BEFORE THE ADJUDICATING OFFICER SECURITIES AND … · 7. The Noticee along with Mr. Aditya...

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BEFORE THE ADJUDICATING OFFICER

SECURITIES AND EXCHANGE BOARD OF INDIA

[ADJUDICATION ORDER NO. PG/AO- 73/2010]

______________________________________________________

UNDER RULE 5 OF SECURITIES & EXCHANGE BOARD OF INDIA (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995

In respect of

Praveen Kumar Jain (SEBI Regn No. INS01516511)

Sub-broker of Hem Securities Ltd. (PAN.- ABZPJ3770A)

In the matter of Autolite India Ltd.

FACTS OF THE CASE IN BRIEF

1. Securities and Exchange Board of India (hereinafter referred to

as “SEBI”) conducted investigation in respect of buying, selling

and dealing in the shares of Autolite India Ltd. (hereinafter

referred to as “AIL/Company/ scrip”) which had witnessed a

large spurt in volume during the period April 07, 2008 to May 16,

2008 (hereinafter referred to as the “Investigation period”) at

the Bombay Stock Exchange Ltd. (hereinafter referred to as

“BSE”).

2. Investigations have revealed that Praveen Kumar Jain

(hereinafter referred to as the “sub-broker”), sub-broker of the

broker Hem Securities Ltd., has executed synchronized

reversal/ circular trades in the shares of AIL on behalf of it’s 2

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clients Mrs. Jyoti Jain (client code: 152J99) & Mr. Rajeev Dadda

(Client Code: 152R99). It is also noted that Mrs. Jyoti Jain is the

wife of Mr. Praveen Kumar Jain (hereinafter referred to as “sub-broker”). These trades created artificial volume in the scrip of

AIL. The address of Praveen Kumar Jain is 4294, Nathmal Ji Ka

Chowk, Johari Bazaar, Jaipur- 302003.

3. It was alleged that Praveen Kr. Jain (hereinafter referred to as

“Noticee”) had violated the provisions of regulations 3, 4(1),

4(2)(a) & 4(2)(b) of SEBI (Prohibition of Fraudulent and Unfair

Trade Practice relating to Securities Markets) Regulations, 2003

(hereinafter referred to as “PFUTP Regulations”) and Clause

A(1), A(2), D(4) & D(5) of the Code of Conduct specified under

Schedule II of Regulation 15 of the SEBI (Stock Brokers and

Sub-brokers) Regulations, 1992 (herein after referred to as the

“Broker Regulations”) and is therefore liable for monetary

penalty under sections 15HA and 15HB of Securities and

Exchange Board of India Act, 1992 (hereinafter referred to as

“SEBI Act”).

APPOINTMENT OF ADJUDICATING OFFICER 4. The undersigned was appointed as Adjudicating Officer vide

order dated August 09, 2010 under section 15 I of SEBI Act read

with rule 3 of SEBI (Procedure for Holding Inquiry and Imposing

Penalties by Adjudicating Officer) Rules, 1995 (hereinafter

referred to as ‘Rules’) to enquire into and adjudge the aforesaid

alleged violations committed by the Noticee.

SHOW CAUSE NOTICE, HEARING AND REPLY

5. A Show Cause Notice dated September 27, 2010 (hereinafter

referred to as “SCN”) was issued to the Noticee under rule 4(1)

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of the Rules to show cause as to why an inquiry should not be

held against the Noticee and penalty be not imposed under

sections 15HA and 15HB of SEBI Act for the alleged violations

specified in the said SCN. No reply to the SCN was received

from the Noticee within the stipulated time.

6. In the interest of natural justice and in order to conduct an

inquiry as per rule 4(3) of the Rules, the Noticee was granted an

opportunity of personal hearing on November 18, 2010 vide

Notice dated November 03, 2010. However, the Noticee vide his

letter dated nil received by SEBI on November 22, 2010 sought

for a extension of 15 days to file reply to the SCN and appear for

hearing. Thereafter, another opportunity of hearing was granted

to the Noticee on December 13, 2010 vide notice dated

November 22, 2010. The Noticee vide its letter dated December

08, 2010 sought another date for the hearing and also requested

that the same be held in Mumbai. Subsequently, another

opportunity of hearing at the SEBI HO in Mumbai was granted to

the Noticee on December 24, 2010, vide notice dated December

14, 2010. 7. The Noticee along with Mr. Aditya Bhansali, Authorised

Representative (hereinafter referred to as “AR”), appeared for

the said hearing and made oral submissions. Vide letter dated

December 18, 2010, the Noticee made certain written

submissions in reply to the SCN. In the oral submissions, the

Noticee reiterated the written reply to the SCN.

