BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI
Appeal No. 202 of 2010 Date of decision: 19.01.2011
Mr. Adolf Pinto
23 Aatmaram Building,
St. Francis Xavier Lane,
Mumbai – 400 002. …Appellant
Versus
Adjudication Officer
Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G-Block,
Bandra-Kurla Complex, Bandra (East),
Mumbai – 400 051. …Respondent
Dr. S.K. Jain, Practicing Company Secretary for the Appellant.
Dr. Poornima Advani, Advocate with Ms. Amrita Joshi, Advocate for the
Respondent.
CORAM : Justice N.K. Sodhi, Presiding Officer
P.K. Malhotra, Member
Per : Justice N.K. Sodhi, Presiding Officer (Oral)
This appeal is directed against the order dated August 30, 2010 passed by the
adjudicating officer imposing a monetary penalty of ` 2 lacs on the appellant for
violating Regulation 4 of the Securities and Exchange Board of India (Prohibition of
Fraudulent and Unfair Trade Practices relating to Securities Market)
Regulations, 2003 (for short FUTP regulations) and code of conduct prescribed for
stock brokers in Schedule II read with Regulation 7 of the Securities and Exchange
Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992.
- The Securities and Exchange Board of India carried out investigations in the
trading in the scrips of BSEL Infrastructure Realty Ltd. and Maharashtra Seamless
Ltd. (referred to hereinafter as BSEL and MSL respectively) to examine the role of 2
brokers, sub-brokers and their clients who had traded in these scrips. Investigations
revealed that certain entities including the appellant had executed synchronized /
reverse / circular trades which led to the creation of artificial volumes in the scrips.
The appellant is a stock broker who had executed trades on behalf of his son who was
his client in both the scrips and those trades were circular in nature. Adjudication
proceedings were initiated against him and he was served with a show cause notice
alleging violation of the aforesaid provisions. He field a reply the relevant part of
which reads as under-
“1. I deny that my son Kenneth Pinto has synchronized trades
and that I have created artificial volume in the scrip of
BSEL and MSL, and further manipulated the price of
BSEL and MSL. From the trade log it is noticed that I have
not traded at the opening bell or a few minutes of the
opening bell but after substantial volume have taken place,
any manipulations trade is simply is not possible. It is a
mere figment of imagination. Even, if there is a co-relation,
it is a mere coincidence, hence the allegation of
synchronized trading is uncalled for. - I deny that I have colluded with certain brokers / clients for
transacting in the scrip of BSEL / MSL, the trades if they
matched with rate and quantity is a mere coincidence, as I
do not know / related with any other broker / clients my
trade is mere jobbing in nature. - I deny all the above allegations and state that this is a mere
coincidence. I deny that I know the opposite enteritis and
my trades are merely jobbing transaction, as we have not
given or taken delivery of shares. Further there are no
ill-gotten gains. - I further state that these trades happened unknowingly,
unwittingly and with no intent. - I express my regret, my remorse and I am sorry that
these “unintentional synchronizing” of trades have
happened .”
The adjudicating officer held an enquiry and relying on the material collected during
the course of the investigations found that the trades executed by the appellant which
were the subject matter of the show cause notice were circular / reverse trades and
that he violated Regulation 4(2) of the FUTP regulations and also the code of conduct
prescribed for the stock brokers. He then imposed a penalty of ` 2 lacs on the
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appellant, 1 lac for violating Regulation 4(2) and another 1 lac for the violation of
the code of conduct. Hence this appeal.
- It is not necessary to examine the details of the trading pattern of the appellant
in view of the admission made by him before the adjudicating officer and also the
admission now made before us by his authorised representative. It is admitted on
behalf of the appellant that he executed circular / reverse trades. In view of this
admission, we cannot but hold the appellant guilty of violating the aforesaid
provisions. The only argument which the authorised representative has raised before
us is that M/s. Inventure Growth and Securities Ltd. (for short Inventure), another
stock broker who was also alleged to have executed circular trades along with the
appellant in the two scrips of BSEL and MSL has been let off by another adjudicating
officer even though the same trades were the subject matter of the two proceedings.
He has referred to the order dated October 7, 2009 passed by one V.S. Sundaresan, an
adjudicating officer in which he has not levied any penalty on Inventure for the same
charge levelled against it. The authorised representative of the appellant strenuously
contends that since Inventure has been let off, there is no reason for imposing any
penalty on the appellant and therefore, the impugned order on this ground should be
set aside. We cannot agree with him. Before we deal with this contention, it is
necessary to refer to the circular trades that were executed by the appellant along with
Inventure and another for which the appellant has now been penalised. It is not in
dispute before us that on December 18, 2003 the appellant along with Inventure and
Vijay Bhagwandas and Company (for short Vijay) another stock broker had executed
circular trades in the scrip of MSL which trades can be pictorially described as under:
5000
Vijay Inventure
5000 5000
Appellant
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It can be seen that Vijay sold 5000 shares to Inventure which then sold the shares to
the appellant and he immediately sold them back to Vijay. The circle got completed
when the shares came back to Vijay who started the circle. These trades among the
three of them were executed in less than 10 seconds. This is not a solitary instance. A
large number of trades in this fashion were executed among the three of them. As
already observed, the appellant admits having executed these circular trades with
Inventure and Vijay and some others. Unfortunately, Inventure has been let off by
another adjudicating officer. In the case of Inventure the adjudicating officer held that
“the synchronized trading indulged by the Noticee was 75.21% of overall trading
indulged by the Noticee in the scrip of MSL. Therefore, I am of the view that the
allegation of violation of PFUTP and Brokers Regulations stands established”.
