Securities Appellate Tribunal
Mr. Adolf Pinto vs Sebi on 19 January, 2011
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.
2. 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.
2. 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.
3. 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.
4. I further state that these trades happened unknowingly, unwittingly and with no intent.
5. 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 3 appellant, ` 1 lac for violating Regulation 4(2) and another ` 1 lac for the violation of the code of conduct. Hence this appeal.
3. 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.
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- 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 Prepared and compared by:
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