2021 (9) TMI 1524 - AT - SEBI

Offence under SEBI Act - synchronized trading, reversal trading and self-trading - appellants made unlawful gains - trading noticees received funds from the financing notices which were directly transferred to the stock brokers against the pay in obligation of the trading noticees - WTM directed the appellants to pay the said amount jointly and severally alongwith interest at the rate of 12% per annum. HELD THAT - Any person who has made profits or averted loss by indulging in any transaction or activity in contravention of the provisions of this Act or Regulations made thereunder would be liable to disgorge an amount equivalent to the unlawful gain or loss averted by such contravention. Thus, disgorgement can only happen if the person contravenes the provisions of the Act or Regulations. Secondly, the disgorgement is equivalent to the wrongful gain made or loss averted. Thus, disgorgement cannot exceed the amount of wrongful gains.The concept of disgorgement under the SEBI laws is based on the principle that a person in possession of wrongful gains by which he is enriched may be asked to part with the amount equivalent to such gains alongwith interest. Black s Law Dictionary defines disgorgement as The act of giving up something (such as profits illegally obtained) on demand or by legal compulsion. To disgorge means to deprive a person of the value by which he is unjustly enriched. Further, disgorgement is an equitable remedy designed to deprive a wrong doer of his unjust enrichment. It aims in ensuring that a person in possession of the wrongful gain does not continue to enjoy them. Section 11B of the Act only talks about disgorgement of unlawful gains/profits. The concept of net profits is not existing in Section 11B but the same has been carved out by Courts exercising equitable jurisdiction. Some Courts have granted only deduction of statutory dues, others have granted other legitimate expenses. Disgorgement in our opinion is an equitable remedy under Section 11B of the Act meant to prevent the wrongdoers from enriching himself by his wrong by wresting ill-gotten gains from the hands of the wrongdoer. The provisions relating to disgorgement is thus remedial in nature and is not punitive. Thus, legitimate expenses can be deducted while arriving at net profit. The respondent in this case has only allowed statutory deductions expended as a deduction while arriving at the net profit but did not allow deduction of administrative expenses and brokerage incurred by the wrongdoer. We are in agreement with the findings given by the WTM in this regard. In our opinion net profit from wrongdoing is the gain made by any business or investment, where both the receipts and payments are taken into account. We are further of the opinion that the appellant will not be allowed to diminish the show of profits by putting in unconscionable expenses or other inequitable deductions even though entire profits of a business may result from the wrongdoings of the appellants and therefore are not entitled for the deductions as prayed by them. Section 37(1) of the Income Tax Act debars an assess claiming any deduction from business profits any expenditure which may be incurred for any purpose which is an offence or which is prohibited by law. The aforesaid principle equally applies to SEBI laws since disgorgement is not a penalty nor is punitive as held by this Tribunal in Gagan Rastogi vs. SEBI 2019 (10) TMI 1047 - SECURITIES APPELLATE TRIBUNAL, MUMBAI Administrative expenses and brokerage charges are in the nature of business expenses and are not legitimate expenses for the purpose of claiming deductions in order to arrive at the net profit. Disgorgement being an equitable remedy and even though the profits results from wrongdoings, the appellants were rightly denied administrative expenses and brokerage. For the reasons stated aforesaid all the appeals are devoid of merit and are dismissed.

Summary

Issues Involved:
1. Compliance with Tribunal's directions on reversal trades and profit calculations.
2. Liability of financing noticees for disgorgement.
3. Disgorgement applicability to an appellant who incurred a loss.
4. Deduction of legitimate expenses in disgorgement calculations.

Issue-wise Detailed Analysis:

1. Compliance with Tribunal's Directions on Reversal Trades and Profit Calculations:
The appellants contended that the Tribunal's directions to provide date-wise details of reversal trades and calculations of profits were not complied with by the WTM. The Tribunal had earlier directed SEBI to provide these details and recalculate the disgorgement amount. Upon review, it was found that while the impugned order did not explicitly detail which trades matched as reversal trades, the voluminous details were provided to the appellants. The Tribunal noted that no objections were raised by the appellants regarding the reversal trades' details, thus the impugned order was not vitiated despite the lack of specific findings in the order.

2. Liability of Financing Noticees for Disgorgement:
The financing noticees argued that they should not be liable for disgorgement as they did not engage in synchronized, self, or reversal trades. However, the Tribunal had previously determined that these noticees were culpable due to their direct connection with trading entities and funding the trades, which constituted indirect access to the securities market. The financing noticees' involvement in the fraudulent scheme made them liable to jointly pay the disgorgement amount.

3. Disgorgement Applicability to an Appellant Who Incurred a Loss:
One appellant argued that since he incurred a loss, no disgorgement should be imposed on him. The Tribunal rejected this contention, emphasizing that the appellant's involvement in fraudulent trading activities violated SEBI regulations, making him liable despite the loss. The principle of joint tortfeasors was applied, holding that all involved parties are jointly and severally liable for the wrongful acts.

4. Deduction of Legitimate Expenses in Disgorgement Calculations:
The appellants argued that while calculating unlawful gains, administrative and brokerage charges should be deducted. The Tribunal upheld the WTM's decision to only allow statutory deductions, reasoning that disgorgement aims to deprive wrongdoers of their ill-gotten gains. The Tribunal referenced Section 11B of the SEBI Act, which mandates disgorgement of unlawful gains without allowing deductions for business expenses incurred during the wrongful activities. The Tribunal further cited the Income Tax Act, which disallows deductions for expenses related to illegal activities, reinforcing that administrative and brokerage charges are not legitimate expenses for deduction in disgorgement calculations.

Conclusion:
The appeals were dismissed, affirming the WTM's order to disgorge the recalculated amount of Rs. 2,69,93,016.79 along with interest. The Tribunal emphasized that disgorgement is an equitable remedy designed to prevent wrongdoers from benefiting from their unlawful actions. The decision was based on thorough legal principles, ensuring that the appellants were held accountable for their involvement in fraudulent trading activities.