2025 (6) TMI 1895 - AT - SEBI

Engagement in illegal trading practices - Search and seizure operation - trade pattern based on non-public information by the front-runners (appellants) in HDFC Ltd. scrip - through WhatsApp chat or calls from a person - take advantage of the prior knowledge of impending trades of the Big Client and thereby made wrongful gains - violation of various provisions of the SEBI Act 1992 and the PFUTP Regulations - HELD THAT - The screenshot extracts containing the trading instructions given by Ketan Parekh are extracted in Table No. 36. Table No. 35 Shows that instruction was given to buy HDFC scrip at 10.03 hrs. The front runner has placed 13 buy orders between 10 03 42 and 10 32 32. The buy order for the entire quantity of 1 lakh shares of HDFC scrip was placed and trade was executed between 10 03 42 and 10 32 34. The Big Client has placed orders for 2, 50, 000 shares between 11 11 02 and 11 11 26. The front runner has immediately sold his One lakh shares at 11 11 08. It is an admitted position that the WhatsApp screenshots are from the device belonging to the appellant Sumit Sonthalia. The facts recorded hereinabove also indicate cash transactions of huge quantity between Sumit Sonthalia and Ketan Parekh. The trade pattern described in Table No. 35 prima facie shows that the instructions were given by Ketan Parekh with regard to buy and sell orders based on prior knowledge of the impending order of the Big client. It is in public knowledge that Ketan Parakh has been implicated in several matters of fraud and manipulation of securities market and was debarred for an unprecedented period of 14 years. The appellants still preferred to join hands with him in the alleged front-running transactions. Thus we are of the considered view that appellants prayer to consider deposit of only 50% of the estimated profit as a condition to grant the interim prayer is devoid of merits. The prayer for interim order stands rejected.

Summary

The core legal questions considered by the Tribunal in this appeal include:

1. Whether the appellants engaged in front-running and illegal trading practices based on non-public information related to the trades of a foreign portfolio investor ("Big Client").

2. Whether the ex-parte interim order-cum-show cause notice passed by SEBI directing the appellants to deposit Rs. 12.45 crores as estimated wrongful gains was justified and proportionate.

3. Whether the appellants' proprietary trading accounts were used to execute trades based on non-public information received from a prohibited entity and whether their conduct amounted to violation of SEBI Act, 1992 and PFUTP Regulations.

4. Whether the interim relief sought by the appellants, including reduction of deposit amount to 50% of the estimated gains, should be granted.

Issue-wise Detailed Analysis:

Issue 1: Engagement in Front-running and Use of Non-Public Information

The relevant legal framework comprises the SEBI Act, 1992 and the Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations. These provisions prohibit trading on the basis of unpublished price sensitive information and front-running, which is the practice of trading ahead of client orders to gain unfair advantage.

The Tribunal examined the evidence collected during SEBI's investigation, including search and seizure operations and statements of noticees. The investigation revealed that the appellants, along with other entities, engaged in complex trading strategies to capitalize on prior knowledge of impending large trades by the Big Client.

Key evidence included WhatsApp chat screenshots from the device of noticee No. 11 (Sumit Sonthalia), which contained trading instructions allegedly issued by Ketan Parekh, a prohibited entity. The chats showed coordination of buy and sell orders timed to precede and then offset the Big Client's trades, generating illegal gains.

Further corroboration came from IPDR data confirming communication between Rohit Salgaocar (noticee No.1) and Ketan Parekh, and cash transactions between Sumit Sonthalia and Ketan Parekh, indicating a financial nexus.

The Tribunal observed that the trade pattern in HDFC Ltd. scrip on September 19, 2022, demonstrated front-running behavior: the front-runners placed buy orders well before the Big Client's orders and sold their positions immediately after the Big Client's trades commenced, profiting from price movements caused by the latter's large trades.

Competing arguments by the appellants denied knowledge that the information was non-public or related to the Big Client's trades. However, the Tribunal found the evidence of communication and coordination compelling and prima facie established the use of non-public information.

Conclusion: The Tribunal held that there was a prima facie case of front-running and misuse of non-public information by the appellants, violating SEBI regulations.

