2019 (11) TMI 1555 - AT - SEBI

Fraudulent tradings in the shares - Suspension of certificate of registration of the appellant as a stock broker for a period of three months for violation of the provisions of Sections 12A(a), (b) and (c) of the SEBI Act, 1992 read with regulations 3, 4(1), 4(2)(a), (e) and (g) of the SEBI - PFUTP Regulations and regulation 7 read with Clauses A and B(2) of Schedule II (Code of Conduct for Stock Brokers) of the SEBI - Stock Brokers Regulations - HELD THAT - In the present case, there are no allegations that the appellant had indulged in proprietary trades. What is alleged is that the entity was grossly negligent and allowed fraudulent transactions to be carried out by Purshottam Khandelwal and two other violations already noted above. Considering all these facts, in our view, the order of the WTM of SEBI directing the suspension of the license of the appellant for a period of three months needs to be set aside and in its place it is hereby directed that the appellant shall not accept any fresh clients for a period of six months from the date of this order.

Summary

Issues:
Violation of SEBI Act, 1992 and related regulations leading to suspension of stock broker's registration for three months; Allegation of allowing fraudulent trades by a client; Failure to deliver contract notes within the specified timeframe.

Analysis:

Violation of SEBI Act and Regulations:
The case involved the suspension of a stock broker's registration for three months due to violations of SEBI Act, 1992 and related regulations. The appellant was found in violation of Sections 12A(a), (b), and (c) of the SEBI Act, 1992, along with regulations from PFUTP Regulations and Stock Brokers Regulations. The violations were related to fraudulent and unfair trade practices in the securities market, including price manipulation and failure to issue contract notes promptly.

Allegation of Allowing Fraudulent Trades:
The investigation revealed that the client, Purshottam Khandelwal, engaged in fraudulent trades through the appellant, resulting in price manipulation of shares. Purshottam Khandelwal was found to be a significant contributor to manipulative trades within the Vishvas Group. The appellant was accused of allowing these fraudulent trades, including synchronized and circular trades, leading to price manipulation and significant deviations from the Last Traded Price.

Failure to Deliver Contract Notes:
Another violation highlighted in the judgment was the failure of the stock broker to deliver contract notes to the client within the required 24-hour timeframe after a trade. This failure to provide timely documentation to the client was considered as one of the grounds for the impugned order leading to the suspension of the registration.

Judicial Analysis and Decision:
Upon hearing both sides, the tribunal observed that the appellant could not have been unaware of the large-scale fraudulent trades executed by the client within a short period. The tribunal agreed with the observation that the appellant's actions went beyond lack of due diligence and amounted to aiding in fraudulent and manipulative trades. The tribunal referred to previous judgments in similar cases to determine the appropriate penalty.

Final Decision:
The tribunal partially allowed the appeal by setting aside the suspension of the license for three months. Instead, it directed that the appellant should not accept any fresh clients for a period of six months from the date of the order. The decision was based on a comparison with penalties imposed in similar cases involving fraudulent trading activities. The miscellaneous application seeking stay was deemed infructuous, and no costs were awarded in the judgment.