2018 (4) TMI 1715 - AT - SEBI

Fraudulent scheme of trading in the scrip of M/s. S. J. Corporation Ltd. ( SJC ) - violation of SEBI Act and PFUTP Regulations - Market manipulation where the scheme employed by the appellants involved hiking the price of the shares in which the promoters had to make open offer - defunct company is taken over - increase the price of the scrip which they have to buy in an open offer at a higher price - HELD THAT - There is no ambiguity in our mind that a scheme of fraud has been conceived and implemented by the appellants herein, except appellant no. 5. We also hold that this is a unique case of manipulation. A defunct company is taken over by a few parties; peculiar interest is shown by a few others in buying the shares of that company placing orders mostly at 5% above the LTP thereby gradually raising its price to abnormal levels and creating artificial liquidity in the scrip and thereafter most of the parties trying to off-load their holdings at a substantially inflated price. If individual case is seen independently there is nothing abnormal about it but when the picture is looked at in totality what is unfolding is a fraud perpetuated on the market / investors. It is not that the trade logs are disputed or the financial transactions are in dispute. What is disputed is only the motive behind such trade and the financial transactions. Even the argument of the promoters of SJC that they did not trade is only legally correct since another companyw herein they were promoters at the relevant time placed a buy order on 28.01.2009 (in Phase-II) for 100 shares at price 5% above the LTP, though only 10 shares got delivered. Similarly, appellant placed one buy order for just 5 shares at the rate of ₹ 1185/- per share on 26.09.2009. This was the highest reported price ever and it is equivalent to a pre-split price of ₹ 11850/-. Since the counter party did not meet the obligation the difference was credited to the appellant s account. This appellant was already holding 400 shares of SJC (pre-split) and her husband (appellant in appeal no. 536 of 2015) had offloaded part of his holdings in Phase-III. Therefore, each small buy or small role played by each appellant needs to be juxtaposed with the motive of the appellant. Further, residing in a location or telephone calls between people also in itself do not make one party to a fraudulent scheme; but all associated factors together do make them parties. Therefore, given the factual matrix perused by us we find no merit in the submissions of the appellants. We find no fault in imposing such a joint and several penalty as it is now abundantly clear that the appellants were acting together and together they inflated the notional value of their shares to more than ₹ 132 crore. If they could be party to such a fraudulent scheme whether they are a homogeneous group or otherwise they should find a way to fulfill the consequences / obligation of paying the penalty jointly and severally imposed upon them. In view of the above reasons we find no merit in the appeals except that of Ms. Reshma Patel, Appellant No. 5 as she succeeds in her appeal. Since in the impugned order penalty of ₹ 2.5 crore has been imposed under Section 15HA of SEBI Act on 19 appellants jointly and severally and one of them succeeds in the appeal the penalty amount also needs to be reduced. Accordingly, we reduce the joint and several penalty from ₹ 2.5 crore to ₹ 2.3 crore to be paid by 18 of the appellants.

Issues Involved:
1. Alleged violation of SEBI Act and PFUTP Regulations.
2. Manipulation of share prices and trading volumes.
3. Relationship and connection among the appellants.
4. Validity of corporate announcements and financial transactions.
5. Legitimacy of the imposed penalties.

Detailed Analysis:

1. Alleged Violation of SEBI Act and PFUTP Regulations:
The appellants were accused of violating Section 12A(a) and 12A(c) of the SEBI Act, 1992, and various provisions of the PFUTP Regulations, 2003. The tribunal found that several entities were involved in a fraudulent scheme to manipulate the price of shares of M/s. S. J. Corporation Ltd. (SJC). The impugned order directed 13 entities to disgorge illegal gains and imposed a joint and several penalties of ?2.5 crore on 19 entities.

2. Manipulation of Share Prices and Trading Volumes:
SEBI's investigation revealed that during the period from March 18, 2008, to October 1, 2009, the price of SJC shares increased by about 2000%. The investigation period was divided into three phases, each showing significant price and volume manipulation. The appellants were found to have placed buy orders at 5% above the last traded price (LTP) to artificially inflate the share price.

3. Relationship and Connection Among the Appellants:
The tribunal noted that the appellants were related by blood, law, or financial relationships. Several appellants were found to be connected through family ties or financial transactions, which facilitated the manipulation scheme. The tribunal provided a detailed relationship matrix among the parties involved, showing how they were interconnected.

4. Validity of Corporate Announcements and Financial Transactions:
The appellants argued that the financial transactions and corporate announcements were genuine. However, the tribunal found that the announcements of sub-division of shares, bonus shares, and dividends were part of the scheme to mislead investors. It was also noted that the financial resources for the open offer were obtained from related parties, contradicting the statements made in the Letter of Offer (LOO).

5. Legitimacy of the Imposed Penalties:
The tribunal upheld the joint and several penalties imposed on the appellants, except for Ms. Reshma Patel, who was found to have only received shares as a gift and did not trade them. The penalty of ?2.5 crore was reduced to ?2.3 crore to be paid by the remaining 18 appellants. The tribunal emphasized that the appellants acted together in the fraudulent scheme, justifying the collective penalty.

Conclusion:
The tribunal concluded that the appellants had conceived and implemented a fraudulent scheme to manipulate the share price of SJC. Despite individual arguments that their actions were in isolation or part of normal business, the totality of the evidence indicated a coordinated effort to defraud the market. The appeals were disposed of with the reduction of the joint and several penalties to ?2.3 crore, except for Ms. Reshma Patel, who was exonerated.

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