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TMI Blog2013 (2) TMI 464X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellants were right in stating that front running has been prohibited only by intermediaries. In the absence of any specific provision in the Act, rules or regulations prohibiting front running by a person other than an intermediary, it is opined that the appellants cannot be held guilty of the charges levelled against them. On considering the fact that when the appellants placed their order, these were screen-based and at the prevalent market price. Admittedly Passport was the major counter-party for trading in the market and was placing huge orders and, hence, possibility of order of traders placing orders for smaller quantities matching with orders of Passport cannot be ruled out. Therefore, it cannot be said that they have manipulated the market. The alleged fraud of Deepak may be a fraud against its employer for which the employer has taken necessary action. In the absence of any specific provision in law, it cannot be said that a fraud has been played on the market or market has been manipulated by the appellants. thus SEBI has erred in holding the appellant guilty of violating regulation 3. - APPEAL NO. 216 OF 2011 - - - Dated:- 9-11-2012 - P.K. MALHOTRA, MEMBER PRE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Dipak in these transactions. By adopting this method KB earned a total profit of Rs. 1,56,32,364/- from the alleged trades. The Board was of the view that such trading is violative of Regulation 3(a),(b),(c) and (d) of FUTP regulations. According to the Board, it also breached the integrity of the market and therefore in exercise of the powers under section 19 read with section 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 (for short the Act), the whole time member of the Board passed an ad interim order on May 28, 2009 giving directions as under, pending investigation: " a. Dipak Patel, Portfolio Manager of M/s Passport India Investment (Mauritius) Ltd not to buy, sell or deal in any securities, directly or indirectly till further directions in this regard. b. Dipak Patel may not be associated with any FII or sub- account or any registered entity of SEBI till further orders. c. Kanaiyalal Baldev Patel, Anandkumar Baldevbhai Patel, BhoomiIndustries are hereby directed not to buy, sell or deal in any securities, directly or indirectly till further directions in this regard. The details with regard to the PAN and Passport number of the above state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hearing, we were told that no further action has been taken by the Board in these proceedings under section 11(4) and 11B of the Act. 4. The Board also initiated adjudication proceedings against the appellants under Chapter VIA of the Act and issued a show cause notice dated February 28, 2011 giving details of the investigation carried out by the Board. The said show cause notice also made reference to the response received from Passport in reply to the direction contained in the ad interim order dated May 28, 2009. The show cause notice records the contents of the Passport's letter dated September 17, 2009 as under: "Passport Capital LLC, vide letter dated September 17, 2009 has made the following submissions with regard to the above: a. They employed the law firm Paul, Hastings, Janofsky and Walker LLP (Paul Hastings) to conduct an internal inquiry in the matter. The investigations of Paul Hastings found that Dipak Patel participated in a trading arrangement substantially similar to that alleged in the SEBI's interim order with KB and violated written policies and procedures. b. The investigation determined that some time during 2007, Dipak Patel would set up an arr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a few seconds. Such a large number of synchronized trades between KB and Passport resulted in a profit of Rs. 1,56,32,364/- to KB. The show cause notice alleged that the said action of the appellants was violative of the provisions of Regulation 3(a),(b),(c) and (d) of FUTP regulations making them liable to penalty under section 15HA of the Act. 5. The appellants filed their replies and submissions at the time of personal hearing. The adjudicating officer of the Board found them guilty of violating the provisions of Regulation 3(a),(b),(c) and (d) of FUTP regulations and imposed monetary penalty under section 15HA as under: Sr. No. Appeal no. and Name of the Appellant Amount of penalty imposed 1. Appeal no. 216 of 2011 Shri Dipal K. Patel (Dipak) Rs. 5 crore 2. Appeal no. 74 of 2012 Shri Kanaiyalal Baladevbhai Patel (KB) Rs. 5 crore 3. Appeal no. 78 of 2012 Shri Anandkumar Baldevbhai Patel (AB) Rs. 1 crore Aggrieved by the aforesaid order passed in adjudication proceedings, the present appeals have been filed. 6. We have heard Mr. Janak Dwarkadas, senior counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. The appellants before us are not intermediaries and the Board has not consciously charged them for violating Regulation 4(2)(q) of the FUTP regulations. It was then argued that prior to coming into force of the FUTP regulations of 2003, Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995 were in force and under these regulations, the prohibition on front running was not confined to intermediaries alone but was applicable to 'any person' trading in the securities market. According to learned counsel for the appellants, the Regulations of 2003 make a clear departure from the earlier position and now front running is prohibited only by the intermediaries and not by other entities trading in the securities market. According to learned counsel for the appellants, this is the first case of this type and Board had not charged any person in the past for such activity. It was, therefore, contended that the impugned order deserves to be set aside. 8. Learned senior counsel for the respondent Board supported the order passed by the adjudicating officer and submitted that Dipak was handling sensi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the term 'front running' is not used in the show cause notice and was used in the impugned order will not amount to change or shifting of stand. It was, therefore, submitted by him that no interference with the impugned order is called for. 9. We have given our thoughtful consideration to the arguments on both sides and also perused the relevant documents. The allegation against the appellants in these appeals is that Dipak, portfolio manager of the Passport, passed on information about the impending trades of the Passport to his cousins KB and AB, based on which KB traded in the stock market and placed opposite matching orders first and then squared off the position with the orders of Passport. The said act of passing of information by Dipak by various means of communications including use of telephone of AB and trading done by KB using the said information is violative of Regulation 3(a),(b),(c) and (d) of FUTP regulations. Let us see what Regulation 3 of the FUTP regulations provides for: "Prohibition of certain dealings in securities 3. No person shall directly or indirectly- ( a ) buy, sell or otherwise deal in securities in a fraudulent manner; ( b ) use or emplo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... another of informed consent or full participation; (8) a false statement made without reasonable ground for believing it to be true; (9) the act of an issuer of securities giving out misinformation that affects the market price of the security, resulting in investors being effectively misled even though they did not rely on the statement itself or anything derived from it other than the market price. And "fraudulent" shall be construed accordingly; ..." As the title of the regulation itself suggests, these regulations are for prohibition of fraudulent and unfair trade practices relating to securities market. It is, therefore, necessary to bring on record as to how the fraud perpetrated by the appellants has affected the securities market. It will also be necessary to look at the modus operandi of the appellants in the trading done by them. The allegation in the show cause notices is that on the basis of information provided by Dipak, KB has done front running in relation to the trades of the Passport. The term front running is not defined in the FUTP regulations. However, the adjudicating officer, in paragraph 6 of the impugned order, has referred to front ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow cause notice, it does not mean that the charge has been given up. The conduct of the appellants as described in the show cause notice and as finally attributed to them in the impugned order, is the same. What we have to see is whether such front running is barred by the regulatory framework. Our attention was drawn to Regulation 4(2)(q) of the FUTP regulations which reads as under: "4.Prohibition of manipulative, fraudulent and unfair trade practices (1)** ** ** (2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud an may include all or any of the following, namely :- ( a ) to (p)** ** ** ( q ) an intermediary buying or selling securities in advance of a substantial client order or whereby a futures or option position is taken about an impending transaction in the same or related futures or options contract." 12. It is an admitted position on both sides that the aforesaid clause applies only to intermediaries and not to other persons trading in the securities market. Reference was made to the earlier FUTP regulations i.e. Securities and Exchange B ..... X X X X Extracts X X X X X X X X Extracts X X X X
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