Order against Sanghavi Brokerage Ltd

WTM/PS/04/IVD/ID-3/APRIL/2010 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: PRASHANT SARAN, WHOLE TIME MEMBER IN THE MATTER OF BAFFIN ENGINEERING PROJECTS LTD. In respect of Sanghavi Brothers Brokerage Ltd. (SEBI Registration No. INB 010992132) Date of hearing: February 05, 2010 Appearances For Noticee: Mr. Prakash Shah, Advocate Mr. Kamlesh Sanghavi, Director For SEBI: Mr. G. Ramar, Deputy General Manager Mr. Lamber Singh, Manager Mr. Pradeep Kumar, Legal Officer Mr. Rajeev Rastogi, Presenting Officer ORDER Under Regulation 28 (2) read with Regulations 38 (2) of the Securities and Exchange Board of India (Intermediaries) Regulations 2008 1. Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) conducted investigation into the buying, selling or dealings in the scrip of Baffin Engineering Projects Ltd. (hereinafter referred to as ‘Baffin’) for the period January 15, 2001 to August 31, 2001. During the time of investigation the scrip of Baffin was listed on Bombay Stock Exchange (hereinafter referred to as ‘BSE’) and Ahmedabad Stock Exchange (hereinafter referred to as ‘ASE’).

2. The trading details of the persons who had traded in the scrip were collected and analyzed along with the data of the volumes contributed by entities traded during the relevant period. During the period of investigation, the price of the scrip had increased from Rs.61/- on January 15, 2001 to Rs.219.40/-on August 16, 2001 and closed at Rs.210/- as on August 31, 2001.

3. During the course of investigation, it was inter alia revealed that Sanghavi Brothers Brokerage Ltd. (hereinafter referred to as ‘noticee’), registered with SEBI as stock broker, bearing registration no. INB 010992132 had dealt in the scrip of Baffin and executed synchronized trades on behalf its client namely Paragon Investments Pvt. Ltd. (hereinafter referred to as Paragon).

4. Based on the findings of the investigations, SEBI initiated enquiry proceedings against the noticee in terms of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred to as ‘Enquiry Regulations’), by appointing an Enquiry Officer under Regulation 5(1) of Enquiry Regulations vide order dated November 14, 2006, read with subsequent order dated November 23, 2007. SEBI appointed the Enquiry Officer, to enquire into the alleged violation of the provisions of the Broker Regulations. As the Enquiry Regulations were repealed with effect from the notification of SEBI (Intermediaries) Regulations, 2008, the Enquiry Officer/ Designated Authority (hereinafter referred to as the Enquiry Officer) submitted his Report dated September 23, 2009, in terms of Regulation 27 of SEBI (Intermediaries) Regulations, 2008 recommending thereby strict warning to noticee for violating Clause A (1) and (2) of Code of Conduct specified under Schedule II of the Broker Regulations.

5. Subsequently, a Show Cause Notice dated October 06, 2009 (hereinafter referred to as ‘SCN’), under Regulation 13(2) of the Enquiry Regulations read with Regulation 28(1) of SEBI (Intermediaries) Regulations, 2008 was issued by SEBI to the noticee, asking it to show cause as to why the appropriate penalty including penalty recommended by the Enquiry Officer, should not be imposed. The noticee was advised to reply to the SCN, together with the documents that it may choose to rely upon in support of his reply within fifteen days of the receipt thereof. It was also informed that in case of failure, it would be presumed that it had no explanation to offer and SEBI shall be free to take such action in the manner as it deemed fit. A copy of the Enquiry Report was also forwarded to the noticee along with the said SCN.

6. The noticee replied to the SCN vide its letter dated December 22, 2009 and requested for an opportunity of personal hearing. Accordingly, an opportunity of personal hearing was also granted to the noticee before me on February 05, 2010. On the date fixed Mr. Prakash Shah, Advocate and Mr. Kamlesh Sanghavi, Director of noticee, appeared before me and reiterated the submissions made vide letter dated December 22, 2009, along with other submissions. During the course of hearing the noticee also filed some documents which were taken on record. The submissions of noticee in brief, are:

• Orders were placed as per the instruction of the client ‘Paragon’. • Have not done any self trade or traded in self account. • Volumes were very small. • Was not aware that Paragon was trading through El Dorado (counterparty broker) too. • Contribution to trading was only 9% of the market volume. • Had merely executed orders of the clients on BOLT, without knowing the timings of the orders of the counterparty. • Have no relationship with counterparty broker. No relation with client except broker-client. • Client was trading in other scrips too and its volume of transactions in subject scrip was very low and insignificant. • Had maintained high standard of integrity, promptitude and fairness in the conduct of all business. • At the time of punching the order in live market conditions, it is not possible to know what will be the market volume of the day in a scrip. • Had stopped trading with Paragon when came to know of its dealings from BSE.

