Amgis Holdings Private Limited vs Securities and Exchange Board of India on 27 December 2010

BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI

Appeal No.114 of 2007

Date of Decision: 27.12.2010

Amgis Holdings Private Limited 1401, Raheja Center 14th Floor, Free Press Marg, Nariman Point, Mumbai – 400 021.

….. Appellant

Versus

Securities and Exchange Board of India SEBI Bhavan, Plot No.C-4A, G Block, Bandra Kurla Complex, Bandra (East), Mumbai – 400 051.

.....Respondent

Mr. P.N. Modi, Advocate with Mr. Deepak Dhane, Advocate for the Appellant. Mr. D.J. Khambatta, Additional Solicitor General with Dr. (Mrs.) Poornima Advani and Mr. Omprakash Jha, Advocates for the Respondent.

CORAM : Justice N.K. Sodhi, Presiding Officer Samar Ray, Member P.K. Malhotra, Member Per : Samar Ray, Member

This order will dispose of three Appeals no. 113 to 115 of 2007 as they raise identical questions of law and fact. Since arguments were heard in Appeal no. 114 of 2007 (Amgis Holdings Private Limited vs. Securities and Exchange Board of India), the facts are being noticed from this case. Learned counsel for both the parties are agreed that decision in Appal no. 114 will govern the other appeals as well.

2. The appellant is a stock broker registered with the Securities and Exchange Board of India (for short the Board) which had initiated investigations on March 22, 2000 into the trading of the scrip of M/s. Roofit Industries Ltd. (the company) to find out the reason behind the sudden spurt in its price and trading volumes. The company is listed, among others, on the National Stock Exchange of India Ltd. (NSE) and Bombay Stock Exchange

Ltd., Mumbai (BSE). The Board had instructed these exchanges to carry out preliminary investigations into the trading of the scrip and they identified 16 brokers involved including the appellant who traded during the period from October 6, 1999 to May 8, 2001. The Board then undertook detailed investigations to look into the possible violations by these 16 brokers of the provisions of Regulation 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 (FUTP regulations) and the code of conduct for brokers prescribed under the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992 (stock broker regulations). Investigations revealed that the appellant alongwith two other brokers namely, M/s. Goldcrest Capital Markets Ltd. and Prashant J. Patel (hereinafter referred to as Goldcrest and Patel respectively) had executed trades on behalf of their clients who were related to each other and also related to the company and influenced the price of the scrip and created volumes by executing matched trades. Investigations further disclosed that the appellant was making adjustment for its clients in delivery of shares and that it also transferred large number of shares from the account of one trading member to the account of another trading member. The appellant is also said to have aided and abetted the related clients in raising funds from the market by misusing the trading system. On the conclusion of the investigations, the Board issued a notice dated September 19, 2003 to the appellant making the aforesaid allegations. The mode and manner in which the appellant alongwith the other two brokers had traded in the scrip of the company were detailed in the investigation report, the relevant extract of which was attached to the show cause notice. The statement of Deven Mehta, a director of the appellant which was recorded during the course of the investigations was also furnished to the appellant alongwith the notice. It was alleged that the appellant was guilty of violating the provisions of Regulation 4 of the FUTP regulations and clause A(1) (4) of the code of conduct prescribed by the stock broker regulations. The appellant was asked to show cause why an enquiry should not be held against it and an appropriate order passed for the aforesaid violations. The appellant filed its reply on December 15, 2003 denying all the allegations claiming that it had no connection with the clients except the client broker relationship and had no knowledge of the clients’ “illegal transactions”. Further, the appellant took shelter under the anonymity of the trading system to contend that it was not

aware of the counter party or the counter party broker(s) at the time when the trades were executed. The appellant pleaded that all the trades carried out by it were bonafide on behalf of its clients. A detailed enquiry was held into the charges levelled against the appellant in which it was afforded ample opportunity to defend itself. The enquiry officer did not accept the stand of the appellant and found that it had violated the aforesaid provisions of the FUTP regulations and the code of conduct. Accordingly, by his report dated April 5, 2004 the enquiry officer recommended that the certificate of registration of the appellant be suspended for a period of two months. On receipt of the enquiry report, the appellant was served with yet another show cause notice dated April 15, 2004 enclosing the enquiry report and calling upon the appellant to show cause why the same be not accepted and an appropriate penalty not imposed. The appellant filed its reply reiterating its earlier denial of all the charges and controverted the findings recorded by the enquiry officer. On a consideration of the material collected during the course of the investigations and the enquiry and also the enquiry report and the replies filed by the appellant, the whole time member agreed with the enquiry officer and came to the conclusion that the appellant had violated Regulation 4 of the FUTP regulations and the code of conduct prescribed for stock brokers. By his order dated July 31, 2007, the whole time member suspended the certificate of registration of the appellant for a period of two months. It is against this order that the present appeal has been filed.