8. The major submissions made by the Noticee are as follows:

i) That the copy of appointment order of the Adjudicating

Officer was not provided to him.

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ii) That the copy of the Investigation Report, based on which

the charges against him have been framed, was not

provided to him.

iii) That there was no ulterior motive/collusion involved

behind the trades in question, executed on behalf of its

clients and that all the trades executed were in the normal

course of business merely to carry out the trading

instruction from the clients.

iv) That there was no major price/ volume

fluctuation/contribution of the Noticee in the scrip of AIL

during the period of investigation.

v) That no loss was caused to the investors because of

alleged trades in question and no gain was received by

the Noticee either.

vi) That there was no common telephone number between

them. There appeared to be some clerical error as the

Noticee’s number was 2575347, that of his wife Jyoti

Jain’s was 2572912 and the number of Rajeev Dadda

was 2564432. The Noticee also submitted copy of

modified UCC details downloaded from BSE website.

CONSIDERATION OF ISSUES AND FINDINGS 9. The issues that arise for consideration in the present case are :

a) Whether the Noticee had violated the provisions of

regulations 3, 4(1), 4(2)(a) & 4(2)(b) of PFUTP Regulations

along with Clause A(1), A(2), D(4) & D(5) of the Broker

Regulations?

b) Do the violations, if any, on the part of the Noticee attract

monetary penalty under section 15 HA and/or 15 HB of SEBI

Act?

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c) If so, what would be the monetary penalty that can be

imposed taking into consideration the factors mentioned in

section 15J of SEBI Act?

10. Before moving forward, it will be appropriate to refer to the

relevant provisions of PFUTP Regulations, which read as under:

PFUTP Regulations

“Regulation 3: Prohibition of certain dealings in securities

No person shall directly or indirectly-

(a) buy, sell or otherwise deal in securities in a fraudulent manner;

(b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made there under;

(c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange;

(d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under.

4. Prohibition of manipulative, fraudulent and unfair trade practices

(1) Without prejudice to the provisions of regulation 3, no person shall

indulge in a fraudulent or an unfair trade practice in securities

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(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: -

(a) indulging in an act which creates false or misleading appearance of

trading in the securities market;

(b) dealing in a security not intended to effect transfer of beneficial

ownership but intended to operate only as a device to inflate, depress

or cause fluctuations in the price of such security for wrongful gain

or avoidance of loss;

“SCHEDULE II

CODE OF CONDUCT FOR SUB-BROKERS [Regulation 15] A. General. (1) Integrity: A sub-broker, shall maintain high standards of integrity,

promptitude and fairness in the conduct of all investment business. (2) Exercise of due Skill and Care : A sub-broker, shall act with due skill,

care and diligence in the conduct of all investment business.

B…… C…… D. Sub-Brokers vis-a-vis Regulatory Authorities (1)…. (2)…. (3)…. (4) Manipulation : A sub-broker shall not indulge in manipulative,

fraudulent or deceptive transactions or schemes or spread rumours with a view to distorting market equilibrium or making personal gains.

(5) Malpractices: A sub-broker shall not create a false market either singly or in concert with others or indulge in any act detrimental to the public interest or which leads to interference with the fair and smooth functions of the market mechanism of the stock exchanges. A sub-broker shall not involve himself in excessive speculative

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business in the market beyond reasonable levels not commensurate with his financial soundness.”

11. Upon careful perusal of the documents available on record

including the basis of allegations made, I find the following:-

a) The analysis of the trade and order log of the transactions

(which was provided to the Noticee as annexure to the SCN)

