TMI Blog2017 (9) TMI 1269X X X X Extracts X X X X X X X X Extracts X X X X ..... from the proved and admitted facts, so long the same are reasonable and can be legitimately arrived at on a consideration of the totality of the materials, would be permissible and legally justified. Concerned parties to the transaction were involved in an apparent fraudulent practice violating market integrity. The parting of information with regard to an imminent bulk purchase and the subsequent transaction thereto are so intrinsically connected that no other conclusion but one of joint liability of both the initiator of the fraudulent practice and the other party who had knowingly aided in the same is possible Having regard to the facts of the present cases i.e. the volume of shares sold and purchased; the proximity of time between the transactions of sale and purchase and the repeated nature of transactions on different dates, in considered view, would irresistibly lead to an inference that the conduct of the respondents were in breach of the code of business integrity in the securities market. The consequences for such breach including penal consequences under the provisions of Section 15HA of the SEBI Act must visit the concerned defaulters for which reason the orders p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red off the position when the order of PII were placed in the market. It was estimated that the KB earned a total profit of ₹ 1,56,32,364.01/- from the alleged trades. This Court in CIVIL APPEAL NO. 2594 OF 2013 , by order dated 05.04.2017, while remanding the matter back to the Appellate Tribunal with respect to AB, held that there is no finding or conclusion recorded with respect to AB in the following manner- Learned counsel for the appellant (SEBI) has vehemently urged that such findings are recorded in the Adjudication Order and the said order has merged with the order of the learned Appellate Tribunal. We disagree with the aforesaid contention urged by the learned counsel for the appellant. In the appeal(s) filed by the aggrieved person(s) against the order(s) of the Adjudicating Officer, the learned Appellate Tribunal was expected to record its own independent findings and arrive at its own conclusions for holding the respondent liable for the penalty imposed. It seems that the learned Appellate Tribunal has proceeded on the basis that the case of the respondent is same and similar to the case of Kanaiyalal Baldev Patel and Dipak Patel which, evidently, is not. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the investigation, SEBI noticed irregularities in her dealings in the scrips of above mentioned four companies. A general trend of trading was noticed which further revealed that the appellant was indulged in Front Running. It was found that the appellant s sell orders (quantity and price) substantially matched with the buy orders (quantity and price) of other traders and that her sell order limit price was always above the sell LTP but was same or very close to the buy limit price of other traders. Moreover the selling price, quoted by her, was close to the highest price reached on market on those days. 7. With this factual background, a reference needs to be made to the scheme of FUTP 2003. SEBI, by a notification under Section 30 of the SEBI Act, 1992, dated 17.07.2003, formulated FUTP 2003. 8. Indisputably, the object and purpose of this regulation (FUTP 2003) is to safeguard the investing public and honest businessmen. The aim is to prevent exploitation of the public by fraudulent schemes and worthless securities through misrepresentation, to place adequate and true information before the investor, to protect honest enterprises seeking capital by accurate disclos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly to any general comments made in good faith in regard to (a) the economic policy of the government (b) the economic situation of the country (c) trends in the securities market or (d) any other matter of a like nature whether such comments are made in public or in private 10. Regulation 3 prohibits certain dealings in securities, whereas regulation 4 prohibits manipulative, fraudulent and unfair practices. Regulation 5 deals with the power of the board to order investigation. Regulation 6 elaborates on the power of the investigating authority. 11. It is important to note that SEBI has amended the regulation, a number of times, to keep up with the technology and times. A reference may be made to the amendments carried out to the regulation 12. Although aforesaid amendments are made to the regulation, yet such amendments sometimes fail to live up to human ingenuity and growth of technology. Usurpation of reprehensible profits by fraudsters, who are not entitled to them, must be made answerable by this Court as per established tenants of rule of law without leaving incentives for fraudulent practices, based on creativity of disingenuous, to survi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to benefit from the subsequent price move. This denotes persons dealing in the market, knowing that a large transaction will take place in the near future and the parties are likely to move in their favour. The illegal private trading by a broker or market maker who has prior knowledge of a forthcoming large movement in prices The Black s Law dictionary (9 th Ed.) Front running , n. Securities. A broker s or analyst s use of non-public 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. Nancy Folbre Nancy Folbre, The Front-Runners of Wall Street, 07.04.2014 (The New York Times). In the world of financial trading, a frontrunner is someone who gains an unf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rst and the last types of trade i.e., tippee trading and trading ahead. It is important to note that trading ahead has been explicitly recognized under regulation 4(2)(q) of FUTP 2003. 