3. We have heard the learned counsel for the parties at great length who have taken us through the record. We find from the record that the appellant had traded for eight clients in the scrip of the company whose names appear in the investigation report that was furnished to it. Out of these eight clients, five were related to each other and their names are M/s. Habiscus Investments Pvt. Ltd., M/s. Onlooker Investments Pvt. Ltd., M/s Alkan Projects Pvt. Ltd., M/s. M’Belle International Pvt. Ltd. and M/s. Mayfair Realtors Pvt. Ltd. (hereinafter referred to as Habiscus, Onlooker, Alkan, M’Belle and Mayfair respectively). Deven Mehta, a director of the appellant in his statement has admitted that these clients were related to each other and also to the company. We have examined his statement very carefully and the tenor thereof makes it clear that he was aware of this relationship at the time when the trades were executed. This fact by itself may not be enough to hold the

appellant guilty but coupled with the other circumstances of the case which are being referred to hereinafter, we are inclined to agree with the enquiry officer and the whole time member. Apart from the relationship of the clients, the trading pattern also leads us to the same conclusion. Admittedly, the scrip was illiquid and the trade log analysis shows that the appellant on behalf of its five related clients had matched 76 trades with the same counter party broker namely, Goldcrest. These trades were executed between November 20, 2000 and March 15, 2001. The appellant had only purchased shares on behalf of its clients and the buy orders in these 76 trades matched the sell orders placed by Goldcrest within a matter of seconds in most of the cases. In fact, in 62 cases the time gap between the buy and sell order was between 0 to 10 seconds which is highly improbable unless both sides had entered the trades with a prior understanding. While we agree with the learned counsel for the appellant that the trading system maintains complete anonymity and the brokers while placing orders (buy or sell) do not know at the time of executing the trade as to who the counter party is or even the counter party broker, but despite anonymity, market players and intermediaries like the brokers execute manipulative trades by defeating the system and this is usually done by placing the buy and sell orders simultaneously for the same amount and at the same price. Such trades are commonly called matched trades, that is, trades which are matched by / through the brokers and not by the system. The possibility of such trades is far greater in scrips which are comparatively less liquid because of the low frequency of the trades. If the broker knows at the time of executing the trade what the client was up to, then obviously he is party to the mischief. Since the trading system maintains complete anonymity, brokers, as in the present case, plead that they were ignorant about the counter party or his broker at the time of executing the trade. In such a situation one has to look to the trading pattern and if the trades match too often or if the matching of the trades is noticed day after day and trade after trade, one can infer that the matching was done not by the system but by manipulating the same. In the absence of prior meeting of minds and knowing the mechanism of the trading system, matching trades as aforesaid cannot be too frequent an occurrence and can lead to only one conclusion that the trades had been manipulated by misusing the system. Normally, no direct evidence would be available to find out whether a broker was aware of the matching trades. The intention of the parties and the brokers will have to be gathered from the surrounding circumstances

looking at the trading pattern, the frequency of trades and other related circumstances. Coming to the facts of the present case, we have already noticed that 76 matched trades were executed between the appellant and Goldcrest and another 18 with Patel. Another fact which is relevant to notice is that while the two clients of the appellant namely, M’Belle and Onlooker were purchasing shares through the appellant, they were also selling the same shares through Goldcrest at the same time. One more interesting feature to note is that in one settlement, the appellant had bought 53,288 shares for Mayfair and 51,076 shares for Habiscus but credited only 34,788 and 47,576 in their respective accounts retaining 22,000 shares in its own account. Similarly, the appellant purchased 2,32,520 shares for M’Belle in one transaction out of which 40,000 shares were transferred to the beneficiary account of Goldcrest which was the counter party broker. When we notice these transactions in the backdrop of matched trades referred to above and the appellant’s foreknowledge about the relationship of the entities inter se and with the company, we cannot escape the inevitable conclusion that the appellant was executing manipulative trades in collusion with these entities. There is yet another important factor which we must take note of. It is not in dispute that the aforesaid five clients of the appellant were in need of funds and they were introduced by the appellant to counter party brokers namely, Goldcrest, Patel and some others for the purpose. Having raised funds from Goldcrest and Patel by executing spot transactions, the clients used those funds and purchased shares of the company through the appellant and the selling brokers were again Goldcrest and Patel. This cannot be a mere coincidence unless it was so planned. The details of these trades have already been referred to above and were furnished to the appellant in the extract from the investigation report. The fact that the appellant introduced the clients to Goldcrest and Patel is borne out from the statement of Deven Mehta who is a director of the appellant company. This is what he stated in his reply to question no. 6 when his statement was recorded during the course of the investigations.

“The clients M/s. Onlooker, M/s. Habiscus, M/s Akira, M/s Alkan, M/s. M’belle and M/s. Mayfair Realtors were in need of funds and as they were known to us, on some occasions, we did introduce them to other brokers viz. M/s. Goldcrest, M/s Prashant J Patel, M/s. Express Securities and M/s Bharat J Patel. However, I would like to state that the business was directly done between them and the clients. I understand that transactions between the clients and the broking entities mentioned above

were in the nature of spot transactions wherein money was immediately collected by them from those brokers after executing the sale transactions.”

This conduct of the appellant, in our view, clearly tilts the balance against the appellant and we are unable to agree with Shri P.N. Modi, Advocate that the appellant was as innocent as he wanted us to believe. Each of the factors mentioned in the show cause notice and the impugned order when considered individually may only cast a doubt on the conduct of the appellant but when considered holistically, the preponderance of probabilities heavily weigh against it and lead us to conclude that the appellant was not an innocent bystander but was involved in the game plan to manipulate the market through execution of fictitious and non-genuine trades. Taking note of the statement of Deven Mehta and all the attending circumstances, we cannot but uphold the findings recorded by the whole time member.

In the result, the appeals fail and they stand dismissed with no order as to costs.

Sd/- Justice N.K. Sodhi Presiding Officer

Sd/-

Samar Ray

Member

Sd/-

P.K. Malhotra

Member

msb/ptm 27.12.2010

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