2020 (7) TMI 31 - AT - SEBI

Restrained orders from accessing the securities market or dealing with the securities market directly or indirectly - BSE Limited ('BSE') was directed to appoint an independent auditor/audit firm for conducting a detailed forensic audit of the books of account of Ricoh India Limited - prima facie suspicion and vicarious liability attributable to a MD/CEO - HELD THAT - The impugned order (quoted at paragraph 5 and 6 of this order) bring out only a suspicion about the role of the appellants. Moreover, we note that though the submissions of the appellants have been noted in detail in the impugned order they have not been dealt with appropriately. Question before us is how long the appellants would be kept out of the market through directions contained in an interim order and confirmatory order which are based on only a prima facie suspicion and vicarious liability attributable to a MD/CEO. This question becomes more relevant particularly in the facts of the case where we are told that the Company Ricoh itself is under liquidation and the appellants are not in-charge of the said Company and therefore not in a position to influence the decisions of the Company. Moreover, we also note that the submissions made by the appellants have not been dealt with in the impugned order in any meaningful manner thereby effectively confirming the interim directions without taking into account the submissions and the documents made available by the appellants. Given these factors we find it difficult to sustain the impugned order qua the appellants. Both the appeals succeed and the impugned order is quashed qua the appellants. However, SEBI is at liberty to issue a fresh show cause notice and proceed in the matter in case evidence against the appellants are available through the forensic audit report or through SEBI's own investigation

Summary

Issues Involved:
1. Challenge to the confirmatory order by SEBI.
2. Allegations of financial misstatements and fraud by Ricoh.
3. Role and involvement of Key Managerial Personnel (KMP) in the alleged fraud.
4. Compliance with principles of natural justice and fair hearing.
5. Validity of SEBI's reliance on preliminary forensic reports.
6. Duration and impact of interim restraint orders on the appellants.
7. SEBI's investigation process and findings.

Detailed Analysis:

1. Challenge to the Confirmatory Order by SEBI:
The appeals were filed to contest the confirmatory order dated August 16, 2018, by SEBI's Whole Time Member (WTM). The order confirmed the interim directions restraining the appellants from accessing or dealing with the securities market and mandated a forensic audit of Ricoh's accounts from 2012-13 to 2018.

2. Allegations of Financial Misstatements and Fraud by Ricoh:
The statutory auditor of Ricoh raised concerns over the financial statements for June and September 2015, prompting Ricoh to conduct a preliminary investigation through PwC. Ricoh reported to SEBI that the financial statements did not reflect the true state of affairs and disclosed a loss of ?1118 crore for the year ending March 2016. SEBI's investigation found that financial misstatements began in 2012-13, leading to significant losses and inflated share prices.

3. Role and Involvement of Key Managerial Personnel (KMP) in the Alleged Fraud:
The appellants, senior officials of Ricoh, were implicated in the financial misstatements. The appellant in Appeal No. 407 of 2018 was the Senior Vice President and Chief Strategy Officer during 2014-15 and 2015-16, later becoming MD and CEO in April 2016. The appellant in Appeal No. 427 of 2018 was the MD and CEO from 2012-13 to 2014-15. SEBI's investigation sought to determine their roles in the misstatements and fraud.

4. Compliance with Principles of Natural Justice and Fair Hearing:
The appellants argued that the confirmatory order violated natural justice principles, as their written submissions were not considered, and they were denied a personal hearing. Despite their cooperation and detailed replies, the WTM confirmed the interim directions without addressing their submissions.

5. Validity of SEBI's Reliance on Preliminary Forensic Reports:
The appellants contended that SEBI's reliance on PwC's preliminary report was flawed, as the report did not implicate them. They argued that the inclusion of their names in the show cause notice was arbitrary and unsupported by evidence. SEBI, however, claimed that its investigation and the PwC report provided clear evidence of large-scale financial misstatements and fraud.

6. Duration and Impact of Interim Restraint Orders on the Appellants:
The interim restraint orders had been in effect since March 6, 2018, causing significant impact on the appellants. They argued that the prolonged restraint, based on suspicion and without concrete evidence, was unjustified. SEBI's delay in finalizing the forensic audit report and passing a final order further exacerbated the situation.

7. SEBI's Investigation Process and Findings:
SEBI's investigation revealed significant financial misstatements and losses due to transfers to third parties, write-offs, and non-recovery of debts. The share price of Ricoh fluctuated dramatically due to the misstatements. SEBI argued that the appellants, as senior officials, could not claim ignorance of the wrongdoing and were responsible for the company's financial health.

Conclusion:
The Tribunal found that the confirmatory order was based on suspicion and did not adequately address the appellants' submissions. The prolonged restraint without concrete evidence was deemed unjustified. The appeals were allowed, and the impugned order was quashed. SEBI was granted the liberty to issue a fresh show cause notice if further evidence emerged from the forensic audit or its investigation.