Magnum Equity Broking Ltd. vs Sebi

Date of Hearing : 27.10.2016 Date of Decision : 28.11.2016

Appeal No. 393 of 2015 Magnum Equity Broking Ltd. D-30, Empire Mahal, 806, Dr. A. B. Road, Khodadad Circle, Dadar T. T., Mumbai - 400 014. ..... Appellant

Versus

Securities and Exchange Board of India SEBI Bhavan, Plot No. C-4A, G Block, Bandra Kurla Complex, Bandra (East), Mumbai - 400 051. ...... Respondent

Mr. Prakash Shah, Advocate for the Appellant. Mr. Kumar Desai, Advocate with Mr. Tomu Francis, Advocate for the Respondent.

CORAM : Justice J. P. Devadhar, Presiding Officer Jog Singh, Member Dr. C. K. G. Nair

Per : Jog Singh

1.

The present Appeal has been filed against Impugned Order dated July 18,

2014 ("Impugned Order") passed by the Securities and Exchange Board of India

('SEBI') against Magnum Equity Broking Ltd. ("Appellant") for violating

provisions of Clause A(2) of the Code of Conduct for Stock Brokers as specified

under Regulation 7 of the SEBI (Stock Brokers and Sub Brokers) Regulations,

1992 ("Stock Broker Regulations") by executing synchronized trades in the scrip

of Aarey Drugs and Pharmaceuticals Ltd. ("ADPL") and Winsome Textile

Industries Ltd. ("WTIL").

2. The Appellant is a stock broker registered with SEBI and a member of the

Bombay Stock Exchange Limited ("BSE") with its registered office at D-30,

Empire Mahal, 806, Dr. A.B. Road, Dadar TT, Mumbai - 400014. The facts of 2

the case are such that SEBI ordered investigation into the affairs of the Appellant

to adjudge whether any violation of the Stock Broker Regulations had been

committed by the Appellant in the period i.e. from January 2009 to August 2009.

A show cause notice dated August 19, 2013 ("SCN") was issued to the Appellant

asking it to show cause as to why an inquiry into the Appellant's affairs should

not be held for executing synchronized trades in the scrips of ADPL and WTIL.

The trades were executed by the Appellant on behalf of its clients - Shri Ronak

Choksi, Shri Shailesh Patel, Ms. Nitaben Patel and Ms. Kapilaben Patel. With

respect to the synchronized trades in question, the Appellant acted both as stock

broker as well as counter party broker. In this background, the Impugned Order

dated July 18, 2014 was passed.

3. Out of the total volume of 68,02,131 shares trade in the scrip of WTIL,

0.14% were synchronized and executed by the Appellant in one day alone.

Further, in case of the scrip of ADPL, out of the total volume of 88,89,052 shares

traded, 0.45% were synchronized trades executed by the Appellants over the

course of five days.

4. The Appellant, at the outset, admits that the impugned trades were indeed

executed by the Appellant. The case of the Appellant is that the synchronized

trades were executed within the normal price range and could not be said to have

led to any artificial price movements. The trades were executed as per the law

prevalent at the time of the transactions. It is also submitted by the Appellant that

the trades in question were executed in order to effect a shift in the portfolios of

members of the same family, and that there was no apparent malafide intention

with respect to the same.

5. Further, the Appellant contends that there is a gap of four years between

the investigation period and the issuance of the SCN. As per SEBI's circular dated

September 14, 1999 cross deals executed between two clients of the same broker

are to be conducted through the screen mechanism of the stock exchange. The 3

Appellant submits that the synchronized trades are in conformity with the circular

in question.

6. It is the Appellant's submission that the sub-broker through whom the

trading took place has not been questioned by SEBI in this regard. The

synchronized trades were all coincidental and not the result of any illicit scheme

of the Appellant. That the Appellant acted diligently in all respects and no harm

or loss was caused to anyone associated with the market. The Appellant further

submits that it is not its responsibility to view every transaction with suspicion

and to behave as a market regulator such as SEBI would. The only responsibility

of the Appellant is to act prudently and responsibly as per law, which the

Appellant claims to have done in every respect.

7. The Appellant contends that SEBI has not put any cogent material on the

record to lead to the inference that the Appellant failed to exercise due skill, care

and diligence as is expected of a broker while executing the synchronized trades.

8. Per contra, the case of the Respondent is that on February 19, 2009, the

Appellant's clients executed 18 trades in the scrip of WTIL worth 68% of the total

number of shares traded that day and 38% of the trades executed that day. 7, out

of the 18 synchronized trades were perfectly synchronized, i.e., the buy and sell

orders were matching, and so were the price and the quantity at which the orders

were placed. The Respondent submits that on March 20, 2009, the Appellant

executed 73 synchronized trades in the scrip of ADPL on behalf of its clients

amounting to 43.8% of the shares traded and 63.4% of the trades executed.

