gains with interest. - Noticee 3, by acting as intermediary linking Noticee 2 with the manipulators and facilitating the scheme, also violated Section 12A(a)-(c) and Regulations 3(a)-(d), 4(1), 4(2)(e) of the PFUTP Regulations, 2003. Issue (6): Role and liability of Noticee 4 (deceased) Legal framework discussed: Section 28B of the SEBI Act (continuation of disgorgement proceedings against legal representatives); PFUTP Regulations, 2003. Interpretation and reasoning: - Noticee 4 received 4,50,000 shares on conversion of warrants and sold 1,92,782 shares in December 2013 at a VWAP of Rs. 563.43 during PCAS (illiquid phase), realising profits. - These sales occurred in Patch 2, prior to the LTP manipulation attributed to Noticees 5 and 6 in Patch 3. - The SCN did not establish any role of Noticee 4 in the manipulation or any connection between his sale timing and the manipulative trades. Conclusion: Although proceedings could theoretically continue against legal representatives under Section 28B, on merits the charge of PFUTP violation against Noticee 4 is not established; SCN against him is disposed of without directions. Issue (7): Liability of the Company under PFUTP Regulations and LODR PFUTP aspect: Reasoning: While its director (Noticee 3) and CMD (Noticee 2) were found part of the scheme with outside entities, the SCN and record did not show any specific role or action by the Company itself in executing or facilitating the manipulative trades. Conclusion (PFUTP): Violation of Regulations 3(a)-(d), 4(1), 4(2)(e) of PFUTP Regulations, 2003 is not established against the Company. LODR aspect: Legal framework discussed: Regulation 30 of the LODR Regulations, 2015 (disclosure of material events, including change in key managerial personnel). Reasoning: The Company failed to disclose the appointment of its Chief Financial Officer on April 25, 2019 within the stipulated 24 hours; this was a technical non-compliance observed during investigation, unrelated in time and substance to the manipulation period. Conclusion (LODR): A violation of Regulation 30 occurred, but in view of its limited impact and the context, no separate penalty or direction was imposed in this proceeding; SCN against the Company was ultimately disposed of without directions. Issue (8): Disclosure violations by Noticee 2 under PIT Regulations, 1992 and SAST Regulations, 2011 SAST Regulations aspect: Legal framework discussed: Regulation 29(2) and 29(3) of SAST Regulations, 2011; SAT precedents (Ravi Mohan, Rakesh Kathotia, Murali Srinivasan Venkatraman). Reasoning: The impugned disposal of shares occurred on June 14, 2013. At that time Regulation 29(3) did not prescribe a time limit for disclosure of disposals. SAT has held that no penalty lies for nondisclosure of sale prior to the amendment introducing timelines. Conclusion (SAST): Alleged violation of Regulation 29(2) read with 29(3) of SAST Regulations, 2011 is not established. PIT Regulations aspect: Legal framework discussed: Regulation 13(3), 13(4), 13(4A), 13(5), 13(6) of PIT Regulations, 1992. Reasoning: - For multiple transactions, Noticee 2 disclosed in Form C, and the Company filed Forms C and D with BSE. However, Regulation 13(4) and 13(4A) cast a direct obligation on the promoter/director to disclose in Form D to the company and the stock exchange within two days when specified thresholds are crossed; Regulation 13(6) separately obliges the company to forward such disclosures to the exchange. - In 16 instances identified, Noticee 2 failed to make Form D disclosures himself under Regulation 13(4) and 13(4A), even though the Company did file certain Form D disclosures. - In five instances, even where disclosures were made, there were delays of 1-6 days beyond the prescribed two-day period, which was admitted and attributed to consolidation of nearby dates. - The Court accepted that correct shareholding information ultimately became available in public domain and that there was no apparent intent to conceal but treated the failures and delays as technical non-compliance. Conclusion (PIT): Noticee 2 violated Regulation 13(4), 13(4A) and 13(5) of PIT Regulations, 1992, attracting penalty under Section 15A(b) of the SEBI Act; however, given the technical nature and availability of information, a lenient monetary penalty was imposed. Issue (9): Alleged independent LTP manipulation by Noticees 8 and 9 Legal framework discussed: PFUTP Regulations, 2003. Interpretation and reasoning: - The SCN alleged that Noticee 8, through small-quantity buy trades above LTP, contributed about 5.37% of total market positive LTP, and that Noticee 9, through similar buy trades, contributed about 10.26% of positive LTP and, in Patch 5, significant negative LTP through small-quantity sell trades below LTP. - Investigation, however, did not establish any connection between Noticees 8 and 9 and the other noticees, nor any connection with their counterparties; this absence of linkages was noted in the SCN. - Noticees 8 and 9 contended they had no nexus with the other noticees, stated that their trading style (including placing orders above LTP in rising scrips) was followed in several scrips, and there was no evidence to the contrary. Conclusion: In the absence of demonstrated connection or additional incriminating circumstances beyond the pattern of trades, the Court refrained from imposing penalty on Noticees 8 and 9; SCN against them was disposed of without directions. Issue (10): Directions, disgorgement and penalties Interpretation and reasoning: - On the established facts, the Court held that Noticees 2, 3, 5, 6 and 7 had jointly employed a fraudulent scheme attracting Regulations 3(a)-(d) and 4(1), 4(2)(e) of PFUTP Regulations, 2003, warranting market access restrictions, disgorgement (for the beneficiary of ill-gotten gains) and monetary penalty under Section 15HA of the SEBI Act. - Ill-gotten gains of Noticee 2 were determined, on a conservative basis, by comparing his Patch 3 sale proceeds with what would have been realised at the last non-manipulated reference price (closing price at the end of Patch 2). - Prior history was considered: except Noticee 5 (previously found guilty under PFUTP in a separate matter), others had no similar past violations; penalties were calibrated accordingly, including joint and several liability under Section 15HA. Conclusions / operative directions: - SCN against Noticees 1, 4, 8 and 9 was disposed of without directions. - Noticees 2, 3, 5 and 6 were restrained from accessing the securities market and from buying, selling or otherwise dealing in securities, directly or indirectly, or being associated with the securities market in any manner, for one year. - Noticee 2 was directed to disgorge Rs. 9,61,722 with 12% interest from May 19, 2014, payable to the Investor Protection and Education Fund, and was restrained from accessing the securities market until the later of completion of the above debarment period or actual payment/recovery of disgorged amount. - Noticee 7 was restrained from executing proprietary trades for one month and warned not to execute or facilitate manipulative trades in future. - A joint and several monetary penalty of Rs. 10,00,000 under Section 15HA of the SEBI Act was imposed on Noticees 2, 3, 5, 6 and 7 for PFUTP violations. - An additional penalty of Rs. 1,00,000 under Section 15A(b) of the SEBI Act was imposed on Noticee 2 for disclosure violations under PIT Regulations, 1992. - Timelines and modalities for payment of penalties and disgorgement were prescribed, and limited carve-outs were provided to allow settlement of existing open positions and unsettled transactions.