BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI Date of Hearing : 27.10.2016 Date of Decision : 28.11.2016 Appeal No. 393 of 2015 Magnum Equity Broking Ltd. D-30, Empire Mahal, 806, Dr. A. B. Road, Khodadad Circle, Dadar T. T., Mumbai 400 014. .. Appellant Versus Securities and Exchange Board of India SEBI Bhavan, Plot No. C-4A, G Block, Bandra Kurla Complex, Bandra (East), Mumbai - 400 051. Respondent Mr. Prakash Shah, Advocate for the Appellant. Mr. Kumar Desai, Advocate with Mr. Tomu Francis, Advocate for the Respondent. CORAM : Justice J. P. Devadhar, Presiding Officer Jog Singh, Member Dr. C. K. G. Nair Per : Jog Singh
1. The present Appeal has been filed against Impugned Order dated July 18, 2014 (Impugned Order) passed by the Securities and Exchange Board of India (SEBI) against Magnum Equity Broking Ltd. (Appellant) for violating provisions of Clause A(2) of the Code of Conduct for Stock Brokers as specified under Regulation 7 of the SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 (Stock Broker Regulations) by executing synchronized trades in the scrip of Aarey Drugs and Pharmaceuticals Ltd. (ADPL) and Winsome Textile Industries Ltd. (WTIL).
2. The Appellant is a stock broker registered with SEBI and a member of the Bombay Stock Exchange Limited (BSE) with its registered office at D-30, Empire Mahal, 806, Dr. A.B. Road, Dadar TT, Mumbai 400014. The facts of the case are such that SEBI ordered investigation into the affairs of the Appellant to adjudge whether any violation of the Stock Broker Regulations had been committed by the Appellant in the period i.e. from January 2009 to August 2009. A show cause notice dated August 19, 2013 (SCN) was issued to the Appellant asking it to show cause as to why an inquiry into the Appellants affairs should not be held for executing synchronized trades in the scrips of ADPL and WTIL. The trades were executed by the Appellant on behalf of its clients Shri Ronak Choksi, Shri Shailesh Patel, Ms. Nitaben Patel and Ms. Kapilaben Patel. With respect to the synchronized trades in question, the Appellant acted both as stock broker as well as counter party broker. In this background, the Impugned Order dated July 18, 2014 was passed.
3. Out of the total volume of 68,02,131 shares trade in the scrip of WTIL, 0.14% were synchronized and executed by the Appellant in one day alone. Further, in case of the scrip of ADPL, out of the total volume of 88,89,052 shares traded, 0.45% were synchronized trades executed by the Appellants over the course of five days.
4. The Appellant, at the outset, admits that the impugned trades were indeed executed by the Appellant. The case of the Appellant is that the synchronized trades were executed within the normal price range and could not be said to have led to any artificial price movements. The trades were executed as per the law prevalent at the time of the transactions. It is also submitted by the Appellant that the trades in question were executed in order to effect a shift in the portfolios of members of the same family, and that there was no apparent malafide intention with respect to the same.
5. Further, the Appellant contends that there is a gap of four years between the investigation period and the issuance of the SCN. As per SEBIs circular dated September 14, 1999 cross deals executed between two clients of the same broker are to be conducted through the screen mechanism of the stock exchange. The Appellant submits that the synchronized trades are in conformity with the circular in question.
6. It is the Appellants submission that the sub-broker through whom the trading took place has not been questioned by SEBI in this regard. The synchronized trades were all coincidental and not the result of any illicit scheme of the Appellant. That the Appellant acted diligently in all respects and no harm or loss was caused to anyone associated with the market. The Appellant further submits that it is not its responsibility to view every transaction with suspicion and to behave as a market regulator such as SEBI would. The only responsibility of the Appellant is to act prudently and responsibly as per law, which the Appellant claims to have done in every respect.
7. The Appellant contends that SEBI has not put any cogent material on the record to lead to the inference that the Appellant failed to exercise due skill, care and diligence as is expected of a broker while executing the synchronized trades.
8. Per contra, the case of the Respondent is that on February 19, 2009, the Appellants clients executed 18 trades in the scrip of WTIL worth 68% of the total number of shares traded that day and 38% of the trades executed that day. 7, out of the 18 synchronized trades were perfectly synchronized, i.e., the buy and sell orders were matching, and so were the price and the quantity at which the orders were placed. The Respondent submits that on March 20, 2009, the Appellant executed 73 synchronized trades in the scrip of ADPL on behalf of its clients amounting to 43.8% of the shares traded and 63.4% of the trades executed.