9. Ld. Counsel for the Respondent further submits that on March 23, 2009,

the Appellant executed 14 synchronized trades; on March 25, 2009, 1

synchronized trade for 500 shares was executed; on March 26, 2009, 4

synchronized trades for 7000 shares were executed; and finally on March 27,

2009, 7 synchronized trades for 6000 shares were executed. 4

10. It is further submitted by the Respondent that these synchronized trades

were executed not just once, but regularly over a period of a few days. Such

synchronized trading creates an artificial volume and leads to price fluctuations,

thereby potentially misleading investors. It is also the Respondents submission

that even though the sub-broker executed the trades, the Appellant would be

responsible for such trades, particularly in light of the fact that these trades were

being executed through the Appellant's trading system. As far as circular dated

September 14, 1999 is concerned, it is the Respondent's submission that inspite of

the trades being executed through the stock exchange mechanism, they were still

structured and synchronized.

11. It is submitted by the Respondent that this Tribunal in the case of

Sparkline Mercantile Co. Pvt. Ltd. vs SEBI, Apeeal No. 171 of 2011 dated

January 16, 2012 held that it is rather difficult to obtain direct evidence with

respect to synchronization of trades and that in such situations preponderance of

evidence is good enough to prove synchronization. Finally, it is the Respondent's

submission that by acting as the broker for both parties the Appellant could easily

match the orders between its own clients who were also family members.

12. We have heard the ld. counsel for both parties and have perused the

Appeal, along with the Reply thereto and all other documents and information

produced before us.

13. At the outset, on a perusal of trades executed by the Appellant on behalf of

their clients, it is borne out that trades were executed between family members in

the scrip of WTIL and ADPL over a period of six days. To recapitulate a few

trades, on February 19, 2009, a volume of 9,489 shares was traded through 18

synchronized trades in the scrip of WTIL between Shri Shailesh Patel and and his

mother, Ms. Kapilaben Patel. Subsequently, 73 synchronized trades were

executed between Ronak Choksi and Nitaben Patel in the scrip of ADPL. Since it

is matter of record that there is common introducer to Ronak Choksi and Shailesh

Patel who is Nitaben Patel's husband.

5

14. Further, the trade logs evidence the execution of the following trades: On

March 23, 2009, 14 synchronized trades were executed amounting to 7.17% of

market volume. On March 25, 2009, 1 synchronized trade itself amounted to 3.4%

of market volume. 4 synchronized trades amounting to 20.4% of market volume

were executed on March 26, 2009. 15.12% of the market volume was traded on

March 27, 2009 through 7 synchronized trades.

15. On an analysis of the trades executed, as spelt out hereinabove, it emerges

that the Appellant did in fact undertake synchronized trades, as accepted by the

Appellant on record. These trades were executed under the Appellant's watchful

eye which did not act with care and due diligence in allowing such transactions to

occur repeatedly between connected entities. It is clear that these trades were

executed with the intention to create an artificial volume. The Appellant should

have been alerted to its clients' intention particularly in light of the seven trades

which were synchronized to perfection, with respect to the buy and sell orders

along with the price at which the buy order and sell order were placed and even

the quantity of shares which were offered for sale and sought to be bought by the

counter-party.

16. Synchronized trades in the history of the securities market have always

been shunned for the simple reason that they create a misleading appearance of

artificial volume in a particular scrip by giving the public the impression that a lot

of trading activity is being conducted with respect to that scrip, making it seem

like a good investment opportunity. Such artifices, if allowed to grow in number

in the market, hurt the sanctity of market mechanism and hinder the ongoing

constant process of the market righting and restoring itself.

17. Moreover, nothing has been brought on record to show that the Appellant

performed a thorough due diligence exercise in order to ascertain the nature of

these synchronized trading transactions. We agree with the Respondent in that

the Appellant as broker would be responsible for the trades executed by its sub- 6

broker. Therefore, the Appellant cannot escape liability by passing the buck onto

its sub-broker.

18. We shall now deal with a few cases cited by the Appellant in support of its

contentions.

19. In the case of SMC Global Securities vs. SEBI, Appeal No. 152 of 2013

dated January 31, 2014, SMC Global had opened share trading accounts for Mr.

