2021 (1) TMI 982 - AT - SEBI

Violator indulging in serous act of misusing client's securities - appellant was expelled from the membership of the respondent exchange and also declared as a defaulter - HELD THAT - All the violations are admitted by him. No reply was submitted to the show cause notice issued regaring violation noted in the inspection for the year 2017-18. Considering the request of the appellant that he wanted to surrender his license afer redressing the complaints the investors, the Committee of respondent no. 1 time and again granted him time in hearing of the proceedings.Ultimately finding that the complaints were not resolved completely the impugned order was passed. As seen that after declaration of the appellant as a defaulter more complaints of the investors are pouring in with the respondent nos.1 and 2. The appellant was earlier penalized for similar violations for the financial years 2015-16, 2016-17 and 2017-18. In the circumstances in our considered view the appellant is a continuous violator much less a repeat violator. Besides respondent no 1 had already granted more than sufficient opportunity to redress the complaints of the investors, as it pleaded that it wanted to surrender the license. Therefore in our view this is not a fit case for interference in the impugned order. Hence the appeal is hereby dismissed.

Issues:
Expulsion from exchange membership and declaration as defaulter, Challenge to consequential notices calling for investor claims, Allegations of misuse of client securities and funds, Failure to fulfill financial obligations, Repeat violations leading to expulsion, Withholding of funds by another exchange, Additional investor complaints during appeal, Request to surrender license after resolving complaints.

Expulsion from Exchange Membership and Declaration as Defaulter:
The appellant, a trading member of two exchanges, was expelled and declared a defaulter by the respondent exchange due to irregularities noted during inspections, including misuse of client securities and funds, non-maintenance of required net worth, and using client funds for other clients' obligations. The expulsion order was based on the appellant's inability to fulfill obligations towards investors and the serious threat posed to the market and investors by allowing continued membership.

Challenge to Consequential Notices:
The appellant challenged the notices calling for investor claims, arguing that the expulsion order was harsh and unreasonable. The appellant claimed to have settled 99.9% of complaints and highlighted pending complaints amounting to ?5.9 lakhs. The appellant sought to resolve all complaints and surrender the license, emphasizing the need for fair treatment in comparison to other cases.

Allegations of Misuse of Client Securities and Funds:
The respondent exchange detailed multiple instances of violations by the appellant, including misuse of client funds and securities over several financial years, non-settlement of client funds, and discrepancies in net worth computation. The violations involved substantial amounts and repeated instances of non-compliance with regulations, leading to the conclusion that the appellant was a repeat violator.

Failure to Fulfill Financial Obligations:
The respondent exchange found the appellant unable to fulfill financial obligations towards investors, leading to the expulsion order. Despite multiple opportunities granted to rectify complaints, the appellant failed to resolve pending investor claims, indicating a lack of capacity to meet obligations and liabilities.

Repeat Violations Leading to Expulsion:
The Committee of the respondent exchange highlighted the appellant's history of violations, including monetary penalties and suspension for previous years. The appellant's failure to address complaints and the seriousness of violations led to the expulsion order, emphasizing the need to protect market integrity and investor interests.

Withholding of Funds by Another Exchange:
The appellant's claim of funds withheld by another exchange was addressed, with the second exchange asserting compliance with rules requiring withholding of deposits for investor claims satisfaction. The second exchange received additional complaints during the appeal, further complicating the situation.

Additional Investor Complaints During Appeal:
New complaints of misuse of client securities were raised during the appeal, indicating ongoing issues despite the expulsion order. The appellant's attempt to address complaints and surrender the license was considered in light of the continuous flow of investor complaints.

Request to Surrender License After Resolving Complaints:
The appellant's plea to surrender the license after resolving investor complaints was acknowledged, but the continuous violations and failure to address pending complaints led to the dismissal of the appeal. The Tribunal found the appellant to be a continuous violator, warranting the expulsion and declaration as a defaulter.

This detailed analysis covers the various issues involved in the legal judgment, addressing the grounds for expulsion, challenges to the decision, allegations of misconduct, and the overall outcome of the appeal.

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