20. A word on interpretation would be appropriate before I take up legal aspects of this case. Mr. K.T.S. Tulsi, learned senior counsel, states that penal laws have to be strictly construed. He places reliance on Govind Impex Pvt. Ltd. v. Income Tax Department (2011) 1 SCC 529.) , Krishi Utpadan Mandi Samiti v. Pilibhit Pantnagar Beej Ltd. (2004) 1 SCC 391.) Although strict construction is well established principle when interpreting a penal provision, but such interpretation should not result in incongruence when compared with the purpose of the regulation. In SEBI v. Kishore R. Ajmera , this Court observed that- the SEBI Act and the Regulations framed there under are intended to protect the interests of investors in the Securities Market which has seen substantial growth in tune with the parallel developments in the economy. Investors' confidence in the Capital/Securities Market is a reflection of the effectiveness of the regulatory mechanism in force. All such measures are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be inferred that as a matter of principle, while interpreting this regulation, the court must weigh against an interpretation which will protect unjust claims over just, fraud over legality and expediency over principle. Once this rule is clearly established, individual cases should not pose any problem. 23. It is equally well settled that in interpreting a statute, effort should be made to give effect to each and every word used by the Legislature. The Courts should presume that the Legislature inserted every part for a purpose and the legislative intention is that every part of the statute should have effect. It must be kept in mind that whenever this Court is seized with a matter which requires judicial mind to be applied for interpreting a law, the effort must always be made to realize the true intention behind the law. 24. Before dealing with the legal issue we are seized with, it would be important to observe certain definition as occurring under the regulations. The definition of dealing in securities acquires some importance as charge under regulation 3 completely depends on the aspect whether the tippee was dealing in securities in the first instant or not. Fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ud under clause (c) of regulation 2 has two parts; first part may be termed as catch all provision while the second part includes specific instances which are also included as part and parcel of term fraud . The ingredients of the first part of the definition are- 1. includes an act, expression, omission or concealment whether in a deceitful manner or not; 2. By a person or by any other person with his connivance or his agent while dealing in securities; 3. So that the same induces another person or his agent to deal in securities; 4. Whether or not there is any wrongful gain or avoidance of any loss. The second part of the definition includes specific instances29 (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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... words employed in the aforesaid provisions are of wide amplitude and would therefore take within its sweep the inducement to bring about inequitable result which has happened in this case instant. 32. Regulation 4 prohibits manipulative, fraudulent and unfair trade practices. It is to be noted that the regulation 4 (1) starts with the phrase without prejudice to the provisions of regulation 3 . This phrase acquires significance as it portrays that the prohibitions covered under the regulation 3 do not bar the prosecution under regulation 4 (1). Therefore regulation 4 (1) has to be read to have its own ambit which adds to what is contained under regulation 3. 33. Regulation 4 (2)(q) of FUTP 2003 states that- (2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:- q) an intermediary buying or selling securities in advance of a substantial client order or whereby a futures or option position is taken about an impending transaction in the same or related futures or options contract. Under the provisions of regulation 4(2)(q), only intermediary trading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t fraud has been committed while dealing in securities, is arrived at, all these provisions get attracted in a situation like the one under consideration. We are not inclined to agree with the submission that SEBI should have identified as to which particular provision of FUTP 2003 regulations has been violated. A pigeon-hole approach may not be applicable in this case instant. 38. Before we conclude, it would be useful to have a look at American jurisprudence which has developed around Title 17, Code of Federal Regulations, Part 240, Rule 10b-5 ( Prohibition of use of manipulative or deceptive devices or contrivances with respect to certain securities exempted from registration ). It is to be noted that much of Indian securities laws have similar provisions and a brief survey of jurisprudence might be useful for the discussion herein. The complexity of the subject we are dealing is reflected even in the American jurisprudence as the U.S Supreme Court seems to have accepted the aforesaid provision to be the most litigated ones. (Securities and Exchange Commission vs. National Securities, Inc., et al., 393 U.S. 453 (1969) Although section 10(b) and 10 b-5 may well be the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits from trading in anticipation of the Heard column's impact on the stock market. In Snepp v. United States, 444 U.S. 507, 515, n. 11, 100 S.Ct. 763, 768, n. 11, 62 L.Ed.2d 704 (1980) ( per curiam), although a decision grounded in the provisions of a written trust agreement prohibiting the unapproved use of confidential Government information, we noted the similar prohibitions of the common law, that even in the absence of a written contract, an employee has a fiduciary obligation to protect confidential information obtained during the course of his employment. As the New York courts have recognized: It is well established, as a general proposition, that a person who acquires special knowledge or information by virtue of a confidential or fiduciary relationship with another is not free to exploit that knowledge or information for his own personal benefit but must account to his principal for any profits derived therefrom. Diamond v. Oreamuno, 24 N.Y.2d 494, 497, 301 N.Y.S.2d 78, 80, 248 N.E.2d 910, 912 (1969); see also Restatement (Second) of Agency 388, Comment c, 396(c) (1958). We have little trouble in holding that the conspiracy here to trade on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duty arises from a specific relationship between two parties and should not be undertaken absent some explicit evidence of congressional intent. Securities Exchange Act of 1934, 10(b) as amended 15 U.S.C.A. 78j(b). 