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TMI Blog2013 (11) TMI 1393X X X X Extracts X X X X X X X X Extracts X X X X ..... creen 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 on the part of Appellant 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 when all transactions were screen based at the prevalent market price. Act of front running is always considered injurious be it an intermediary or any other person for that reasons. We would like to give a liberal interpretation to the concept of front running and would hold that any person, who is connected with the capital market, and indulges in front running is guilty of a fraudulent market practice as such liable to be punished as per law by the respondent. Appellant nos. 1 and 2 have not been implicated in the case on basis of being mere hus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ma (Appellant no. 1) and Shri Sanjay Kashiram More, following a report from National Stock Exchange (NSE), to ascertain any instances of contravention of provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 during period from December 1, 2009 to March 31, 2010. 3. Investigation revealed that Shri Jitendra Kumar Sharma (Appellant no. 2) is husband of Appellant no. 1 and has been equity dealer for Central Bank of India (CBI) since May 8, 2008. He used to place orders for CBI with brokers namely Kaviraj Securities P. Ltd. (Kaviraj) and Trustline Securities Ltd. (Trustline). Appellant no. 1 has a trading account with the broker, Eureka Stock Share Broking Services Ltd. (Eureka). It was further observed that during period under investigation, on 16 days trades were executed in account of Appellant no. 1 in such a way that net quantity at end of day was zero (day traded). On 14 out of the said 16 days, sell trades of Noticee no. 1 matched 100% with that of buy trades of CBI. The Appellant no. 1 had earned positive square off difference in all trades with CBI as counter party. Noticee no. 1 traded for Rs. 35,63,000/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity Dealer. In the capacity of an Equity Dealer his work includes - preparation of technical charts for consideration of Chief Dealer and promptly placing of orders for purchase and sale of shares with bank's broker, in accordance with instructions of Chief Dealer. He was always acting under control, instructions and supervision of Chief dealer and was not involved with decision making mechanism. Dealing room of Bank is located at its Central Office at the 5th Floor of Chandermukhi Building at Nariman Point is fitted with all necessary security features, has dedicated voice recorded telephone lines through which dealers like him place orders with brokers. Mobile phones are not permitted to be used in dealing room and hence, he did not carry his mobile to office while working as equity dealer for the Bank. Chief dealer or Investment Committee of the Bank take decision regarding script, quantity and price to be invested / traded on a day-to-day basis and such decisions are taken at beginning of trading day / session and executed during the day. 8. Appellant no. 1 traded in shares of various companies since April 2007 i.e. much before Appellant no. 2 became equity dealer for the ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 2011. 13. Appellant no. 1 had been trading in securities market considerably prior to Appellant no. 2's appointment as an equity dealer for Central Bank. Copy of Office Order No: CO: ITB: 2008-09, dated June 16, 2008, spelling out main duties and responsibilities of Equity dealer are : (i) Preparation of Technical chart for the scrips/shares selected and choose by Chief Dealer - Treasury for his consideration. (ii) Promptly placing buy/sell orders for scrips/shares as per instructions/directions of Chief Dealer- Treasury. 14. Appellant no. 2, as responsible employee of Central Bank had in fact disclosed and informed Central Bank vide his letters dated April 25, 2007, March 28, 2012 and June 2, 2012 about his wife, Appellant no. 1 being a day trader. Central Bank was also informed that she had opened a trading and demat account with Eureka Stock and Share Broking ("Eureka") and FRR Shares and that she also intended to register as sub-broker. 15. It was also stated by learned counsel for appellants that trade between Appellant no. 1 and Central Bank matched for 14 days only, out of total investigation period of 40 days and this is an inadequate sample size to ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all cases. 20. Time difference of 3 hours 33 minutes 10 seconds is found in case of sale/purchase of scrip of Federal Bank when Appellant no. 1 purchased 10,000 shares of Federal Bank at 11:19:56 at Rs. 238 and placed these for sale straight away for entire quantity at 11.30 at Rs. 238, when last traded price of scrip was 236.55 and CBI placed order for purchase of 1,00,000 shares of same scrip at 15:03:01 at Rs. 239. The trade was struck at 15:19:52 which resulted in sale of entire quantity of shares offered by Appellant no. 1, which were purchased by CBI. It appears that Appellant no. 1 was sure that Federal Bank scrip offered by her for sale will be picked up during the course of the day at the price offered by her, even though the price of scrip had in fact fallen since the time she bought (Rs. 238) to the time she offered the entire quantity of same for sale (Rs. 236.25) to the time when CBI put purchase order at Rs. 239, when LTP of scrip was Rs. 235.55. 21. Similarities are found in all 14 scrips offered for sale by Appellant no. 1 for 14 days, which resulted in purchase of these scrips, in full quantity by CBI, at price higher than price at which appellate had bought th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et. 23. Learned senior counsel for Respondent also submitted that insider trading regulations and fraud definition have been developed for purpose of ensuring level play field for all players. Investors/players in market who have recourse to privileged or special information, which is not in public domain, uses this information, practices fraud on other investors and on market and affects integrity of markets and other investors are put at a loss. Appellant no. 1 buys scrips at low price (LTP) and knows that CBI will purchase same scrip at higher price, pretending to be faceless in trading screen of NSE/BSE, but is not faceless since she is in possession of privileged information and uses the same and commits fraud on other investors. 