reveals that the Noticee, Praveen Kumar Jain carried out

synchronized trades on behalf of the two clients Rajeev Dadda

& Jyoti Jain, which constituted nearly 70% of the trading

volume in the market. 271 trades / transactions were executed

for Jyoti Jain during the period of investigation out of which, 1

was a self trade and in 233 trades Rajeev Dadda was the

counterparty. Again, 267 trades were executed for Mr Rajeev

Dadda, out of which 1 was a self trade and Jyoti Jain was the

counterparty in 233 trades. A total of 127 buy transactions

were executed for Jyoti Jain out of which 117 had Rajeev

Dadda as the seller and 144 sell transactions out of which 116

trades had Rajeev Dadda as the buyer. A total of 2,08,856

shares of AIL each were bought and sold for Jyoti Jain during

the investigation period. 137 buy trades and 130 sell trades

were executed for Rajeev Dadda including 1 self trade. Out of

the 137 buy transactions, 116 transactions had Jyoti Jain as

the seller and out of the 130 sell transactions, 117 transactions

had Jyoti Jain as the buyer. There were 2,07,856 shares of AIL

each, bought and sold on behalf of Rajeev Dadda, during the

investigation period. b) The trading details of the two clients of sub-broker Praveen Kr.

Jain of broker Hem Securities Ltd. for the period April 07, 2008

to May 16, 2008 in the shares of AIL are tabulated as below:

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Broker (Sub broker)

Client Reversal Trading days/Total Traded days

Buy Qty in Reversal trading

Total Buy Qty of the client

Buy Qty as % to Market Volume

Sell Qtyin Reversal trading

Total Sell Qty of the client

Sell Qty as % to Market Volume

Hem Securities Ltd (Praveen Jain)

Rajeev Dadda

27 / 27 205218 207856 34.76 207147 207856 34.76

Hem Securities Ltd (Praveen Jain)

Jyoti Jain

27 / 27 207147 208856 34.93 205218 208856 34.93

Total 412365 412365

Market Volume BSE

597865 597865

c) The summary of daily trades executed by the Noticee for the

clients Jyoti Jain & Rajeev Dadda during the investigation

period is given below:

DETAILS OF SYNCHRONOUS TRADES BETWEEN RAJEEV DADDA & JYOTI JAIN

Sell Client

Trade Date Buy Client Rajeev Dadda Jyoti Jain Total Trade

07/04/2008 10000 10000 20000 Rajeev Dadda 10000 10000 Jyoti Jain 10000 10000 08/04/2008 5500 5490 10990 Jyoti Jain 5500 5500 Rajeev Dadda 5490 5490 09/04/2008 3500 3500 7000 Rajeev Dadda 3500 3500 Jyoti Jain 3500 3500 10/04/2008 5000 5000 10000 Rajeev Dadda 5000 5000 Jyoti Jain 5000 5000 11/04/2008 5500 5500 11000 Rajeev Dadda 5500 5500

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Jyoti Jain 5500 5500 15/04/2008 10000 10000 20000 Rajeev Dadda 10000 10000 Jyoti Jain 10000 10000 16/04/2008 10000 9937 19937 Jyoti Jain 10000 10000 Rajeev Dadda 9937 9937 17/04/2008 9995 10000 19995 Rajeev Dadda 10000 10000 Jyoti Jain 9995 9995 21/04/2008 10000 10000 20000 Rajeev Dadda 10000 10000 Jyoti Jain 10000 10000 22/04/2008 7499 6059 13558 Jyoti Jain 7499 7499 Rajeev Dadda 6059 6059 23/04/2008 4500 4500 9000 Rajeev Dadda 4500 4500 Jyoti Jain 4500 4500 24/04/2008 6000 6000 12000 Rajeev Dadda 6000 6000 Jyoti Jain 6000 6000 25/04/2008 10996 10690 21686 Jyoti Jain 10996 10996 Rajeev Dadda 10690 10690 28/04/2008 6050 6856 12906 Rajeev Dadda 6856 6856 Jyoti Jain 6050 6050 29/04/2008 6712 6000 12712 Jyoti Jain 6712 6712 Rajeev Dadda 6000 6000 30/04/2008 10000 10000 20000 Rajeev Dadda 10000 10000 Jyoti Jain 10000 10000 02/05/2008 4500 4500 9000 Rajeev Dadda 4500 4500 Jyoti Jain 4500 4500 05/05/2008 1500 1500 3000 Rajeev Dadda 1500 1500 Jyoti Jain 1500 1500 06/05/2008 10000 9792 19792 Jyoti Jain 10000 10000 Rajeev Dadda 9792 9792 07/05/2008 10000 10000 20000