40. Although excessive reliance on foreign jurisprudence may not be necessary as we have starkly deviated in many aspects from American jurisprudence, but we need to keep in mind the developments which other countries have undertaken regarding this issue. 41. Now we come back to the regulations 3 and 4 (1) which bars persons from dealing in securities in a fraudulent manner or indulging in unfair trade practice. Fairness in financial markets is often expressed in terms of level playing field. A playing field may be uneven because of varied reasons such as inequalities in information etc. Possession of different information, which is a pervasive feature of markets, may not always be objectionable. Indeed, investors who invest resources in acquiring superior information are entitled to exploit this advantage, thereby making markets more efficient. The unequal possession of information is fraudulent only when the information has been acquired in bad faith and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2666 of 2013 are allowed. At the same time, for the same reason, Civil Appeal Nos. 5829 of 2014 and 11195-11196 of 2014 are dismissed. JUDGMENT RANJAN GOGOI,J. 1. I have had the privilege of going through the very erudite judgment of my learned brother Ramana, J. I can only agree with the trend of reasoning that my learned brother has chosen to adopt to arrive at his ultimate conclusions. However, I am of the view that the present case is capable of resolution within a very narrow spectrum of law and on an interpretation of the relevant provisions of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations 2003 (hereinafter referred to as 2003 Regulations ). I, therefore, propose to record my own views in the matter. 2. The relevant provisions of the 2003 Regulations which would require consideration of this Court has been set out in extenso by my learned brother and, therefore, I need not burden this order with a repetition of the same. All that I consider necessary to point out is that it is the provisions of Regulation 2(c),(3) and (4) of the 2003 Regulations which woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that on a reading of Regulation 2(c),(3) and Regulation(4) of the 2003 Regulations it does not transpire that the acts attributable amount to fraudulent or unfair trade practice warranting the findings recorded by the Adjudicating authority and the imposition of penalty in question on that basis. 5. If Regulation 2(c) of the 2003 was to be dissected and analyzed it is clear that any act, expression, omission or concealment committed, whether in a deceitful manner or not, by any person while dealing in securities to induce another person to deal in securities would amount to a fraudulent act. The emphasis in the definition in Regulation 2(c) of the 2003 Regulations is not, therefore, of whether the act, expression, omission or concealment has been committed in a deceitful manner but whether such act, expression, omission or concealment has/had the effect of inducing another person to deal in securities. 6. The definition of 'fraud', which is an inclusive definition and, therefore, has to be understood to be broad and expansive, contemplates even an action or omission, as may be committed, even without any deceit if such act or omission has the effect of inducing an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng without prejudice to the provisions of Regulation 3 of the 2003 Regulations would operate on its own without being circumscribed in any manner by what is contained in Regulation 3. 10. Adverting to the facts of the present case, if the information with regard to acquisition of shares by M/s Passport India was parted with by Dipak Patel to Kanaiyalal Baldevbhai Patel and Anandkumar Baldevbhai Patel and the latter had transacted in huge volume of shares of the particular company/scrip mentioned by Dipak Patel a little while before the bulk order was placed by M/s. Passport India and the said persons had sold the same a short-while later at an increased price, such increase being a natural consequence of a huge investment made in the particular scrip by M/s Passport India, surely, it can be held that by the conduct of Dipak Patel, Kanaiyalal Baldevbhai Patel and Anandkumar Baldevbhai Patel were induced to deal in securities. A natural and logical inference that would follow is that the aforesaid two latter persons would not have entered into the transactions in question, had it not been for the information parted with by Dipak Patel. The track record of earlier trading of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mens rea is not an indispensable requirement and the correct test is one of preponderance of probabilities. Merely because the operation of the aforesaid two provisions of the 2003 Regulations invite penal consequences on the defaulters, proof beyond reasonable doubt as held by this Court in Securities and Exchange Board of India Vs. Kishore R. Ajmera (supra) is not an indispensable requirement. The inferential conclusion from the proved and admitted facts, so long the same are reasonable and can be legitimately arrived at on a consideration of the totality of the materials, would be permissible and legally justified. Having regard to the facts of the present cases i.e. the volume of shares sold and purchased; the proximity of time between the transactions of sale and purchase and the repeated nature of transactions on different dates, in my considered view, would irresistibly lead to an inference that the conduct of the respondents in Appeal Nos.2595 of 2013, 2596 of 2013 and 2666 of 2013 and appellants in Appeal Nos.5829 of 2014 and 11195-11196 of 2014 were in breach of the code of business integrity in the securities market. The consequences for such breach including penal c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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