24. Learned senior counsel for Respondent also defined front running as a specie of insider trading and as covered under Section 3 of Unfair Trade Practices Regulations. In the instant case, Appellant no. 2 has price sensitive information, is aware that there will be movement in price of a scrip based on this information and communicates this information to Appellant no. 1 who acts on same and hence it is a clear case of insider trading. 25. Lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 and her acting on that basis is much more than probability of coincidence of timing and pricing on all 14 days of trade, resulting in positive squaring off of trade in favour of Appellant no. 1. Appellant no. 2 says that he is only a dealer in CBI, entrusted with duties and responsibilities of preparation of technical charts for scrips/shares selected and chosen by Chief Dealer/Treasury for his consideration and promptly placing buy/sell orders for scrips/shares as per information/documents of Chief Dealer/Treasury. This may be true, but as dealer he is responsible for preparation of technical charts for scirps/shares selected and chosen by Chief Dealer/Treasury for his consideration and he was definitely in know of which scrip/share is likely to purchase on what day and at what time and at what price and in case Chief Dealer/Treasury was not making much changes to these charts prepared by dealer, he could be almost certain as to what will be purchased during the day and at what price. This point, as a matter of fact, could have been investigated further by Respondents, to add more weightage to preponderance of probability, in their favour. 28. Regarding examination of voice re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... knowing that when the information becomes public, the price of the securities will change in a predictable manner. This practice is illegal. Front-running can occur in many ways. For example, a broker or analyst who works for a brokerage firm may buy shares in a company that the firm is about to recommend as a strong buy or in which the firm is planning to buy a large block of shares." It will thus be seen that if a person trades in stocks or other investments having knowledge of the upcoming transaction by a third party which is likely to affect the market price of the investment, the person can be said to be doing front running. Examined in the above perspective, is clear that the appellants were doing front running in relation to the trades of the Passport. The Board, while dealing with the matter, has used the word "customised front running". We are unable to agree with learned counsel for the appellants that the Board has given up the charge of front running in the impugned order. Simply because the term front running is not used in the show cause notice, it does not mean that the charge has been given up. The conduct of the appellants as described in the show cause not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as an agent, execute a transaction with a client at a price other than the price at which the transaction was executed by him, whether on a stock exchange or otherwise, or at a price other than the price at which it was off set against the transaction of another client." 13. We are inclined to agree with learned counsel for the appellants that the 1995 Regulations prohibited front running by any person dealing in the securities market and a departure has been made in the Regulations of 2003 whereby front running has been prohibited only by intermediaries. The cases cited by the learned senior counsel for the Board and referred to above also relate to front running by intermediaries and not by other traders in the market. In the absence of any specific provision in the Act, rules or regulations prohibiting front running by a person other than an intermediary, we are of the view that the appellants cannot be held guilty of the charges levelled against them. There is no denying 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rule sand the regulations made thereunder." "4. Prohibition of manipulative, fraudulent and unfair trade practices (1) Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities.' 35. Main findings of learned adjudicating officer are that Appellants are husband and wife and out of 40 days of trading days, under investigation, Appellant no. 1 has traded for single scrip on 14 days, when her trading matched 100% with trading in same scrip by CBI, resulting in net positive square off for Appellant no. 1 on all these days, resulting in profit to extent of Rs. 7,15, 857 on trading volume of Rs. 35,63,000/-; by placing sale orders for these scrips by Appellant no. 1 at prices significantly higher than Last Traded Price (LTP) of the scrip but equal to or slightly below the buy order placed of CBI, which was also significantly higher than LTP, but more or less matched with sale order price of Appellant no. 1, who was a day trader i.e. she squared off he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce as submitted by learned senior counsel for appellants, in sense that Appellant no. 1 was working on basis of her studies, research reports, types by broker, reports of commercial channels of TVs etc. or on basis of mantra of trading, namely, "buy cheap sell costly", since matching of trade at significantly higher price than LTP, timing, quantity of sale/purchase matched to extent of 100% on all 14 days, out 40 days of investigation period. (4) Perfect matching of trade of Appellant no. 1 and CBI on 14 days, out of 40 days of investigation period of 40 days, in statistically very significant and hence study for larger number of days to see matching, was not required. (5) No useful purpose will be served by listening to recordings of telephonic conversation of dealing room for the period when the same is available, though not pertaining to days of investigation period. Since practice of recording telephonic conversation was introduced subsequent to investigation period and the same is not available for investigation period. (6) Appellant nos. 1 and 2 have not been implicated in the case on basis of being mere husband and wife and on basis of their relation, b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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