7. I have carefully considered the Enquiry Report, the SCN issued to noticee and reply thereof. The noticee has argued that while punching order in live market conditions, it is not possible to know the total market volume of the day. I note that at the end of trading day the broker can get to know about the total traded volume in the scrip and at the same time the broker has the knowledge about its own trades in the scrip. In the present case the client of the noticee was trading regularly during the period and it had the knowledge about the traded volumes of the client. In view of this, I find no merits in the argument of the noticee.

8. While proceeding further with the matter, the short issue that arises for my consideration is whether the noticee has violated the provisions of Regulation 7 read Clauses A (1) and (2) of the Code of Conduct as specified in schedule II of the SEBI (Stock Brokers and Sub Brokers) Regulations, 1992.

a. I note that the noticee had acted in the scrip of Baffin on behalf of its client Paragon. During the relevant period, Paragon was also found trading with other brokers as a client. Paragon was acting as ultimate client for noticee as well as for the counter party broker by placing buy orders through one broker and sale orders through another broker. The table below shows the trading details of trades executed on behalf of Paragon by the noticee and counter party broker during the relevant period of time:

Date El Dorado Guarantee Ltd. Sanghavi Brothers Settlement Total Total Total Brokerage Ltd. Obligation Gross Qty. Gross of two Qty. traded Qty. of brokers (El brokers Gross Gross Net Gross Gross Net Dorado & (Gross herein as Purchase Sales Qty. Purchas Sales Qty. Sanghvi sales + % of s es Bros.) in Gross Total Qty. correspondi Purchase traded ng s) Settlement 16/1/2001 500 -500 500 500 500 3100 16.13% 17/1/2001 1000 1300 -300 1300 1000 300 2300 2900 79.31% 43 Nil 18/1/2001 1200 1200 1200 -1200 1200 2900 41.38% 19/1/2001 900 1300 -400 1300 900 400 2100 2400 87.50% 22/1/2001 300 300 300 -300 44 Nil 300 700 42.86% 23/1/2001 1500 1000 500 1000 1500 -500 2500 2600 96.15%

24/1/2001 600 2100 -1500 2100 600 1500 2700 2700 100.00% 25/1/2001 700 700 700 -700 700 22600 3.10% 30/1/2001 1100 1300 -200 1300 1100 200 2400 3100 77.42% 1/2/2001 1900 1600 300 1600 1900 -300 45 Nil 3700 4000 92.50% 2/2/2001 1200 1300 -100 1300 1200 100 2500 3400 73.53% 5/2/2001 400 2000 -1600 2000 400 1600 2800 3600 77.78% 6/2/2001 500 300 200 300 500 -200 800 800 100.00% 46 200 8/2/2001 800 800 800 -800 800 800 100.00% 9/2/2001 800 800 800 -800 800 1800 44.44% 12/2/2001 600 600 600 600 1200 1200 100.00% 13/2/2001 100 -100 100 100 100 100 100.00% 14/2/2001 100 100 100 100 47 Nil 200 200 100.00% 15/2/2001 100 100 100 100 200 200 100.00% 16/2/2001 100 100 100 -100 100 200 50.00% 19/2/2001 300 300 300 -300 300 400 75.00% 20/2/2001 300 -300 300 300 800 1200 66.67% 48 100 22/2/2001 400 400 400 -400 400 400 100.00% 23/2/2001 300 300 300 300 600 600 100.00% 26/2/2001 1800 500 1300 500 1800 -1300 2300 2600 88.46% 27/2/2001 100 -100 100 100 100 100 100.00% 28/2/2001 1000 1000 1000 -1000 49 Nil 1000 4500 22.22% 1/3/2001 700 -700 700 700 700 700 100.00% 2/3/2001 1100 -1100 1100 1100 1100 1500 73.33% 5/3/2001 300 1800 -1500 1800 300 1500 2100 2100 100.00% 7/3/2001 300 -300 300 300 300 500 60.00% 50 100 8/3/2001 1800 100 1700 100 1800 -1700 1900 2000 95.00% 9/3/2001 200 200 200 -200 200 400 50.00% 13/3/2001 600 600 -100 600 500 100 1100 1600 68.75% 51 100 14/3/2001 1500 1500 0 1500 1500 0 3000 3200 93.75% Total 10200 10300 -100 10300 10200 100 Nil 43800 81100 65.38 b. The trades as detailed above appeared to be circular in nature which gives rise to reversal of trades without any change in beneficial ownership, for example, on January 24, 2001, the total traded quantity was 2,700 shares and these entire 2,700 shares were traded between the noticee and the counter party broker El Dorado. I note that the noticee had traded for its client from January 16, 2001 to March 14, 2001 and during this period it had executed trades from the price level of Rs.61/- to Rs.128/-. There was almost no delivery due to client/ broker, further in most of the trades there were no delivery in comparison of the volume traded.

