2010 (10) TMI 1168 - AT - Companies Law

Summary

Issues involved:
The issues involved in this case are manipulation of stock prices, front running, synchronized trading, cross deals, violation of market mechanism, and penalty imposition.

Manipulation of Stock Prices:
The appellant, a stock broker, was charged with manipulating the price of a company's scrip by allowing clients to execute synchronized and cross deals, leading to artificial volumes in trading. The Securities and Exchange Board of India (SEBI) investigated the transactions from September 18, 2000, to March 13, 2001, and found irregularities in the trading activities of the appellant. The appellant was also accused of front running through the account of a relative. After a detailed enquiry and show cause notice, the whole time member held the appellant guilty of certain charges and suspended its registration certificate for a week. The appellant appealed against this order.

Synchronized Trading and Cross Deals:
The appellant executed multiple cross deals for related entities simultaneously, as per the instructions of the clients. These deals were settled through the exchange, and ownership was transferred. The Board found no evidence of a direct relationship between the broker and its clients beyond the broker-client association. The Tribunal noted that the transactions were not intended to manipulate the market, as they were in line with the circular of the Board dated September 14, 1999. Consequently, the charge of allowing clients to execute synchronized and cross deals was deemed baseless.

Front Running:
Front running, an irregular practice akin to insider trading, was observed in the appellant's actions. The appellant allowed his nephew to engage in front running by taking advantage of confidential information about pending orders from other clients. The nephew made a profit by buying shares at a lower rate and selling them to related entities at a higher rate based on insider knowledge. This practice was considered against market ethics and was found to be in violation of fair trading practices. The charge of front running against the appellant was upheld by the Tribunal.

Penalty Imposition and Conclusion:
The Tribunal expressed concern over the significant delay of nine years in issuing the final order, causing undue hardship to the appellant. Considering the circumstances, the Tribunal decided to reduce the penalty imposed on the appellant to a warning, emphasizing the importance of adhering to market regulations in the future. The impugned order was modified accordingly, and the appeal was disposed of with no costs awarded.