Aditya Sharma and Ms. Abhilash Sharma. SEBI conducted an enquiry into the

trading activity undertaken by the above-said persons between January 1, 2008

and May 31, 2008. Most of these trades were made through a sub broker of SMC

Global - Mr. Lohia. It was alleged that Abhilash and Aditya had executed large

value transactions disproportionate to the levels of income disclosed by them in

the KYC details. SEBI alleged that the Appellant ought not to have allowed them

to so trade since the impugned trades led to an artificial volume being created in a

number of scrips. This Tribunal vide order dated November 25, 2011 held that

SMC Global did all it could do to remain responsible and diligent in its duties as

stock brokers. There was nothing in the conduct of Abhilash and Aditya which

could have aroused any suspicion in the minds of either the sub-broker or SMC

Global itself. However, in the matter at hand, it is a matter of record that a few

trades between the clients of the Appellant were perfectly synchronized to such a

level that even the time and prices of the buy and sell orders, between the clients

acting as counterparties, were identical. The case of SMC Global, therefore, does

not have much bearing as far as the present matter goes.

20. In the case of SEBI vs Kishore R. Ajmera [(2016) 6 SCC 368], Prakash

Shantilal and Co (Ajmera's sub-broker) had clients - Mayekar Investments and

KP Investment which indulged in synchronized trading thereby creating artificial

volume in the scrip of Malvica Engineering Ltd. during the period December 20,

1999 to March 31, 2000, and August 7, 2000 to August 31, 2000. Ajmera was,

therefore, alleged to be vicariously liable for the defaults of his sub-broker. The

Hon'ble Supreme Court held that there was no material on record to "hold either 7

lack of vigilance or bona fides on the part of the sub-broker so as to make

Respondent-Broker liable." There in the case of Ajmera, the Hon'ble Apex view

was of the opinion that Ajmera could not have been held vicariously liable

primarily because there was nothing to indicate any sort of lack of responsibility

or diligence on the part of the broker. In the present matter, as has been pointed

out hereinabove, we agree with SEBI that the fact of perfectly matching trades

purely to shift portfolio between family members which did in fact result in

creation of artificial volume in the scrip of ADPL and WPIL. As a matter of fact,

in the judgment of Kishore Ajmera, the Hon'ble Supreme Court held that "While

the said fact by itself i.e. proximity of time between the buy and sell orders may

not be conclusive in an isolated case such an event in a situation where there is a

huge volume of trading can reasonably point to some kind of a

fraudulent/manipulative exercise with prior meeting of minds." In the instant

case, the volume of transactions was high enough for it to raise red flags and lead

to a reasonable inference of fraudulent and manipulative activity between the

clients who were also family members.

21. The Hon'ble Supreme Court in the case of Ajmera further goes on to state

that the test "is one of preponderance of probabilities so far as adjudication of

civil liability arising out of the violation of the Act or the provisions of the

Regulations framed thereunder is concerned". On a perusal of the

aforementioned ratio laid down in the case of Ajmera it is borne out that several

circumstances have to be looked at before arriving at any conclusion regarding an

entity's culpability, and that preponderance of evidence would be acceptable since

direct proof of meeting of minds would rarely be available or even accessible to

the market regulator.

22. In the case of Cholamandalam Securities Ltd. vs SEBI, Appeal No. 380

of 2015 dated June 22, 2016, the broker Cholamandalam executed trades in the

scrip of Richa Industries Ltd. on behalf of its clients - Dynamic Global

Profanchises Pvt. Ltd., Man Mohan Singh Dua and Ajit Singh Dua without

change in beneficial ownership and to allegedly give the illusion of heavy trading 8

in the scrip. This Tribunal set aside the impugned order while stating that no

finding had been recorded in the impugned order to the effect that the broker had

interfered with the price and order matching mechanism of the system. In the

case before us however, the Impugned Order against the Appellants herein states

clearly that by acting as broker for buyer and the counterparty broker for the seller

of shares, it was rather easy for the Appellant to ensure synchronization of trades

to give the impression of a large number of trades being executed in the scrip of

the two aforementioned companies. In any case, it is hard to deny that the

Appellant definitely failed in its duty to be responsible and diligent by not

stopping the perfectly synchronized trades and aiding its clients in creating an

artificial volume in the scrips of ADPL and WTIL.

23. It is pertinent to mention that on being asked the reason for shifting the

portfolio of shares constantly between members of the same family, no reason

was forthcoming from the Appellants. In a situation where the Appellant has

failed to give a cogent reason or provide a purpose behind the execution of trades

of a considerably high volume, we do not find it necessary to interfere with the

order of the Respondent. The same is upheld and the appeal is hereby dismissed.

No order as to costs.

Sd/-

Justice J. P. Devadhar Presiding Officer

Sd/-

Jog Singh Member

Sd/-

Dr. C. K. G. Nair Member

28.11.2016 Prepared & Compared by PTM