c. I observe that the noticee while trading for Paragon had executed 185 trades, which together with the trades of counterparty broker accounted for 65.38% of the gross traded quantity on the days when such trades were observed. Further, out of the 35 days on which the trades had taken place, on 12 days the trading volume of noticee along with the counter party broker was 100% of the volume traded in the market, which indicates that there was no other trader in the scrip on those days.

d. I note that on all the said 35 days, the client of the noticee has traded so as to synchronize the buy orders as well as the sale orders with the orders of the counter party broker. The table below shows the pattern of trading of the client of the noticee on sample basis in the scrip of Baffin:

Buy Sell Trade Memb Client Qty Price Time Counte Client Qty. Price Time Trade Time date er Code. r party Code Time Diff. Code Code 17-Jan-01 D0061 Paragon 100 61 9:56:53 D0141 Paragon 100 61 9:57:22 09:57:22 0:00:29 17-Jan-01 D0141 Paragon 100 71.1 10:11:36 D0061 Paragon 100 71.1 10:13:35 10:13:36 0:01:59 17-Jan-01 D0141 Paragon 100 71.1 10:11:36 D0061 Paragon 100 71.1 10:13:35 10:13:36 0:01:59 17-Jan-01 D0141 Paragon 100 71.1 10:11:36 D0061 Paragon 100 71.1 10:13:35 10:13:36 0:01:59 17-Jan-01 D0141 Paragon 100 71.1 10:11:36 D0061 Paragon 100 71.1 10:13:35 10:13:36 0:01:59 17-Jan-01 D0141 Paragon 100 71.1 10:11:36 D0061 Paragon 100 71.1 10:13:35 10:13:36 0:01:59 17-Jan-01 D0141 Paragon 100 71.1 10:11:36 D0061 Paragon 100 71.1 10:13:35 10:13:36 0:01:59 17-Jan-01 D0141 Paragon 100 71.1 10:11:36 D0061 Paragon 100 71.1 10:13:35 10:13:36 0:01:59 17-Jan-01 D0141 Paragon 100 71.1 10:11:36 D0061 Paragon 100 71.1 10:13:35 10:13:36 0:01:59 17-Jan-01 D0141 Paragon 100 71.1 10:11:36 D0061 Paragon 100 71.1 10:13:35 10:13:36 0:01:59 17-Jan-01 D0141 Paragon 100 71.1 10:11:36 D0061 Paragon 100 71.1 10:13:35 10:13:36 0:01:59 17-Jan-01 D0141 Paragon 100 69 9:59:20 D0061 Paragon 100 69 10:07:58 10:07:58 0:08:38 17-Jan-01 D0141 Paragon 100 68 9:59:17 D0061 Paragon 100 68 10:08:29 10:08:30 0:09:12 17-Jan-01 D0141 Paragon 100 67 9:57:57 D0061 Paragon 100 67 10:08:56 10:08:57 0:10:59 17-Jan-01 D0061 Paragon 100 71.1 14:01:26 D0141 Paragon 100 71.1 14:18:54 14:18:54 0:17:28 17-Jan-01 D0061 Paragon 100 71.1 14:01:26 D0141 Paragon 100 71.1 14:18:54 14:18:54 0:17:28 17-Jan-01 D0061 Paragon 100 71.1 14:01:26 D0141 Paragon 100 71.1 14:18:54 14:18:54 0:17:28 17-Jan-01 D0061 Paragon 100 71.1 14:01:26 D0141 Paragon 100 71.1 14:18:54 14:18:54 0:17:28 17-Jan-01 D0061 Paragon 100 71.1 10:28:36 D0141 Paragon 100 71.1 11:37:32 11:37:32 1:08:56 17-Jan-01 D0061 Paragon 100 71.1 10:28:36 D0141 Paragon 