2020 (7) TMI 7 - AT - SEBI

Insider trading - circumstantial evidence as to whether a person is guilty of insider trading - HELD THAT - Appellant had passed on the price sensitive information regarding the open offer to the Tippees. Such inference taken from the immediate and proximate facts and circumstances surrounding the events is reasonable and logical which any prudent man would arrive at such a conclusion. The Supreme Court in Kanhaiyalal Patel 2017 (9) TMI 1269 - SUPREME COURT held that an inferential conclusion from proved and admitted facts would be permissible and legally justified so long as the same is reasonable. In the light of the aforesaid, the decisions cited by the learned counsel for the appellant on the issue that a person cannot be held guilty only on the strength of proximity of relationship with the Tippee are distinguishable on facts and are not applicable in the instant case. We find from the record that there is ample evidence to draw a reasonable inference that the appellant had passed on the price sensitive information to the Tippees and, consequently, we are of the opinion that the order of the AO does not suffer from an error of law.

Issues Involved:
1. Whether the appellant was guilty of insider trading.
2. Whether the findings of the Adjudicating Officer (AO) were based on sufficient evidence or merely on the proximity of relationship between the appellant and the Tippees.
3. Whether the circumstantial evidence was adequate to infer that the appellant passed on price-sensitive information to the Tippees.

Detailed Analysis:

Issue 1: Whether the appellant was guilty of insider trading.
The appeal was filed against the order dated 30th August 2019 by the AO of SEBI, holding the appellant guilty of insider trading. The appellant, an employee of Morgan Stanley, was involved in an open offer assignment for CRISIL Ltd., which was considered sensitive information under SEBI (Prohibition of Insider Trading) Regulations, 1992 (PIT Regulations). The AO concluded that the appellant, who was privy to unpublished price-sensitive information (UPSI), had passed this information to his sister (Tippee-1), her mother-in-law (Tippee-2), her husband (Tippee-3), and her father-in-law (Tippee-4). The Tippees traded in CRISIL shares based on this information and made significant profits. The AO found the appellant guilty of insider trading but did not impose any penalty.

Issue 2: Whether the findings of the AO were based on sufficient evidence or merely on the proximity of relationship between the appellant and the Tippees.
The appellant argued that the AO's findings were based on surmises and conjectures, not on foundational facts. The appellant contended that the statements of his sister and her family were not considered, which would have shown that they were independent professionals capable of making their own trading decisions. The appellant also pointed out that SEBI's investigation into another trader, Ajay Bhalla, who made more significant profits, did not result in similar findings of guilt. The appellant relied on various legal precedents to argue that proximity of relationship alone should not lead to a finding of guilt.

Issue 3: Whether the circumstantial evidence was adequate to infer that the appellant passed on price-sensitive information to the Tippees.
The tribunal found that the appellant did not deny being a connected person or an insider as per the PIT Regulations. The tribunal noted that insider trading allegations could be inferred from circumstantial evidence and the totality of attending facts and circumstances. The tribunal cited the Supreme Court's decision in SEBI v. Kishore Ajmera, which held that courts could take notice of immediate and proximate facts and circumstances to reach a reasonable conclusion. The tribunal identified several foundational facts supporting the AO's conclusion:
- The appellant was a connected person and an insider privy to price-sensitive information.
- The appellant had a close relationship with the Tippees.
- The appellant attempted to conceal his relationship with the Tippees during the investigation.
- The trading pattern of the Tippees indicated prior knowledge of the open offer.
- The Tippees traded exclusively in CRISIL shares and made substantial profits.
- The Tippees' trading behavior was abnormal and suspicious.

Based on these facts, the tribunal concluded that an irresistible inference could be drawn that the appellant had passed on the price-sensitive information to the Tippees. The tribunal found the AO's order to be reasonable and logical, supported by ample evidence, and not merely based on the proximity of the relationship.

Conclusion:
The tribunal dismissed the appeal, upholding the AO's finding that the appellant was guilty of insider trading. The tribunal emphasized that circumstantial evidence and the totality of facts and circumstances were sufficient to draw a reasonable inference of guilt. The decision was delivered through video conference due to the COVID-19 pandemic, and the order was digitally signed.

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