TaxTMI 
TaxTMI 
2012 (5) TMI 774
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....tion of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003 and Regulation 15(1)(b) relating to code of conduct for sub-brokers specified in Schedule II of the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulation, 1992 (hereinafter referred to as FUTP Regulations and Brokers Regulation respectively). The adjudicating officer levied a penalty of ` 3,50,000 for the violation of FUTP Regulations and a sum of 1,50,000 for the violation of the code of conduct for sub-brokers. 2. The cause of action for the impugned order arose during investigations in the scrip of the company for the period March 27, 2009 to August 12, 2009. The investigation was triggered on account of sharp price rise and trading in heavy volumes in the scrip of the company. During the investigation period, the shares were traded for 138 days and the price of the scrip rose from ` 8.90 to a high of ` 80.15. The adjudicating officer verified certain circular/reversal trades between connected parties which resulted in artificial volumes in the market. He also analysed the factors relating to price rise and inferred that ....
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....ence of the same the charge regarding manipulation cannot survive. With reference to the trades executed by the appellant, it is contended that there was no systematic matching of trades which normally leads to manipulation. In the present case there were only matching of trades in parts on a few days which cannot be attributed to any act of deliberate and wilful manipulation. During the course of the hearing of the appeal, the appellant's learned counsel submitted a chart showing the data by which alleged reversal/circular trades were carried out and observed that out of a total of 35 trading days, reversal trades happened only on 8 days which is insignificant as compared to the total volume of trades and counter parties traded with. So the allegation regarding matching of trades in large volumes on many occasions is said to be totally unfounded. In the grounds of appeal also the appellant has set out an analysis of the trades which took place in the relevant period of 35 days. The result, as shown in the chart submitted during the hearing of the case, has been highlighted to justify the appellant's case. So, according to the appellant, th....
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....ration was only in respect of creating new high price and connection between the parties. It is his case that the appellant was actually involved in the reversal trades alongwith the clients and there was a clear meeting of minds in this regard. The manipulation spanned over a period of 35 days, even though intermittently, and this cannot be disregarded especially when the scrip was illiquid. The adjudicating officer has established in the order that the intermittent sell and buy orders over a period of time at the rate of about 50,000 shares per day resulted in reversal/circular trades and the appellant cannot brush this aside on the plea that the squared up trades were minor and insignificant. There was manipulation of volume through reversal trades and a look at the entire chain of transactions as done by the adjudicating officer clearly establishes the wrong doing of the appellant. With regard to the code of conduct it is argued that the broker was expected to look at all the transactions especially when there was periodical price rise. The broker was aware of the nature of transactions since the scrip was illiquid and the volume of trades wa....
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.... to price rise of ` 15.2 There is no material before me to show any connection of the Noticee with the counter party broker and client with whose sell orders the Noticee's buy orders matched. Further there is no material on record to show any connivance of the Noticee with the counter parties to influence the price of the scrip. In absence of any corroborative evidence on record I am inclined to give benefit of doubt to the Noticee and hence the charges against the Noticee of influencing the price of the scrip by placing orders higher than LTP does not stand established". In para 29 of the impugned order there is a further reiteration of the findings which reads as under: "With regard to provisions of Regulation 4(2)(e) which provides 'any act or omission amounting to manipulation of the price of the security' it is observed in para 17 and 19 that the Noticee had no role in the contribution to the price rise through new high price and through LTP. Hence the allegation of violation of Regulation 4(2)(e) does not stand established". 6. As regards violation of FUTP Regulations the only charge that survives for consideration is that of execution of reve....
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....cer. The transactions of the appellant during the investigation period have to be viewed holistically. The appellant is a sub-broker. So his role is to place orders as per the directions and demand of the client. He cannot be regarded as a co-conspirator unless it is established that he had connection with the parties in crystallising the trades in a fraudulent manner or had knowledge of the fraudulent activities of his clients. In a case where a trader indulges in fraudulent trade the objective is primarily to create artificial increase in price and volumes. This is generally adopted to create investor interest and thereby get undue enrichment from sale of shares. So the connection/connivance of the broker in the fraudulent transaction has to be established. Generally, efforts are made in a systematic manner over a period of time to jack up the price and volume of the shares. In the present case, the adjudicating officer has already ruled out the connivance/connection of the appellant with his client in respect of a segment of the transactions during the period under investigation. So it is a debatable issue whether meeti....