100 71.1 11:37:32 11:37:32 1:08:56 17-Jan-01 D0061 Paragon 100 71.1 10:28:36 D0141 Paragon 100 71.1 11:37:50 11:37:50 1:09:14 17-Jan-01 D0061 Paragon 100 71.1 10:28:36 D0141 Paragon 100 71.1 11:37:50 11:37:50 1:09:14 17-Jan-01 D0061 Paragon 100 71.1 10:28:36 D0141 Paragon 100 71.1 14:18:54 14:18:54 3:50:18 24-Jan-01 D0141 Paragon 100 84.75 15:45:01 D0061 Paragon 100 84.75 15:45:31 15:45:32 0:00:30 24-Jan-01 D0061 Paragon 100 84.75 14:27:58 D0141 Paragon 100 84.75 14:28:39 14:28:39 0:00:41 24-Jan-01 D0141 Paragon 100 84.75 15:44:20 D0061 Paragon 100 84.75 15:43:39 15:44:21 0:00:41 24-Jan-01 D0141 Paragon 100 84.75 15:44:20 D0061 Paragon 100 84.75 15:43:39 15:44:21 0:00:41 24-Jan-01 D0141 Paragon 100 84.75 15:44:20 D0061 Paragon 100 84.75 15:43:39 15:44:21 0:00:41 24-Jan-01 D0141 Paragon 100 84.75 15:44:20 D0061 Paragon 100 84.75 15:43:39 15:44:21 0:00:41 24-Jan-01 D0141 Paragon 100 84.75 15:44:20 D0061 Paragon 100 84.75 15:43:39 15:44:21 0:00:41 24-Jan-01 D0141 Paragon 100 84.75 15:44:34 D0061 Paragon 100 84.75 15:43:39 15:44:35 0:00:55 24-Jan-01 D0141 Paragon 100 84.75 15:44:34 D0061 Paragon 100 84.75 15:43:39 15:44:35 0:00:55 24-Jan-01 D0141 Paragon 100 84.75 15:44:34 D0061 Paragon 100 84.75 15:43:39 15:44:35 0:00:55 24-Jan-01 D0141 Paragon 100 84.75 15:44:34 D0061 Paragon 100 84.75 15:43:39 15:44:35 0:00:55 24-Jan-01 D0141 Paragon 100 84.75 15:44:34 D0061 Paragon 100 84.75 15:43:39 15:44:35 0:00:55

24-Jan-01 D0061 Paragon 100 84.75 14:27:58 D0141 Paragon 100 84.75 14:29:14 14:29:15 0:01:16 24-Jan-01 D0061 Paragon 100 84.75 14:27:58 D0141 Paragon 100 84.75 14:29:14 14:29:15 0:01:16 24-Jan-01 D0061 Paragon 100 84.75 14:27:58 D0141 Paragon 100 84.75 14:29:39 14:29:39 0:01:41 24-Jan-01 D0061 Paragon 100 84.75 14:27:58 D0141 Paragon 100 84.75 14:29:39 14:29:39 0:01:41 24-Jan-01 D0141 Paragon 100 87 11:50:27 D0061 Paragon 100 87 12:09:34 12:09:35 0:19:07 24-Jan-01 D0141 Paragon 100 87 11:50:27 D0061 Paragon 100 87 12:10:07 12:10:07 0:19:40 24-Jan-01 D0141 Paragon 100 86.5 11:50:21 D0061 Paragon 100 86.5 12:45:14 12:45:14 0:54:53 24-Jan-01 D0141 Paragon 100 86 11:50:14 D0061 Paragon 100 86 12:45:37 12:45:37 0:55:23 24-Jan-01 D0141 Paragon 100 86 11:50:14 D0061 Paragon 100 86 12:45:53 12:45:54 0:55:39 24-Jan-01 D0141 Paragon 100 85.5 11:50:06 D0061 Paragon 100 85.5 12:46:21 12:46:21 0:56:15 24-Jan-01 D0141 Paragon 100 85.5 11:50:06 D0061 Paragon 100 85.5 12:46:39 12:46:39 0:56:33 24-Jan-01 D0141 Paragon 100 85 11:50:00 D0061 Paragon 100 85 12:47:01 12:47:01 0:57:01 24-Jan-01 D0141 Paragon 100 85 11:50:00 D0061 Paragon 100 85 12:47:17 12:47:17 0:57:17 24-Jan-01 D0061 Paragon 100 85 12:48:09 D0141 Paragon 100 85 14:28:39 14:28:39 1:40:30

