TaxTMI 
TaxTMI 
2019 (5) TMI 977
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....umar Baldevbhai Patel (hereinafter referred to as "AB"). It was alleged that DP provided information to KB and AB regarding the forthcoming trading activities of Passport. It was found that trades were executed using the telephone number which was registered in the name of AB at the common residential address of KB and AB. It is alleged that AB and KB took advantage of the information received from DP whereby KB indulged in trading before Passport and consequently squared off the position when order of Passport was placed in the market. It was alleged that KB earned a total profit of Rs. 1,56,32,364.01/- from the alleged trades. Pending investigation, an ex-parte interim order dated 28/5/2009 was passed by the Whole Time Member of SEBI issuing a slew of directions and one such direction was that the appellant including others were restrained from buying, selling or dealing in any securities directly or indirectly. 2. Based on the investigation, a show-cause notice dated 28/02/2011 was issued alleging that DP was placing orders for Passport coupled with the fact that KB bought and sold shares of various companies which were common between KB and Passport. The show-cause notice in....
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.... by third parties who are tipped on an impending block trade ("tippee" trading), transactions in which the owner or purchaser of the block trade himself engages in the offsetting futures or options transaction as a means of "hedging" against price fluctuations caused by the block transaction (self front-running), and transactions where an intermediary with knowledge of an impending customer block order trades ahead of that order for the intermediary's own profit (trading ahead). The Supreme Court further found that front running was explicitly recognized under Regulation 4 (2)(q) of the FUTP Regulations, 2003. The Supreme Court further held that in order to establish charges against tipee, under Regulations 3(a), (b), (c) and (d) and 4(1) of the FUTP Regulations, 2003, one needs to prove that a person who had provided the tip was under a duty to keep the non-public information under confidence. Further, such breach of duty was known to the tippee who traded in the market with that information thereby playing a fraud. Insofar as the modus operandi in the instant case, the Supreme Court gave an explicit finding against KB and Passport to the extent that the parting of information wit....
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....re, they are parties to the fraud committed by Dipak Patel having aided and abetted the same." 6. In the light of the aforesaid narration of facts, we have heard Shri Yogesh Jagia, learned Counsel assisted by Mr. Chinmay Paradkar, Advocate for the Appellant. The learned Counsel for the appellant contended that he is only engaged in importing and trading of scrap metal and was not dealing in the securities market. It was further contended that the Adjudicating Officer only found trading of the securities by KB and that there was no finding that the appellant had done any trading. It was contended that the mere fact that KB was using the landline telephone which was registered in the name of the appellant does not make the appellant liable for aiding and abetting or conniving in any fraudulent activities being done between KB and DP. It was also contended that the ex-parte adinterim order dated 28/05/2009 gave a specific prima facie finding that KB had prior information from DP and on the basis of the same material SEBI has improved its version in the showcause notice by including the name of the appellant which shows the mala fide intent since no further evidence was available wi....
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....rice of the scrips. 7. It was thus urged that in the present case there is no clinching evidence to lead to the conclusion that the appellant had indulged in fraudulent activities in the securities market. It was contended that in the absence of mens rea, the appellant cannot be found guilty and consequently the imposition of penalty should be set aside. 8. On the other hand, Shri Gaurav Joshi, the learned Senior Counsel assisted by Shri Mihir Mody and Mr. Sushant Yadav, Advocates contended that in the first instance the Supreme Court had itself found that on the basis of modus operandi the appellant had sensitive information which induced him for monetary gains. It was contended that considering the relationship of the appellant with KB and DP coupled with the fact that KB and AB were brothers and living under the same roof as well as usage of telephone registered in the name of the appellant for trading purposes as well as the mobile calls between DP and AB and between DP and KB during the time when actually trades were being executed, leaves no room for doubt that parting of the information by DP to AB and KB and subsequent transactions by KB are intrinsically connected an....
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....e that KB had received prior information from the appellant about the forthcoming large institutional trades that enabled KB to square off his initial transactions. 10. Annexure-E to the show-cause notice is a chart showing details of the calls exchanged between DP and KB and the appellant. A perusal of this chart indicates that the appellant was speaking to AB on his mobile during the time when the trades were being carried out by KB on the internet and, therefore, leads to an inescapable conclusion about the involvement of the appellant in the entire modus operandi and also leads to an irresistible conclusion of the appellant being a part of the front running. From the analysis of the trades mentioned in the show-cause notice, it can be seen that KB and Passport were placing orders in close proximity of time. The majority of the Sell Orders were placed after Passport starting entering the Buy Orders. The majority of the trades placed by Passport and KB were in close proximity of time. KB entered orders in the post closing session and Passport also closed orders in the post closing session. All these indicate that there was a premeditative move as most of the trades of KB match....
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.... the totality of the attending facts and circumstances surrounding the allegations/charges made and leveled. While direct evidence is a more certain basis to come to a conclusion, yet, in the absence thereof the Courts cannot be helpless. It is the judicial duty to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges/allegations are founded and to reach what would appear to the Court to be a reasonable conclusion therefrom. The test would always be that what inferential process that a reasonable/prudent man would adopt to arrive at a conclusion." 13. In SEBI vs. Rakhi Trading (P) Ltd. (2018) 13 SCC 753, Supreme Court held that in the quasi judicial proceedings before SEBI, the standard of proof is preponderance of probability and that proof of manipulation depends on inference drawn from a mass of factual details. The Supreme Court held that; "4.24. The proof of manipulation in the circumstances always depends on inferences drawn from a mass of factual details. Findings must be gathered from patterns of trading data and the nature of the transactions, etc. Several circumstances of a determinative character coupled ....