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Rajeev Dadda 10000 10000 Jyoti Jain 10000 10000 08/05/2008 10000 10000 20000 Rajeev Dadda 10000 10000 Jyoti Jain 10000 10000 09/05/2008 10000 10000 20000 Rajeev Dadda 10000 10000 Jyoti Jain 10000 10000 12/05/2008 10000 10000 20000 Rajeev Dadda 10000 10000 Jyoti Jain 10000 10000 13/05/2008 8995 10396 19391 Jyoti Jain 8995 1500 10495 Rajeev Dadda 8896 8896 14/05/2008 6000 5998 11998 Jyoti Jain 6000 6000 Rajeev Dadda 5998 5998 15/05/2008 10400 10000 20400 Rajeev Dadda 500 10000 10500 Jyoti Jain 9900 9900 16/05/2008 5000 5000 10000 Rajeev Dadda 5000 5000 Jyoti Jain 5000 5000 Grand Total 207647 206718 414365

It is observed that almost the total quantity of shares

purchased by one client on a particular day was being

reversed on the same day. This indicates that these clients

did not have any investment interest in the shares of AIL.

d) A sample of some of the orders placed by the Noticee on

behalf of the above clients during this period is given below:

Trade Date

Trade Time Quantity Price

Buy Client Code

BO Time

BO Qty

BO Rate

Sell Client Code

SO Time

SO Qty

SO Rate

Time Diff

07/04/2008 14:15:52 5000 68.5 152J99 14:15:43 5000 68.50 152R99 14:15:52 5000 68.50 00:00:09

07/04/2008 14:17:02 2500 68.4 152R99 14:16:51 2500 68.40 152J99 14:17:02 2500 68.40 00:00:11

07/04/2008 14:18:46 2500 68.6 152R99 14:18:45 2500 68.60 152J99 14:18:40 2500 68.60 00:00:05

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07/04/2008 15:21:16 5000 68.5 152R99 15:21:16 5000 68.50 152J99 15:21:09 5000 68.50 00:00:07

08/04/2008 10:18:23 2500 67 152J99 10:18:22 2500 67.00 152R99 10:18:16 2500 67.00 00:00:06

08/04/2008 10:19:58 500 67.5 152J99 10:19:58 500 67.50 152R99 10:19:48 500 67.50 00:00:10

08/04/2008 10:22:50 2500 67 152J99 10:22:50 2500 67.00 152R99 10:22:43 2500 67.00 00:00:07

08/04/2008 11:18:23 1000 67 152R99 11:18:23 1000 67.00 152J99 11:18:16 1000 67.00 00:00:06

09/04/2008 14:16:31 2500 67.8 152R99 14:16:30 2500 67.80 152J99 14:16:24 2500 67.80 00:00:06

09/04/2008 14:18:25 2500 67.8 152J99 14:18:25 2500 67.80 152R99 14:18:20 2500 67.80 00:00:05

09/04/2008 14:20:18 1000 67.25 152R99 14:20:11 1000 67.25 152J99 14:20:18 1000 67.25 00:00:07

09/04/2008 14:20:46 1000 67.25 152J99 14:20:40 1000 67.25 152R99 14:20:45 1000 67.25 00:00:05

10/04/2008 10:23:31 5000 68 152J99 10:23:25 5000 68.00 152R99 10:23:31 5000 68.00 00:00:06

10/04/2008 10:23:55 5000 68 152R99 10:23:55 5000 68.00 152J99 10:23:51 5000 68.00 00:00:04

11/04/2008 12:06:15 2500 70 152J99 12:06:15 2500 70.00 152R99 12:06:09 2500 70.00 00:00:06

11/04/2008 12:06:52 2500 70 152R99 12:06:52 2500 70.00 152J99 12:06:47 2500 70.00 00:00:05

11/04/2008 12:08:00 1500 69.5 152R99 12:07:49 1500 69.50 152J99 12:08:00 1500 69.50 00:00:11

11/04/2008 12:09:39 1500 69.5 152J99 12:09:38 1500 69.50 152R99 12:09:32 1500 69.50 00:00:06

15/04/2008 10:43:28 500 70 152J99 10:43:28 500 70.00 152R99 10:43:12 500 70.00 00:00:16

15/04/2008 10:44:59 500 70 152R99 10:44:59 500 70.00 152J99 10:44:51 500 70.00 00:00:08

15/04/2008 10:59:37 500 71 152J99 10:59:36 500 71.00 152R99 10:59:27 500 71.00 00:00:09

15/04/2008 11:00:35 500 71.25 152J99 11:00:35 500 71.25 152R99 11:00:31 500 71.25 00:00:04

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e) On April 7, 2008, an order for purchase of 5000 shares of

AIL was placed by the Noticee on behalf of Jyoti Jain which

was matched with the sell order of Rajeev Dadda and the

time difference between buy & sell order was 9 seconds.