From this table, it is seen that the positions in the scrip were squared off so that there would not be any obligation of delivery. It is further observed that the orders limit price and quantity of both buy and sell orders were exactly matching. I find that the volumes in the scrip were thin and the trading pattern of the client must have raised suspicion in the mind of the noticee.

e. During the period January 17, 2001 to March 14, 2001, the price of the shares rose from Rs.61/- to Rs.128/-. Thus, by helping its client to execute repeated circular/ reversal trades, the noticee succeeded in creating an impression of volumes and also contributed to rise in the prices. Subsequently, the price of the scrip went up to Rs.219.40/- on August 16, 2001 and closed at Rs.210/- as on August 31, 2001.

f. From the above discussion, I find that the increase in the volume and price in the scrip of Baffin was aided by the noticee by allowing its client, Paragon to trade artificially. I note the argument of the noticee that it had discontinued trading with Paragon pursuant to the receipt of information from BSE. Further, the noticee has submitted that it has improved upon the systems to ensure that no such clients be allowed on the system and also upgraded the software. The noticee while attending the hearing has argued that its client was a day trader. In the facts and circumstances of the present case, I am not convinced with the argument of the noticee as the scrip herein was illiquid scrip and no genuine day trader will trade in scrip where it is difficult to settle the position at the end of the day. If a client still wants to trade as day trader in illiquid scrip then such behavior of a client should be a matter of worry for the broker. I note that the steps taken by the noticee were in the nature of preventing any further damage by its client to the market. However, had the noticee taken necessary precautions beforehand, then the same could have prevented Paragon from succeeding in its game plan. These observations, points that the noticee has failed to prevent its client in carrying out its nefarious design and had thus aided and abetted him creating the artificial volumes in the subject scrip.

g. The above findings lead to the conclusion that the noticee has failed to comply with its duties as a stock broker as specified under the provisions of the Broker Regulations. It is the duty of the stock broker to maintain high standards of integrity, promptitude and fairness, further, it shall not inter alia indulge in manipulative transactions with a view to distort the market equilibrium to the detriment of genuine investors. As already established the noticee has aided and abetted the misleading appearance of trading of its client in the securities market. From this, it is clear that the noticee has failed to comply with duties as expected of a registered intermediary. Thus, I hold that the noticee has failed to maintain high standards of integrity, promptitude and fairness in the conduct of the business dealings as specified in Regulation 7 read with Clause A (1) and has failed to exercise due skill, care and diligence as specified in Regulation 7 read with Clause A (2) of the Code of Conduct as specified in Schedule II of the Broker Regulation.

9. I note that pursuant to the notification of the SEBI (Intermediaries) Regulations, 2008, the Enquiry Regulations have been repealed and in terms of Regulation 38(2) of the SEBI (Intermediaries) Regulations, 2008, notwithstanding such repeal, any enquiry commenced under the Enquiry Regulations, shall be deemed to have been commenced under the corresponding provisions of SEBI (Intermediaries) Regulations, 2008.

10. Taking into the facts and circumstances of the case, I, in exercise of the powers conferred upon me in terms of Section 19 of the Securities and Exchange Board of India Act, 1992 read with Regulation 28(2) of Securities and Exchange Board of India (Intermediaries) Regulations, 2008, hereby warn the noticee, Sanghavi Brothers Brokerage Ltd. (Registration No. INB 010992132) [PAN: AAECS 5879A], to be careful and cautious in the conduct of its business and to adhere to and comply with all the statutory provisions while carrying out its activities in the securities market.

DATE : 07/04/2010 PRASHANT SARAN PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA