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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 ..... ecurities Market) Regulations, 2003 ("PFUTP Regulations"). 2. Securities and Exchange Board of India (hereinafter referred to as 'SEBI') conducted an investigation into the trading activity of Smt. Vibha Sharma (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 trad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12. 7. The Appellants, inter alia, submitted that : The Appellant no. 2 has been employed with Bank since 1991 and has served the bank in various capacities including Branch Manager, Forex Dealer and Equity 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntral Bank"), an ISO 27001:2005 Certified PSB with distinction of complying International Standard for securities capabilities and worked as equity dealer of Central Bank from June 16, 2008 to June 1, 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 su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur to 3 hour 31 minutes for another 4 trades. Similarly, quantity of shares offered for sale by Appellant no. 1 was always less than quantity of purchase by CBI and in fact it was quite a few times the sale by Appellant no. 1, in 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. 23 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ider trading, which may not qualify her for front runner, since by definition front running, at present, can be done by intermediaries only, but is a clear case of fraud on other investors in the market and manipulation of market. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but a result of meeting of mind, which is borne out by events and since SEBI case is based on preponderance of probability, it is clear this probability of communication of acts of CBI being communicated to Appellant no. 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (Investment)" The Black's Law Dictionary (Ninth Edition) defines the term 'front running' as under: "front-running, n. Securities. A broker's or analyst's use of nonpublic information to acquire securities or enter into options or futures contracts for his or her own benefit, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the same security for purchase, sale or other dealings in respect of securities. Nothing contained in this clause shall apply where according to the clients instruction, the transaction for the client is to be effected only under specified conditions or in specified circumstances; (c) intentionally and in contravention of any law for the time being in force delays the transfer of securities in the name of the transferee or the despatch of securities or connected documents to any transferee; (d) indulge in falsification of the books, accounts and records (whether maintained manually or in computer or in any other form); (e) when acting 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 se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "3. Prohibition of certain dealings in securities-No person shall directly or indirectly- (a) buy, sell or otherwise deal in securities in a fraudulent manner; (b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made thereunder; (c) employ, any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange; (d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lants were related as husband and wife and since wife was a day trader and husband is dealer in securities for Central Bank of India, there was exchange of information between them and Appellant no. 1 traded on basis of this information (by whatsoever means it was communicated) and made handsome profits by manipulating sale price of one scrip only on each and every of these 14 days, out of 40 days of investigation period, and was suitably supported, in this activity by Appellant no. 2. (2) Advance information of definite trade by CBI at manipulated price of particular scrip was available to Appellant no. 1 and on basis of this information she traded in security market and secured undue profits, which was to disadvantageous to other investors, since they were not privy to this privileged information and resulted in manipulation of securities in market. (3) This is not a case of mere coincidence 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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