Issue 2: Justification and Proportionality of the Interim Order Directing Deposit of Rs. 12.45 Crores

The impugned order directed the appellants to deposit jointly and severally Rs. 12,45,20,605/- in an interest-bearing savings account with a lien in favor of SEBI, and prohibited debits from their bank accounts without SEBI's permission.

The appellants contended that the order was harsh and unjust, particularly since it was passed ex-parte and simultaneously with the show cause notice. They argued that the estimated wrongful gain amount was incorrect and that the usual practice of the Tribunal is to direct deposit of only 50% of the penalty or disgorgement amount as a condition for interim relief.

SEBI opposed this, emphasizing the gravity of the violation, the involvement of a previously debarred entity (Ketan Parekh), and the substantial evidence of coordinated front-running. SEBI submitted that the appellants had knowingly joined hands with a notorious market manipulator to generate illegal profits.

The Tribunal acknowledged the appellants' submission regarding the usual practice of directing 50% deposits but clarified that such practice is not a rigid rule and interim orders are passed based on facts and circumstances of each case.

Given the prima facie evidence, including admitted WhatsApp chats and cash transfers, and the serious nature of the alleged violations, the Tribunal found no merit in reducing the deposit amount. It emphasized the public interest in preventing market manipulation and protecting market integrity.

Conclusion: The Tribunal rejected the appellants' prayer for interim relief on reduced deposit terms and upheld the interim order as justified and proportionate.

Issue 3: Use of Proprietary Trading Accounts and Role of Prohibited Entities

The investigation revealed that the appellants used proprietary trading accounts, specifically Salasar Stock Broking Ltd., to execute trades based on instructions received from Ketan Parekh, who was debarred from securities market participation for 14 years.

The Tribunal noted that Ketan Parekh orchestrated the front-running scheme by receiving non-public information from Rohit Salgaocar and issuing trade instructions to the front-runners through WhatsApp groups such as "Jack Saro."

The Tribunal considered the admitted facts, including the WhatsApp messages and cash transactions, as prima facie evidence of collusion and use of front-running strategies via proprietary accounts.

The appellants' denial of knowledge or involvement was not accepted in light of the documentary evidence and their association with the prohibited entity.

Conclusion: The Tribunal held that the use of proprietary trading accounts to execute trades based on non-public information received from a debarred entity constituted a violation of SEBI regulations.

Issue 4: Treatment of Interim Relief and Deposit Conditions

The appellants sought interim relief on the condition of depositing only 50% of the estimated wrongful gains, citing the Tribunal's usual practice in penalty cases.

The Tribunal clarified that interim orders are discretionary and fact-specific. The admitted evidence against the appellants, including WhatsApp chats, cash transfers, and trade patterns, warranted a stringent approach.

The Tribunal emphasized that the observations made were prima facie and would not influence the final adjudicatory proceedings, which SEBI was directed to conduct independently.

Conclusion: The Tribunal declined to grant interim relief on reduced deposit terms and maintained the full deposit requirement as per the impugned order.

Significant Holdings:

"The trade pattern described in Table No. 35 prima facie shows that the instructions were given by Ketan Parekh with regard to buy and sell orders, based on prior knowledge of the impending order of the Big client."

"It is in public knowledge that Ketan Parakh has been implicated in several matters of fraud and manipulation of securities market and was debarred for an unprecedented period of 14 years. The appellants still preferred to join hands with him in the alleged front-running transactions."

"In the facts and circumstances of this case, we are of the considered view that appellants" prayer to consider deposit of only 50% of the estimated profit as a condition to grant the interim prayer is devoid of merits. The prayer for interim order stands rejected."

"All observations in this order are prima facie in nature while considering the interim prayer and shall have no binding effect. SEBI shall pass the adjudicatory orders, wholly uninfluenced by this order."

The Tribunal established key principles that front-running based on non-public information, especially involving a debarred entity, constitutes a serious violation warranting stringent interim measures. The Court emphasized that interim relief is discretionary and must reflect the gravity of the alleged misconduct and the need to protect market integrity. The decision underscores that prima facie evidence of collusion and illegal gains justifies freezing of assets and full deposit of estimated wrongful profits during the pendency of adjudication.