2015 (8) TMI 287 - AT - Companies Law

Manipulative, fraudulent and unfair trade practices Circular trading Non-compliance of statutory requirement Penalty was imposed for violation of Regulations 4(1), 4(2)(a), 4(2)(e) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 and violation of Code of Conduct for Stock Brokers Held that - not in dispute that six clients of Appellant acted in collusion amongst each other in synchronized / circular / reversal manner, thereby artificially increased volume / price of GIL scrip Rule 260 of BSE specifically holds stock broker fully responsible for all acts of its employees Appellant executed more than 25% of trades in scrip, carried out synchronized, reversal and circular trading thereby manipulated price Since fraudulent transactions took place from terminal of Appellant in ordinary course of business, appellant cannot escape liability No fault in impugned order Appeal dismissed Decided against appellant.

Summary

Issues Involved:
1. Imposition of penalty on the appellant for violating PFUTP Regulations.
2. Imposition of penalty on the appellant for violating the Code of Conduct for Stock Brokers.
3. Vicarious liability of the appellant for the acts of its employee.

Issue-Wise Detailed Analysis:

1. Imposition of penalty on the appellant for violating PFUTP Regulations:

The appellant, JHP Securities Pvt. Ltd., was penalized by SEBI for violating Regulations 4(1), 4(2)(a), and 4(2)(e) of the PFUTP Regulations. SEBI's investigation revealed that the appellant, trading on behalf of six clients, engaged in synchronized, circular, and reversal trades in the scrip of Gemstone Investment Limited (GIL) during the investigation period (IP). The trades were executed from the terminal of Devendra Vadhaiya, an employee of the appellant, who was also part of the NG Group. The appellant's clients were found to be related to each other and to the NG Group, which manipulated the price and volume of GIL's scrip. The appellant's defense that it had no connection with its clients beyond a stock-broker relationship and that the trades were conducted anonymously was rejected. SEBI held that the appellant's substantial trading volume and the nature of the trades indicated collusion and manipulation, thus violating the PFUTP Regulations.

2. Imposition of penalty on the appellant for violating the Code of Conduct for Stock Brokers:

The appellant was also penalized for violating Clauses A(1) to A(5) of the Code of Conduct for Stock Brokers under the Stock-Brokers Regulations. These clauses require stock brokers to maintain high standards of integrity, promptitude, and fairness, and to act with due skill, care, and diligence. The appellant's involvement in synchronized, circular, and reversal trades created a misleading appearance of trading, artificial volumes, and manipulated prices in the shares of GIL. The appellant's failure to detect and prevent such trades over a prolonged period indicated negligence and a breach of the Code of Conduct. Consequently, a penalty of Rs. 2,00,000 was imposed under Section 15HB of the SEBI Act.

3. Vicarious liability of the appellant for the acts of its employee:

The core issue was whether the appellant could be held liable for the manipulative trades executed by its employee, Devendra Vadhaiya. The appellant argued that it should not be held responsible for the unauthorized acts of its employee. However, Rule 260 of the Bombay Stock Exchange explicitly states that a member is fully responsible for the acts and omissions of its employees. The tribunal concluded that the appellant was liable for the fraudulent trades executed by Vadhaiya, as they were conducted from the appellant's terminal in the ordinary course of business. The tribunal referred to the case law and Rule 260 to establish that the appellant could not escape liability for the acts of its employee. Therefore, the imposition of penalties under Sections 15HA and 15HB of the SEBI Act was justified.

Conclusion:

The appeal was dismissed, and the penalties imposed by SEBI were upheld. The tribunal found that the appellant played a crucial role in the manipulation of GIL's scrip by executing synchronized, circular, and reversal trades on behalf of its clients. The appellant's defense that it was unaware of its employee's actions was not accepted, and the appellant was held vicariously liable for the fraudulent trades. The penalties of Rs. 6,00,000 under Section 15HA and Rs. 2,00,000 under Section 15HB of the SEBI Act were deemed appropriate given the nature and extent of the violations.