Subsequently buy orders totaling 10000 shares were placed

by the Noticee on behalf of Rajeev Dadda which were

matched with sell orders of Jyoti Jain. The time difference

between the buy and sell orders was ranging from 5 seconds

to 11 seconds. Further, on the same day, 5000 shares were

bought on behalf of Jyoti Jain, the counterparty being Rajeev

Dadda, wherein time difference in orders was 5 seconds. In

all these orders the order quantity and price also matched.

The Noticee executed trades in similar manner during April

7, 2008 to May 16, 2008 and created artificial volume by

executing synchronized reversal trades between the two

clients.

f) Conducting synchronized reversal / circular trades over a long

period of time indicates the Noticee’s involvement in this

manipulative activity. Conducting such synchronized trades

from the same trading terminal (ID 3020010002012001)

further confirms the involvement of the Noticee in this

activity. These trades were conducted for Jyoti Jain, who is a

related entity being wife of the Noticee. The counterparty

with whom the trades matched was also a client of the

Noticee. The above analysis indicates that the Noticee has

been knowingly executing such manipulative trades on

behalf of the above clients.

12. My observations / findings with regard to submissions made by

the Noticee are as under:

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i) The appointment order of the Adjudicating Officer was

shown to the Noticee during the personal hearing and he

did not make any submissions in this regard.

ii) During the hearing, it was explained to the Noticee that

the relevant portions of the Investigation Report based on

which charges have been framed against it were

mentioned in the SCN. The Noticee did not make any

adverse submissions in this regard.

iii) The Noticee has disputed that the telephone number of

both clients and the Noticee was common. As per the

Unique Client code (UCC) details, both clients had the

common telephone number: 2575347 which was the

office number of the Noticee. In response, the Noticee

has submitted photocopy of “Modify UCC Client” details

from BSE site wherein the phone number of Jyoti Jain is

mentioned as 2572912 and that of Rajeev Dadda as

2575347. In his submissions, Noticee has mentioned

Rajeev Dadda’s number as 2564432 but has not

enclosed any proof thereof. While the Noticee has

alleged that there has been a clerical error in uploading

the details, the records indicate that Noticee and Rajeev

Dadda have common number. Further Jyoti Jain, who is

a related entity, appears to have quoted her residence

number.

iv) The intention of the parties in a securities transaction

could be inferred from the attending circumstances

because direct evidence in such cases may not be

available. The very fact that such synchronized circular

trades between the same set of clients of the Noticee

continued for such considerable period of time could not

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have been a matter of mere coincidence without prior

knowledge and collusion between the parties.

v) The price of the scrip during the period of investigation

moved from Rs. 68.65 (on April 07, 2008) to Rs. 82.50

(on May 07, 2008) and closed at Rs. 71.65 (on May 16,

2010). The volume contribution of the trades in question

between the two clients of the Noticee as against the total

volume of trades in the scrip of AIL was about 70 %

which is substantial.

vi) It is evident from the trade and order logs for the

concerned period in the scrip of AIL that fictitious/false

trades conducted by the Noticee on behalf of its two

clients created a false appearance of volume and liquidity

in the scrip.

13. The Hon’ble SAT in Ketan Parekh Vs. Securities & Exchange Board

of India (Appeal No. 2 of 2004) held that in order to find out

whether a transaction has been executed with the intention to

manipulate the market or defeat its mechanism will depend upon

the intention of the parties which could be inferred from the

attending circumstances because direct evidence in such cases

may not be available. In the case of Ashok K Chaudhary v SEBI,

Appeal No 69 of 2008, dated November 5, 2008, the Hon’ble

SAT observed that large number of reverse trades raises a

presumption of manipulative transactions. In Nirmal Bang

Securities Pvt. Ltd Vs Chairman, SEBI, Appeal No. 54-57/2002,

dated October 31, 2003, the Hon’ble SAT observed that where

there are too many transactions over a period of time giving an

impression that these were all synchronized, the argument that

the parties had no means of knowing whether any entity

controlled by the client is simultaneously entering any contra

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order elsewhere for the reason that in the online trading system,

confidentiality of counter parties is ensured, is untenable.

