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TMI Blog2012 (6) TMI 872X X X X Extracts X X X X X X X X Extracts X X X X ..... onth. The appellant is a public limited company which is registered as a stockbroker with the Board. It had executed trades on behalf of its clients, among others, in the scrip of G. G. Automotive Gears Ltd. (for short the company). The Board carried out investigations in the dealings of the scrip of the company for the period from August 1, 2002 to October 16, 2002 and it found that a group of four member brokers, including the appellant, and their clients traded in the scrip of the company in a circular manner intra day for forty days during the investigation period. The appellant had executed trades on behalf of its client Ms. Indumati Goda. Proceedings were initiated against the brokers and their clients separately around the same time. Show cause notice dated June 5, 2006 was issued to the four brokers including the appellant alleging that the four member brokers and their clients had traded in a circular pattern intra day for forty days during the period of investigation. The brokers and their clients involved in the circular trading alongwith the contribution of each was referred to in the show cause notice in the form of a table which is reproduced hereunder for facility of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the stockbrokers regulations and suspended the certificate of registration of the appellant for a period of one month. The appellant challenged the said order before this Tribunal. After hearing learned counsel for the parties at length, the Tribunal, by its order dated June 21, 2011, remanded the matter to the Board for proceeding afresh in the matter. While remanding the matter to the Board, the Tribunal observed as under:- We have heard ............ the appellant has been foundguilty of aiding and abetting its client, namely Ms. I. U. Goda for the creation of misleading appearance of trading in the securities market by executing circular trades. Separate proceedings had been initiated against the clients as well including Ms. I. U. Goda and it is common ground between the parties that she has been let off the charge of executing circular trades. It must be remembered that every broker executes either a self trade or a trade on behalf of his client(s). Admittedly, in the case before us the appellant is said to have executed trades on behalf of Ms. I. U. Goda and the finding recorded by the whole time member is that while executing trades on her behalf, the appellant had aid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circular manner among the group of said brokers. c. The total volume generated by way of such circular trades by the said group of four brokers, was 4,28,749 shares i.e., about 19% of the total quantity of the shares traded during the period of investigation. The total number of shares bought and sold among the said four brokers is same i.e. 4,28,749 shares. Out of this you had purchased 1,11,250 shares and sold 98,420 shares in the scrip of GGAGL while trading on behalf of your registered client Ms. I. U. Goda on whose behalf Shirish C. Shah had placed orders/ fraudulently traded. The orders in respect of most of the trades entered by you were entered with a startling proximity in the timing, price and quantity with that of said brokers, thus resulting into matching of the orders. d. The Enquiry Officer has found that the trades were synchronized and circular in nature and executed in such a manner that led to creation of artificial volumes in the scrip and was designed to create a false market leading to significant price movement in the scrip. e. The Enquiry Officer after considering the facts of the case including your submissions has recommended a penalty of suspension ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cross-examine Indumati Goda. The whole time member of the Board, after considering the material on record, rejected the preliminary objection and request of the appellant for cross-examining Indumati Goda and held him guilty of violating the provisions of 4 (a), (b), (c) and (d) of the FUTP regulations and also Clause A (2) to (5) of the code of conduct under the stockbrokers regulations and, by the order dated December 27, 2011, suspended certificate of registration of the appellant for a period of one month. Hence the present appeal. 5. We have heard the learned counsel for the parties at length. They have taken us through the records of the case, placed before us certain judgments/orders stated to be relevant to the points on issue and taken us through the relevant provisions of the Act and the regulations. The appellant has been found to be guilty of violating the provisions of regulation 4 of the FUTP regulations on the ground that all the four brokers including the appellant had followed the common pattern of circular trading which also indicates synchronization in placing of orders thereby creating artificial volume in the scrip of the company which resulted in increasing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilable on record that the appellant knew that the trades were fictitious then there would be no hesitation in upholding the finding of the Board. However, there is no such link available either on the record or any finding to this effect has been recorded by the whole time member. There is no material on record to show that the appellant, as a broker knew, that the trades were circular/synchronised. There are no findings that either the broker and their clients were connected persons or they were acting in concert. Trading was through the exchange mechanism and was