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TMI Blog2012 (5) TMI 774X X X X Extracts X X X X X X X X Extracts X X X X ..... to code of conduct for sub-brokers specified in Schedule II of the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulation, 1992 (hereinafter referred to as FUTP Regulations and Brokers Regulation respectively). The adjudicating officer levied a penalty of ` 3,50,000 for the violation of FUTP Regulations and a sum of 1,50,000 for the violation of the code of conduct for sub-brokers. 2. The cause of action for the impugned order arose during investigations in the scrip of the company for the period March 27, 2009 to August 12, 2009. The investigation was triggered on account of sharp price rise and trading in heavy volumes in the scrip of the company. During the investigation period, the shares were traded for 138 days and the price of the scrip rose from ` 8.90 to a high of ` 80.15. The adjudicating officer verified certain circular/reversal trades between connected parties which resulted in artificial volumes in the market. He also analysed the factors relating to price rise and inferred that placing orders consistently at a price higher than the last traded price contributed to new high price and in this manner the value of the scrip was jacked ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pulation. In the present case there were only matching of trades in parts on a few days which cannot be attributed to any act of deliberate and wilful manipulation. During the course of the hearing of the appeal, the appellant s learned counsel submitted a chart showing the data by which alleged reversal/circular trades were carried out and observed that out of a total of 35 trading days, reversal trades happened only on 8 days which is insignificant as compared to the total volume of trades and counter parties traded with. So the allegation regarding matching of trades in large volumes on many occasions is said to be totally unfounded. In the grounds of appeal also the appellant has set out an analysis of the trades which took place in the relevant period of 35 days. The result, as shown in the chart submitted during the hearing of the case, has been highlighted to justify the appellant s case. So, according to the appellant, the data regarding trading days and matching of trades relied on by the adjudicating officer is basically incorrect and so the charge regarding reversal based on such data cannot be sustained. As a broker, the appellant could not have raised his eyebro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en though intermittently, and this cannot be disregarded especially when the scrip was illiquid. The adjudicating officer has established in the order that the intermittent sell and buy orders over a period of time at the rate of about 50,000 shares per day resulted in reversal/circular trades and the appellant cannot brush this aside on the plea that the squared up trades were minor and insignificant. There was manipulation of volume through reversal trades and a look at the entire chain of transactions as done by the adjudicating officer clearly establishes the wrong doing of the appellant. With regard to the code of conduct it is argued that the broker was expected to look at all the transactions especially when there was periodical price rise. The broker was aware of the nature of transactions since the scrip was illiquid and the volume of trades was of a high order. It was not necessary to look for an alert from the BSE which is concerned with the macro picture as against the appellant who could have focused on the specifics of a few transactions. 5. We have heard the rival submissions. The counsel for the parties took us through the details of the transactions. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o give benefit of doubt to the Noticee and hence the charges against the Noticee of influencing the price of the scrip by placing orders higher than LTP does not stand established . In para 29 of the impugned order there is a further reiteration of the findings which reads as under: With regard to provisions of Regulation 4(2)(e) which provides any act or omission amounting to manipulation of the price of the security it is observed in para 17 and 19 that the Noticee had no role in the contribution to the price rise through new high price and through LTP. Hence the allegation of violation of Regulation 4(2)(e) does not stand established . 6. As regards violation of FUTP Regulations the only charge that survives for consideration is that of execution of reversal/circular trades resulting in artificial volumes in the scrip of the company. The adjudicating officer has given details of all the transactions, which, according to her, establish reversal/circular trades. The transactions in question spread over a period of 35 dyas. According to the adjudicating officer the trades which took place for 35 days consisted of 25.72 per cent of the total volume of shares traded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ective is primarily to create artificial increase in price and volumes. This is generally adopted to create investor interest and thereby get undue enrichment from sale of shares. So the connection/connivance of the broker in the fraudulent transaction has to be established. Generally, efforts are made in a systematic manner over a period of time to jack up the price and volume of the shares. In the present case, the adjudicating officer has already ruled out the connivance/connection of the appellant with his client in respect of a segment of the transactions during the period under investigation. So it is a debatable issue whether meeting of minds can be established for a part of the period only. Even assuming so, the period during which alleged reversal has taken place is considerably insignificant in the facts of the case. The role of the broker and the client in the manipulation has to be viewed in the proper perspective. It is reported that action has been taken against the client in the present case. But in the case of the broker, close co-ordination with the client in reversing the trades has to be established. As already observed above, the adjudicating officer h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant. So, considering the detailed explanations offered by the appellant and the nature of the transactions we are not able to uphold the charge of reversal/circular trades in the present case. 9. With respect to the allegation regarding non compliance with the code of conduct of brokers we find that the appellant had taken all reasonable precautions to avoid possible malpractices in the market. We have already observed above that the appellant was not a party to the reversal/circular trades. There is considerable merit in the argument of the appellant that the allegation of reversal could be levelled by the Board only after perusing the trade and order logs i.e. in hindsight. The adjudicating officer has held the appellant non compliant with the standards of integrity and fairness considering the fact that alleged fraudulent transactions took place repeatedly over a period of time. But this has been considered by us above and found to be not established in the facts of the case. So the appellant cannot be hauled up in this case alleging that he has failed to exercise due diligence. The decision of this Tribunal in the case of SMC Global Securities Ltd. vs. The Adju ..... X X X X Extracts X X X X X X X X Extracts X X X X
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