9. Ld. Counsel for the Respondent further submits that on March 23, 2009, the Appellant executed 14 synchronized trades; on March 25, 2009, 1 synchronized trade for 500 shares was executed; on March 26, 2009, 4 synchronized trades for 7000 shares were executed; and finally on March 27, 2009, 7 synchronized trades for 6000 shares were executed.
10. It is further submitted by the Respondent that these synchronized trades were executed not just once, but regularly over a period of a few days. Such synchronized trading creates an artificial volume and leads to price fluctuations, thereby potentially misleading investors. It is also the Respondents submission that even though the sub-broker executed the trades, the Appellant would be responsible for such trades, particularly in light of the fact that these trades were being executed through the Appellants trading system. As far as circular dated September 14, 1999 is concerned, it is the Respondents submission that inspite of the trades being executed through the stock exchange mechanism, they were still structured and synchronized.
11. It is submitted by the Respondent that this Tribunal in the case of Sparkline Mercantile Co. Pvt. Ltd. vs SEBI, Apeeal No. 171 of 2011 dated January 16, 2012 held that it is rather difficult to obtain direct evidence with respect to synchronization of trades and that in such situations preponderance of evidence is good enough to prove synchronization. Finally, it is the Respondents submission that by acting as the broker for both parties the Appellant could easily match the orders between its own clients who were also family members.
12. We have heard the ld. counsel for both parties and have perused the Appeal, along with the Reply thereto and all other documents and information produced before us.
13. At the outset, on a perusal of trades executed by the Appellant on behalf of their clients, it is borne out that trades were executed between family members in the scrip of WTIL and ADPL over a period of six days. To recapitulate a few trades, on February 19, 2009, a volume of 9,489 shares was traded through 18 synchronized trades in the scrip of WTIL between Shri Shailesh Patel and and his mother, Ms. Kapilaben Patel. Subsequently, 73 synchronized trades were executed between Ronak Choksi and Nitaben Patel in the scrip of ADPL. Since it is matter of record that there is common introducer to Ronak Choksi and Shailesh Patel who is Nitaben Patels husband.
14. Further, the trade logs evidence the execution of the following trades: On March 23, 2009, 14 synchronized trades were executed amounting to 7.17% of market volume. On March 25, 2009, 1 synchronized trade itself amounted to 3.4% of market volume. 4 synchronized trades amounting to 20.4% of market volume were executed on March 26, 2009. 15.12% of the market volume was traded on March 27, 2009 through 7 synchronized trades.
15. On an analysis of the trades executed, as spelt out hereinabove, it emerges that the Appellant did in fact undertake synchronized trades, as accepted by the Appellant on record. These trades were executed under the Appellants watchful eye which did not act with care and due diligence in allowing such transactions to occur repeatedly between connected entities. It is clear that these trades were executed with the intention to create an artificial volume. The Appellant should have been alerted to its clients intention particularly in light of the seven trades which were synchronized to perfection, with respect to the buy and sell orders along with the price at which the buy order and sell order were placed and even the quantity of shares which were offered for sale and sought to be bought by the counter-party.
16. Synchronized trades in the history of the securities market have always been shunned for the simple reason that they create a misleading appearance of artificial volume in a particular scrip by giving the public the impression that a lot of trading activity is being conducted with respect to that scrip, making it seem like a good investment opportunity. Such artifices, if allowed to grow in number in the market, hurt the sanctity of market mechanism and hinder the ongoing constant process of the market righting and restoring itself.
17. Moreover, nothing has been brought on record to show that the Appellant performed a thorough due diligence exercise in order to ascertain the nature of these synchronized trading transactions. We agree with the Respondent in that the Appellant as broker would be responsible for the trades executed by its sub- broker. Therefore, the Appellant cannot escape liability by passing the buck onto its sub-broker.