online where the code number of the broker alone is known and it is not possible for anyone to know from the screen as to who the clients are. Merely because the appellant acted as a broker it cannot be concluded that he must have known about the transactions. There has to be more material on record to prove that fact. While drawing the inference that the appellant must have known about the nature of the transaction, the Board could have made enquiries from the clients which it has failed to do. Mr. Shiraz Rustomjee, learned senior counsel for the respondent Board, very streneously urged before us that a trade cannot mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same time it cannot lead to the conclusion that the broker had knowledge of fictitious trades being executed between the buyer and the seller. It has been observed by this Tribunal in a number of cases that on a screen based trading system, it is not possible for a broker to know who the counter party is at the time when the trades are executed. The case of Triumph International Finance Ltd., relied upon by the Board, is distinguishable as it was categorically admitted in that case that in all the trades the buyers and the sellers were Ketan Parekh entities who were found guilty of executing manipulative trades and had been proceeded against by the Board. The appellant was also found to be a close associate of Ketan Parekh and his investment/broking companies. The Board has not brought any material on record in the case in hand proving any nexus between the appellant and the other broker entities or the clients. Even in the case of Ajmera (supra) this Tribunal has observed that merely because the two clients have executed matched trades, it does not follow that their brokers were necessarily a party to the game plan. Following the decision in the case of Kasat Securities Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son who comes to buy or sell shares. The Board in the impugned order while drawing an inference that the appellant must have known about the nature of the transactions has observed that the appellant failed to eqnuire from its clents as to why they were wanting to sell the securities. We do not think that any broker would ask such a question from its clients when he is getting business nor is such a question relevant unless of course, he suspects some wrong doing for which there has to be some material on the record. 7. It has been specifically pleaded by the appellant that during the investigation period, i.e. in the year 2002, there was no software available for carrying out long or real time surveillance and it was not possible to carry out surveillance of thousands of transactions of all clients on a daily basis. It has also been pleaded by the appellant that the impugned trades in the scrip of the company were done on behalf of its clients and the intra day trading was the normal/usual pattern of the trading adopted by the said client. The appellant had not entered into any proprietary trades in the scrip. It is a matter of record that there were positive media reports regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribed KYC documents including proof of identity and number of particulars were collected. It is no case of the Board that KYC norms were not followed by the appellant at the relevant time. In this view of the matter, we are unable to agree with the findings of the whole time member that the appellant had connived with Shirish Shah or was negligent in executing the trades. These findings of the whole time member are not supported by any material on record. Learned counsel for the appellant had also challenged the order on the ground of violation of principles of natural justice as copies of the order/trade logs were not provided to it and, inspite of request made, the appellant was not afforded an opportunity to cross-examine Ms. Indumati Goda. In its reply dated November 21, 2011 to the show cause notice the appellant had specifically stated that it has not been "furnished with the documents or material which would show or imply that Ms. Indumati Goda or her daughter in law, Ms. Trusha Goda have disputed or denied the said trades." It was further stated that the charges are fundamentally based on allegation that Mr. Shirish Shah had fraudulently traded on behalf of Ms. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt- employee, failure to do so would not automatically result in quashing or setting aside of the order or the order being declared null and void. For that, the delinquent employee has to show 'prejudice'. Unless he is able to show that non-supply of report of the Inquiry Officer has resulted in prejudice or miscarriage of justice, an order of punishment cannot be held to be vitiated. And whether prejudice had been caused to the delinquent- employee depends upon the facts and circumstances of each case and no rule of universal application can be laid down. In this judgment itself, the Court has restated the principles of natural justice and indicated that they are flexible and in the recent time, they had undergone a sea change. If there is no prejudice to the employee, an action cannot be set aside merely on the ground that no hearing was afforded before taking decision by the authority. The non observance of the natural justice is itself prejudice to any man and proof of prejudice independent of proof of denial of natural justice is unnecessary. While passing the impugned order the whole time member has observed that "SEBI has not solely relied upon the submission o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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