2023 (10) TMI 1502 - Board - SEBI

Fraudulent and Unfair Trade Practices - Trading in illiquid stock options done by the Noticee during the Investigation Period was in violation of Regulations 3(a) (b) (c) (d) 4(1) and 4(2)(a) of the PFUTP Regulations - whether the Noticee is liable for a levy of monetary penalty u/s 15HA of the SEBI Act and if yes how much should be the penalty? HELD THAT - Noticee had contributed to the artificial volume in the range of 10.81% to 22.57% vs total market volume in the said contracts. Thus find that the Noticee by executing non genuine trades had contributed to the creation of artificial volumes in the said contracts. Trades between the Noticee and the counterparties were a consequence of pre-meditated decision of all the parties and hence are unfair trades as per PFUTP Regulations. It cannot be a matter of coincidence or lack of awareness or without knowledge of the counterparties. Hence the trades placed on the stock exchange platform by mutual understanding are non-genuine trades which are prohibited under PFUTP Regulations. Noticee s transactions were fraudulent/ manipulative as contemplated in the PFUTP Regulations. Hence as inclined to impose monetary penalty on the Noticee. Quantum of penalty to be levied we take into regard the manipulative nature of the trades placed by the Noticee that has led to creation of artificial volume in the contract. Determine the quantum of penalty to be imposed bearing in mind the parameters laid down in Section 15J of the SEBI Act. The amount of disproportionate gain or unfair advantage is not quantifiable. Therefore considering all the facts and circumstances in this matter we are inclined to impose a minimum penalty against the Noticee as provided under Section 15HA of the SEBI Act. As per the provisions of the Amendment of Section 15HA vide the Securities Laws (Amendment) Act 2014 that came into force on September 08 2014 the penalty shall not be less than five lakh rupees. In the instant case it is observed that the violation of the PFUTP Regulations took place after the aforesaid date therefore the penalty shall not be less than five lakh rupees. Therefore in exercise of powers conferred upon me under Section 15-I(2) of the SEBI Act read with Rule 5 of the Adjudication Rules I hereby impose a penalty of Rs 5, 00, 000/- (Rupees Five Lakhs only) upon the Noticee i.e. Manoj Jain HUF (PAN No AAJHM5595D) under Section 15HA of the SEBI Act for violation of Regulations 3(a) (b) (c) (d) 4(1) and 4(2)(a) of the PFUTP Regulations. Noticee shall remit / pay the said amount of penalty within 45 days of receipt of this order through online payment facility available on the website of SEBI.

Summary

ISSUES PRESENTED and CONSIDERED

The core issue in this case was whether the trading in illiquid stock options by the Noticee during the Investigation Period violated Regulations 3(a), (b), (c), (d), 4(1), and 4(2)(a) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations). Additionally, if such a violation occurred, the issue was whether the Noticee was liable for a monetary penalty under Section 15HA of the SEBI Act and the appropriate amount for such a penalty.

ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents

The PFUTP Regulations prohibit fraudulent and manipulative practices in securities trading. Specifically, Regulation 3 prohibits dealing in securities in a fraudulent manner, using deceptive devices, employing schemes to defraud, and engaging in practices that operate as fraud or deceit. Regulation 4 prohibits manipulative, fraudulent, and unfair trade practices, including creating false or misleading appearances of trading.

Section 15HA of the SEBI Act prescribes penalties for fraudulent and unfair trade practices, with a minimum penalty of five lakh rupees and a maximum of twenty-five crore rupees or three times the profits made, whichever is higher.

The Supreme Court's judgment in SEBI vs. Rakhi Trading established that synchronized and reverse trades with predetermined arrangements constitute unfair trade practices, affecting the integrity and transparency of the securities market.

Court's Interpretation and Reasoning

The Court noted that the Noticee engaged in non-genuine trades, characterized by exact reversal of buy and sell positions within seconds, with no legitimate rationale for price variations. These trades created artificial volumes in the market, violating the PFUTP Regulations.

The Court relied on the Rakhi Trading case to affirm that such trades were non-genuine and manipulative, as they did not involve genuine change of ownership and were pre-arranged to create misleading appearances in the market.

Key Evidence and Findings

The evidence included records of eight non-genuine trades executed by the Noticee on four different days, involving exact quantities and rapid reversals with the same counterparties. The trades contributed significantly to artificial market volumes, ranging from 10.81% to 22.57% of the total volume in the respective contracts.

Application of Law to Facts

The Noticee's trades were deemed manipulative and fraudulent as per the PFUTP Regulations. The absence of a legitimate purpose for the trades, combined with the rapid reversals and pre-arranged nature, demonstrated a violation of the regulations.

Treatment of Competing Arguments

The Noticee failed to provide a substantive defense or explanation for the trades, despite being given multiple opportunities to respond. The Noticee's claim of not executing the trades was not supported by evidence, and the trades' characteristics indicated a premeditated scheme.

Conclusions

The Court concluded that the Noticee violated the PFUTP Regulations by engaging in fraudulent and manipulative trades, creating artificial volumes in the securities market. The Noticee was liable for a monetary penalty under Section 15HA of the SEBI Act.

SIGNIFICANT HOLDINGS

The Court held that the Noticee's trades were fraudulent and manipulative, as they involved pre-arranged reversals and created artificial market volumes. The trades violated Regulations 3(a), (b), (c), (d), 4(1), and 4(2)(a) of the PFUTP Regulations.

The Court imposed a penalty of Rs 5,00,000/- on the Noticee, considering the manipulative nature of the trades and the creation of artificial volumes. The penalty was the minimum prescribed under Section 15HA of the SEBI Act, given the absence of quantifiable disproportionate gains.

The judgment reinforced the principles established in the Rakhi Trading case, emphasizing the need for fairness, integrity, and transparency in the securities market. It highlighted the importance of preventing market abuse and maintaining investor confidence.

The Noticee was ordered to pay the penalty within 45 days, with provisions for recovery proceedings in case of non-compliance.