9911796707
TMI Blog2013 (2) TMI 464X X X X Extracts X X X X X X X X Extracts X X X X ..... 2003 (for short FUTP regulations). 3. The facts of the case, in brief, which are taken from Appeal no. 216 of 2011, are that the Securities and Exchange Board of India (the Board) conducted investigations into the trading activity of Shri Kanaiyalal Baldevbhai Patel (for short 'KB') an individual trader and Passport India Investment (Mauritius) Ltd. (for short 'Passport'), a foreign institutional investor, for the period January, 2007 to March, 2009. It was noted that KB had placed and executed orders before the order of Passport and consequently squared off his position when the orders of Passport were placed in the market. Mr. Dipak Patel, appellant in Appeal no. 216 of 2011 (for short 'Dipak') was the portfolio manager of Passport and is also cousin of KB, appellant in Appeal no. 74 of 2012 and Shri Anandkumar Baldevbhai Patel (for short 'AB), appellant in Appeal no 78 of 2012. The modus operandi of these persons, as noted by the Board, was that Dipak provided information to KB and AB regarding forthcoming trading activity of Passport. Taking advantage of the same KB indulged in 'front running' i.e. he placed and executed orders before the order of Passport and consequently sq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I Registration No IN-US-FA-1016-05) and its Sub-account M/s Passport India Investment (Mauritius) Ltd to conduct an internal enquiry into the above matter and initiate appropriate actions against their employee Dipak Patel (Portfolio Manager of Passport India Investment (Mauritius) Ltd) named in this order and submit an action taken report within 30 calendar days of this order to SEBI. f. I further direct M/s. Passport Capital, LLC and its sub-account M/s Passport India Investment (Mauritius) Ltd to take steps to ensure that their trading information and other trade related details are not misused to the detriment of market integrity. I also direct them to exercise due diligence in supervising their employees to the above end. g. A copy of this Order shall be served on all recognized stock exchanges and depositories to ensure that the above mentioned entities are not allowed to undertake transactions prohibited in Para a & c above." The said ad interim order was also a show cause notice giving opportunity to the entities named therein to file their objections, if any, to the said order. After considering the reply filed by the entities against whom ad interim order was passed, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m. Subsequently, on June 26, 2009, Dipak Patel resigned from Passport. e. Based on the interviews conducted and extensive review of documents, Paul Hastings found no evidence that any other Passport employee or principal authorized, was aware of, or was otherwise involved in the trading arrangement that Mr. Patel had with KB." The show cause notice concluded that as portfolio manager of Passport for India, Dipak was placing trade order for Passport coupled with the fact that KB bought and sold shares of various companies which were common between KB and Passport. The show cause notice also stated that during the investigation period, 557 synchronized trades were executed on National Stock Exchange of India Ltd. (NSE) across 11 scrips between KB and Passport wherein both the buy order by the Passport and sell order by KB with identical price were placed within the gap of a few seconds. Similarly, there were 192 synchronized trades in 8 scrips between KB and Passport wherein both the sell order by the Passport and buy order by KB with identical price were placed within a time gap of a few seconds. Out of 228 scrips, 214 were common between KB and Passport. Similarly there were 50 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat selection of exchange and price generally depends on real time basis on the factors such as value, liquidity, price differential etc. and the investor chooses to trade or not to trade based on his rationale or behavioral judgment. Therefore, no adverse inference can be drawn against the appellant on these counts also. If at all there is any wrongdoing, it may be between Passport and Dipak who was the portfolio manager of the Passport and it is for Passport to take action, if any, against Dipak. The Passport has, in fact, terminated services of Dipak for violation of Passport's policies. However, that, by itself, does not mean that appellants can be charged for violation of FUTP regulations. Passport has not made any complaint to the Board against the conduct of Dipak. The transactions had not affected the market in any way as all transactions were screen based and at the prevailing market price. It was further argued by the learned counsel for the appellants that according to impugned order the transactions in question amount to front running but there was no such charge in the show cause notice. 7. Our attention was also drawn to the provisions of Regulation 4(2)(q) of the FU ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed by the whole time member of the Board in the matter of M/s. Ballarpur Industries Ltd. (b) Order No. WTM/KMA/IVD/267/06/2010 dated June 17, 2010 passed by the whole time member of the Board against Nilesh Kapadia and Ors. Learned senior counsel for the Board had also drawn our attention to the order passed by this Tribunal in the case of Jayant Amerchand Kalidas v. SEBI [Appeal No.123 of 2010 decided on October 14, 2010] wherein this Tribunal had observed that front running is an irregular practice of a stock broker executing orders on behalf of its clients in a security while taking advantage of advance knowledge of pending orders from its other clients. This is something akin to insider trading and is not permitted in the market. He has also referred to various definitions of front running and argued that the activities of the appellant squarely fall within the definition of front running. He further argued that there is no shift in the charge from show cause notice to the impugned order. The charge in the show cause notice and charge in the impugned order is the same. The alleged act of the appellants is in violation of regulation 3(a),(b),(c) and (d) of the FUTP regulatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003. (2)** ** ** Definitions 2.(1)** ** ** (a) and (b)** ** ** (c) "fraud" includes any act, expression, omission or concealment committed whether in a deceitful manner or not by a person or by any other person with his connivance or by his agent while dealing in securities in order to induce another person or his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss, and shall also include- (1) a knowing misrepresentation of the truth or concealment of material fact in order that another person may act to his detriment; (2) a suggestion as to a fact which is not true by one who does not believe it to be true; (3) an active concealment of a fact by a person having knowledge or belief of the fact; (4) a promise made without any intention of performing it; (5) a representation made in a reckless and careless manner whether it be true or false; (6) any such act or omission as any other law specifically declares to be fraudulent; (7) deceptive behavior by a person depriving another of informed consent or full participatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 front running". We are unable to agree with learned counsel for the appellants that the Board has given up the charge of front running in the impugned order. Simply because the term front running is not used in the show cause notice, it does not mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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 securities market and a departure has been made in the Regulations of 2003 whereby front running has been prohibited only by intermediaries. The cases cited by the learned senior counsel for the Board and referred to above also relate to front running by intermediaries and not by other traders in the market. In the absence of any specific provision in the Act, rules or regulations prohibiting front running by a person other than an intermediary, we are of the view that the appellants cannot be held guilty of the charges levelled against them. There is no denying the fact that when the appellants placed their order, these were screen based and at the prevalent market price. Admittedly Passport was the major counter party for trading in the market and was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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