TaxTMI 
TaxTMI 
2020 (7) TMI 7
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....o. 138/2020 is accordingly disposed of. 2. The present appeal has been filed against the order dated 30th August, 2019 passed by the Adjudicating Officer ('AO' for short) of Securities and Exchange Board of India ('SEBI' for short) holding that the appellant was guilty of insider trading. The AO, however, did not impose any penalty. 3. The facts leading to the filing of the appeal is, that a Confidentiality Agreement between the McGraw Hill Asian Holdings and Morgan Stanley was executed on 4th April, 2013. Based on this agreement, Morgan Stanley was engaged on 1st May 2013 by McGraw Hill Asian Holdings to work on the open offer assignment for acquisition of the shares of CRISIL Ltd. This open offer was considered as a sensitive information under the SEBI (Prohibition of Insider Trading) Regulations, 1992 ('PIT Regulations' for short). The appellant was an employee of Morgan Stanley and, during the relevant period, was directly involved with the activities pertaining to the said offer. 4. CRISIL is a credit rating agency and is registered with SEBI and its shares are listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). 5. O....
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....ving an opportunity of hearing to the appellant, found that the appellant was a 'connected person' under Regulation 2(c)(ii) of the PIT Regulations. The AO also found that the appellant was an' insider'' as per Regulation 2(e) and that the Tippees were 'persons deemed to be connected' as per Regulation 2(h)(viii) of the PIT Regulations. The AO further came to the conclusion on the basis of circumstantial evidence that the appellant tipped the Tippees with regard to the price sensitive information and, therefore violated Regulation 3(ii) read with clause 2.0 and 2.1 of Schedule I Part B of Model Code of Conduct for Prevention of Insider Trading for Other Entities. The AO found that on the basis of the information supplied by the appellant, the Tippees purchased large quantities of shares of CRISIL during unpublished price sensitive information (UPSI) period and sold the said shares immediately after the open offer was announced. The AO also found that the Tippees' trading record indicates that earlier they had never traded in large quantities. The AO after holding the appellant guilty of insider trading, however, did not impose any penalty. 9. The ....
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.... the Whole Time Member held that the finding of guilt on the basis of family relationship was not proper. Similar view was taken in the matter of Sanjay Gala decided by the AO on 2-12-2016. The learned counsel also contended that the decision relied on by the AO was not applicable and was distinguishable, especially the decision of the Supreme court in SEBI v. Kishore R Ajmera (2016) 6 SCC 368 which has no application to the present facts and circumstances of the case as the said decision was based on circumstantial evidence. 12. Mr. Gaurav Joshi, learned senior counsel for the respondent defended the order of AO and contended that in a case of insider trading, there is hardly any direct evidence and that from the foundational facts one can infer on a preponderance of probability or can infer from a circumstantial evidence as to whether a person is guilty of insider trading. The learned counsel contended that in the instant case the appellant was a connected person; was an insider and was privy to the price sensitive information and, based on these foundational facts the AO rightly came to a conclusion that the appellant had tipped the Tippees. The learned senior counsel further....
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.... "2(e) "insider" means any person who, (i) is or was connected with the company or is deemed to have been connected with the company and is reasonably expected to have access to unpublished price sensitive information in respect of securities of a company.." 16. The aforesaid regulation 2(e)(i) is in two parts. The first part has reference to any person which is connected with the company or is deemed to be connected with the company. In the instant case, the fact that the appellant is a connected person has not been denied nor can there be any doubt that the definition of a connected person contained in regulation 2(c) would rope in the appellant under sub-clause (i) thereof, as the appellant was employed by the Merchant Banker, i.e., Morgan Stanley, and was deputed to work on the open offer and including it's pricing was thus privy to the price sensitive information, being directly involved with the activities pertaining to the open offer. The second part of the Regulation 2(e)(i) is also required to be satisfied, namely, that such person must reasonably be expected to have access to unpublished price sensitive information by virtue of such connection in respect o....
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....circumstantial evidence in considering such factors as "(1) access to information; (2) relationship between the tipper and the tippee; (3) timing of contact between the tipper and the tippee; (4) timing of the trades; (5) pattern of the trades; and (6) attempts to conceal either the trades or the relationship between the tipper and the tippee." United States v. Larrabee, 240 F.3d 18, 21-22 (1st Cir. 2001)..." 21. Taking a cue from the decision in Ajmera's case and Raj Ratnam's case, we find the foundational facts as under:- A. The appellant was a connected person and was an insider as per the PIT Regulations and was privy to the price sensitive information and was directly involved with the activities pertaining to the open offer. B. The appellant had close relationship with the Tippees. C. During the investigation, the appellant made attempts to conceal his relationship with the Tippees, as well as tried to dilute his role in the open offer process. D. The trading pattern of the Tippees makes it apparently clear that the Tippees had prior information with regard to the open offer. To elaborate, we find that the Tippee-1 i.e., the sist....