2019 (10) TMI 1510 - AT - SEBI

Ingenuine preferential allotment of shares - disgorgement of ill-gotten gains - matter relating to buying and selling of shares of the company and, upon an analysis of the trading activity in the scrip of the company, it found that 37 entities were acting together as a group and had adopted a fraudulent device and artifice to defraud the genuine shareholders of the company by falsely portraying fraudulent transactions as genuine preferential allotment of shares and offloading the shares allotted pursuant to the preferential allotment thereby earning illegal profits - Orders against 37 entities restraining them from accessing the securities market and further prohibiting them from buying, selling or dealing in the securities market either directly or indirectly and further directed them to keep in an escrow account an amount of ₹ 6 crore which they had earned illegally from sale of the shares allotted in preferential allotment by the company - contention of some of the appellants that they were only employees in the company and had no knowledge of the fraudulent activities HELD THAT - We find that the contention of some of the appellants that they were only employees in the company and had no knowledge of the fraudulent activities is patently baseless and cannot be accepted. Each of the appellants were aware of the activities being done through their accounts and, therefore, it is inconceivable to believe that they were not aware of their bank accounts, trading accounts or the demat accounts being utilized by Shri Rajesh Ranka. The contention that they were not signatories to these accounts is a mere afterthought as, except one, others have not filed an FIR to this effect. However, there is nothing to show that this appellant (in Appeal No. 71 of 2019) pursued the matter in any manner. Further, we find that the appellants were beneficiaries to the profits which came into these accounts. All the appellants were acting in concert as majority of the appellants had a common e-mail and address of Rajesh Ranka who is alleged to be an employee in the company and to whom a power of attorney was also given to the bank to send all e-mails and statements of accounts. This fact has not been denied by any of the appellants.The contention that the appellant Rajesh Ranka cannot be held guilty either for debarment or for disgorgement as he was neither a preferential allottee nor profited by the sale of these shares is patently erroneous. Rajesh Ranka has been found to be acting in concert with the appellant and other entities in adopting fraudulent devices and was operating all the accounts of the appellants through the power of attorney given to him. In certain instances, there has been evidence of transfer of funds from one account to the other account. The WTM has further found that he had access to the e-mail account of all the appellants and was also the authorized signatory of the bank account of all the other appellants. Not only that, the bank statement of the appellants was being sent to him. Therefore, he was part of the fraud and even though he may not be an allottee himself but was involved in the manipulation or fraud in concert with others. The contention made by the appellants that they have not made profits nor sold the shares, and therefore, cannot be made liable for disgorgement either individually or jointly is patently misconceived - The contention that since the profit has not been computed, the amount cannot be disgorged under Section 11B is patently erroneous. A feeble attempt was made by one of the appellants that the expenses incurred by the appellants in the transactions should be deducted from the profits or wrongful gains made by them. Such submission cannot be considered in the absence of any amount being brought on record to show the actual expenses incurred by the appellants. The contention raised is misconceived and an afterthought. The contention by some of the appellants that they were not signatories to the bank accounts, trading accounts or the demat accounts and that a fraud was played upon them and, therefore, they should not be made liable for disgorgement is patently erroneous. We are of the opinion that by renting their demat account, trading account etc., the appellants were concealing the identity of the fraudster and, thus, were acting not only in concert but in connivance with the said fraudster. The appellants cannot, thus, escape from the liability of debarment and the wrongful gains made by them. From the aforesaid, it is clear that a person can be directed to disgorge amount equivalent to the wrongful gain made by him. By such contravention, the liability to disgorge the amount is individual and not collective. Thus, we are of the opinion that the direction of the WTM directing the appellants to pay the amount jointly or severally is against the provisions of Section 11B and to that extent, it cannot be sustained. The order of the WTM is consequently, modified to the extent that the liability of the appellants in question except Rajesh Ranka to disgorge the amount is to the extent of the profit earned by them as calculated by the WTM under Table 9. In the event of failure by these appellants to pay the amount, it would be open to SEBI to recover the amounts in the order of hierarchy stipulated in paragraph 145(e) of the impugned order. We are of the view that in view of the role played by Rajesh Ranka, the disgorgement is jointly and severally for which we do not find any fault with the order of the WTM. Appeal dismissed.

Summary

Issues Involved:
1. Legitimacy of preferential allotment of shares.
2. Alleged fraudulent activities and manipulation of the securities market.
3. Joint and several liability for disgorgement.
4. Individual liability and extent of disgorgement.
5. Validity of claims regarding lack of knowledge and involvement in fraudulent activities.
6. Legitimacy of profits earned and calculation of disgorgement amount.

Issue-wise Detailed Analysis:

1. Legitimacy of Preferential Allotment of Shares:
The company allotted 3 crore shares through preferential allotment to 31 entities on March 13, 2012, which became 30 crore shares after a stock split in November 2012. SEBI found that 37 entities acted together to defraud genuine shareholders by portraying fraudulent transactions as genuine preferential allotments and offloading the shares, thereby earning illegal profits.

2. Alleged Fraudulent Activities and Manipulation of the Securities Market:
SEBI's enquiry revealed that the entities adopted a fraudulent device to defraud shareholders by sending SMS recommendations to buy the company's scrip. The investigation found that the entities shared common contact details and authorized Rajesh Ranka to manage their accounts, indicating concerted fraudulent activities. SEBI issued an ad-interim ex-parte order restraining 37 entities from accessing the securities market and directing them to keep ?6 crore in an escrow account.

3. Joint and Several Liability for Disgorgement:
The WTM ordered the appellants to disgorge ?6,78,85,716/- jointly and severally, along with 12% interest p.a. from November 5, 2013, until payment. The hierarchy for recovery in case of non-payment was specified. The appellants contested this, arguing that liability should be individual and not joint and several.

4. Individual Liability and Extent of Disgorgement:
The Tribunal found that each appellant was aware of the fraudulent activities and benefited from the profits. The contention that they were merely employees or unaware of the activities was rejected. The Tribunal modified the WTM's order, stating that liability should be individual based on the profit earned by each appellant, except for Rajesh Ranka, who was liable jointly and severally due to his significant role.

5. Validity of Claims Regarding Lack of Knowledge and Involvement in Fraudulent Activities:
The appellants argued that they were unaware of the fraudulent activities, with some claiming to be victims of fraud by Rajesh Ranka or Mahesh Shah. The Tribunal found these claims baseless, noting that the appellants were aware of their accounts being used and had benefited from the profits. The Tribunal dismissed the argument that they were not signatories to the accounts, as they had not pursued any legal action to substantiate their claims.

6. Legitimacy of Profits Earned and Calculation of Disgorgement Amount:
The Tribunal upheld the WTM's calculation of profits earned by each appellant, rejecting the argument that disgorgement should not include notional profits. The Tribunal found that the appellants had earned profits and were liable for disgorgement. The contention that expenses should be deducted from the profits was dismissed due to lack of evidence.

Conclusion:
The Tribunal affirmed the WTM's order with modifications, stating that the liability for disgorgement should be individual based on the profit earned by each appellant, except for Rajesh Ranka, who was liable jointly and severally. The appeals were disposed of with no order as to costs.