18. We shall now deal with a few cases cited by the Appellant in support of its contentions.
19. In the case of SMC Global Securities vs. SEBI, Appeal No. 152 of 2013 dated January 31, 2014, SMC Global had opened share trading accounts for Mr. Aditya Sharma and Ms. Abhilash Sharma. SEBI conducted an enquiry into the trading activity undertaken by the above-said persons between January 1, 2008 and May 31, 2008. Most of these trades were made through a sub broker of SMC Global Mr. Lohia. It was alleged that Abhilash and Aditya had executed large value transactions disproportionate to the levels of income disclosed by them in the KYC details. SEBI alleged that the Appellant ought not to have allowed them to so trade since the impugned trades led to an artificial volume being created in a number of scrips. This Tribunal vide order dated November 25, 2011 held that SMC Global did all it could do to remain responsible and diligent in its duties as stock brokers. There was nothing in the conduct of Abhilash and Aditya which could have aroused any suspicion in the minds of either the sub-broker or SMC Global itself. However, in the matter at hand, it is a matter of record that a few trades between the clients of the Appellant were perfectly synchronized to such a level that even the time and prices of the buy and sell orders, between the clients acting as counterparties, were identical. The case of SMC Global, therefore, does not have much bearing as far as the present matter goes.
20. In the case of SEBI vs Kishore R. Ajmera [(2016) 6 SCC 368], Prakash Shantilal and Co (Ajmeras sub-broker) had clients Mayekar Investments and KP Investment which indulged in synchronized trading thereby creating artificial volume in the scrip of Malvica Engineering Ltd. during the period December 20, 1999 to March 31, 2000, and August 7, 2000 to August 31, 2000. Ajmera was, therefore, alleged to be vicariously liable for the defaults of his sub-broker. The Honble Supreme Court held that there was no material on record to hold either lack of vigilance or bona fides on the part of the sub-broker so as to make Respondent-Broker liable. There in the case of Ajmera, the Honble Apex view was of the opinion that Ajmera could not have been held vicariously liable primarily because there was nothing to indicate any sort of lack of responsibility or diligence on the part of the broker. In the present matter, as has been pointed out hereinabove, we agree with SEBI that the fact of perfectly matching trades purely to shift portfolio between family members which did in fact result in creation of artificial volume in the scrip of ADPL and WPIL. As a matter of fact, in the judgment of Kishore Ajmera, the Honble Supreme Court held that While the said fact by itself i.e. proximity of time between the buy and sell orders may not be conclusive in an isolated case such an event in a situation where there is a huge volume of trading can reasonably point to some kind of a fraudulent/manipulative exercise with prior meeting of minds. In the instant case, the volume of transactions was high enough for it to raise red flags and lead to a reasonable inference of fraudulent and manipulative activity between the clients who were also family members.
21. The Honble Supreme Court in the case of Ajmera further goes on to state that the test is one of preponderance of probabilities so far as adjudication of civil liability arising out of the violation of the Act or the provisions of the Regulations framed thereunder is concerned. On a perusal of the aforementioned ratio laid down in the case of Ajmera it is borne out that several circumstances have to be looked at before arriving at any conclusion regarding an entitys culpability, and that preponderance of evidence would be acceptable since direct proof of meeting of minds would rarely be available or even accessible to the market regulator.
22. In the case of Cholamandalam Securities Ltd. vs SEBI, Appeal No. 380 of 2015 dated June 22, 2016, the broker Cholamandalam executed trades in the scrip of Richa Industries Ltd. on behalf of its clients - Dynamic Global Profanchises Pvt. Ltd., Man Mohan Singh Dua and Ajit Singh Dua without change in beneficial ownership and to allegedly give the illusion of heavy trading in the scrip. This Tribunal set aside the impugned order while stating that no finding had been recorded in the impugned order to the effect that the broker had interfered with the price and order matching mechanism of the system. In the case before us however, the Impugned Order against the Appellants herein states clearly that by acting as broker for buyer and the counterparty broker for the seller of shares, it was rather easy for the Appellant to ensure synchronization of trades to give the impression of a large number of trades being executed in the scrip of the two aforementioned companies. In any case, it is hard to deny that the Appellant definitely failed in its duty to be responsible and diligent by not stopping the perfectly synchronized trades and aiding its clients in creating an artificial volume in the scrips of ADPL and WTIL.
23. It is pertinent to mention that on being asked the reason for shifting the portfolio of shares constantly between members of the same family, no reason was forthcoming from the Appellants. In a situation where the Appellant has failed to give a cogent reason or provide a purpose behind the execution of trades of a considerably high volume, we do not find it necessary to interfere with the order of the Respondent. The same is upheld and the appeal is hereby dismissed. No order as to costs. Sd/- Justice J. P. Devadhar Presiding Officer Sd/- Jog Singh Member Sd/- Dr. C. K. G. Nair Member 28.11.2016 Prepared & Compared by