Despite holding Inventure guilty of violation of the statutory provisions and the code
of conduct, the adjudicating officer did not impose any penalty on it for the reasons
that are mentioned in para 18 of his order of October 7, 2009 which is reproduced
hereunder for ease of reference:
“In this regard, I have taken into consideration the following
factors:
The investigation did not establish any link (a) between the
Noticee and its client (b) between the Noticee and other
brokers who had traded in the scrip (c) between the Noticee
and clients of other brokers who had traded in the scrip
(d) between Noticee and the company/directors of MSL.
The Noticee had not indulged in proprietary trading in the
scrip of BSEL and MSL during the investigation period.
- Sparc had traded in other scrips also through the Noticee
during the investigation period. - Sparc had used 2 brokers, viz. the Noticee on BSE and Sai
Broking on NSE, in order to execute the manipulative trades
in the scrips of BSEL and MSL during the investigation
period. - Sparc had traded through the Noticee in the scrip of MSL in
both the exchanges. However, the allegations leveled against
the Noticee are only for those trades which were executed in
BSE. - The Noticee had earned the total brokerage of Rs. 10,538/- by
executing the said trades. 5 - Sparc had always met the pay-in obligations on time. Hence,
The Noticee had no chance to doubt the credibility of the
trades executed by Sparc.”
We are clearly of the view that the adjudicating officer in the case of Inventure had
misdirected himself in observing that there was no link established between the
appellant therein and the other stock brokers with whom it had executed circular
trades. It appears to us that the adjudicating officer is not conversant with the trading
system of the stock exchange which does not permit circular trading. A circular trade
is a fictitious trade in which persons forming the circle keep on trading the scrip
among themselves without the beneficial ownership being transferred in the traded
scrip. Such trades are only meant to create volumes on the trading screen which tend
to lure the lay investors who then jump into the fray. As already observed, the trades
were executed within seconds and in the case of some of them there was no time gap
at all and, therefore, it is abundantly clear that such trades had been executed among
the three brokers including the appellant with a prior meeting of minds and that the
brokers had misused the trading system. We have time and again observed that such
trades are not possible in the normal course of trading and this is what we recently
observed in Ajmera Associates Pvt. Ltd. vs. The Securities and Exchange Board of
India, Appeal no. 190 of 2010 decided on December 13, 2010.
“……………………the only question that we need to answer is
whether the appellant had knowledge at the time of executing the
trades that those were circular in nature and that it was a part of the
whole chain. It is not in dispute that the trading system that we
have on the stock exchanges is a blind trading system which
maintains complete anonymity of the persons trading. The broker
while executing an order (buy or sell) cannot possibly know at the
time of placing the order through the system as to who the counter
party is or even the counter party broker. In other words, the
trading system does not permit the buyers and the sellers to have
any interaction between them except through the trading system. A
buy order placed on the system matches with a sell order and a
trade comes to be executed and this matching is done by the
system on a price time priority basis. Despite the anonymity of the
system, we have seen market players and the intermediaries like
the brokers executing manipulative trades by defeating the system
and this is usually done by placing the buy and sell orders
simultaneously for the same amount and at the same price. Such
matching orders usually result in trades in comparatively less
liquid scrips. This being the system, it sometimes becomes difficult
to find out whether the brokers who execute the trades of their
clients and who are expected to carry out their directions are also a
party to the mischief. If the broker knew at the time of executing
the trade what the client was upto, then obviously he is a party to 6
the mischief. Since the trading system maintains complete
anonymity, brokers always plead that they were ignorant about the
counter party or his broker. In such a situation one has to look to
the trading pattern and if the trades match too often or if the
matching of the trades is noticed day after day and trade after
trade, one can infer that the matching was done not by the system
but by manipulating the same. Similarly, if two or more market
players start trading in circles and do not allow the shares to go out
of the circle, it could be reasonably inferred that both traders and
their brokers are colluding to execute such artificial trades which
give a misleading appearance of trading in the market without
change of beneficial ownership in the traded scrip. Such an
inference can be drawn more readily when the circle consists of a
larger group of entities. In the absence of prior meeting of minds
and knowing the mechanism of the trading system, matching and
circular trades as aforesaid cannot be too frequent an occurrence
and can only lead one to conclude that the trades had been
manipulated by misusing the system. Whether a broker was aware
that the client was trying to match the orders or execute circular
trades can be judged only through their trading pattern as we do
not have direct evidence in such cases. The intention of the parties
and the brokers will have to be gathered from the surrounding
circumstances looking at the trading pattern, the frequency of
trades, their volumes and such other circumstances as may be
relevant for such determination.”
In view of the above, we cannot but hold that the decision of the adjudicating officer
in the case of Inventure is wrong and the appellant cannot take benefit of the same.
In the result, the appeal fails and the same stands dismissed with no order as to
costs. Sd/-
Justice N.K. Sodhi
Presiding Officer Sd/-
P.K. Malhotra
Member
19.01.2011
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