14. The method and the manner in which the trades were executed

are the most important factors to be considered in these

circumstances. In almost all the deals, the orders were so

placed by the Noticee, so as to ensure immediate matching of

the buy and sell quantity and the price with the same

counterparty. The buy and sell orders were placed at almost the

same time between the counterparty entities, with a difference of

zero to few seconds. This proximity in the inputting of orders at

the same price and for the same quantity, resulted in their

immediate matching, thus proving synchronization in placement

of the same. Further, almost all the quantity of AIL shares

purchased/sold by the Noticee on a particular day was being

reversed on the same day. This proves that the Noticee was

only creating artificial volumes in the market. This also proves

that the Noticee indulged in synchronized circular / reversal

trades.

15. Had the aforesaid trades been executed in the normal course of

business, such perfect matching would not have been possible.

The buy and sell prices of one entity were mostly same as the

buy/sell rates of the other entity in all the settlements, such that

the trades of these entities always matched. The transactions as

mentioned earlier which were spread over a period of time were

definitely done with some inbuilt component of ‘intent’ involved.

Greater the number of such synchronized trades, the larger is

the chance of trades not being genuine in nature, which is

bound to affect the market equilibrium. Considering the number

of such trades, it is clear that there has been a gross misuse of

the screen based trading system. It is also to be stated that

“intention” is inherent in all cases of synchronized trading

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involving large scale manipulation and the same was also

brought out in the earlier cited case of Nirmal Bang Securities

(P) Ltd. vs SEBI by the Hon’ble SAT wherein it was observed

that “Intention is reflected from the action of the Appellant. Choosing

selective time slots does not appear to be an involuntary action.”

16. In my view, the Noticee through the said artificial trades

interfered with the market equilibrium and thereby manipulated

the price and volume of AIL shares. The trades executed herein

by the Noticee were not the real trades as there was no intention

to change the beneficial ownership of the shares. When the

trades were inherently not genuine, I do not feel that it is

necessary to prove that investors had, in fact, got induced and

bought and/or sold on the basis of these trades. Similar views

were expressed by Hon’ble SAT in its order dated 14.7.2006 in

Ketan Parekh Vs. SEBI wherein it had observed that “When a

person takes part in or enters into transactions in securities with the

intention to artificially raise or depress the price he thereby

automatically induces the innocent investors in the market to buy /sell

their stocks. The buyer or the seller is invariably influenced by the

price of the stocks and if that is being manipulated the person doing so

is necessarily influencing the decision of the buyer / seller thereby

inducing him to buy or sell depending upon how the market has been

manipulated. We are therefore of the view that inducement to any

person to buy or sell securities is the necessary consequence of

manipulation and flows therefrom. In other words, if the factum of

manipulation is established it will necessarily follow that the investors

in the market had been induced to buy or sell and that no further proof

in this regard is required. The market, as already observed, is so wide

spread that it may not be humanly possible for the Board to track the

persons who were actually induced to buy or sell securities as a result

of manipulation and law can never impose on the Board a burden

which is impossible to be discharged. This, in our view, clearly flows

from the plain language of Regulation 4(a) of the Regulations.”

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17. Regulation 3 of PFUTP Regulations prohibits a person from

conducting any trade in securities in any manner fraudulent in

nature. Regulation 4(2) (a) of PFUTP Regulations prohibits a

person from indulging in an act which creates false or

misleading appearance of trading in the securities market.

Regulation 4(2)(b) of PFUTP Regulations prohibits dealings in a

security intended to operate as a device to inflate, depress or

cause fluctuations in the price of such security for wrongful

gains. As detailed above, the acts of the Noticee clearly created

false and misleading appearance of trading in the shares of AIL

and he did not act in a bonafide manner. The facts of the case

highlight the Noticee’s involvement, by executing continuous

synchronized reversal trades in a substantial manner, in the

manipulation of price / volume of the shares of AIL which led to

creation of artificial volumes and misleading appearance of

trading in the said shares on account of collusive activities with

the entities as discussed in the preceding paragraphs.

18. Clauses A (1) of Code of Conduct for sub-brokers as prescribed

under Broker Regulations stipulates that the entity shall maintain

high standards of integrity and fairness. Further Clauses D(4) &

(5) of the Code of Conduct stipulate that the entity shall not, inter

alia, indulge in manipulative transactions, create false market or

indulge in any act detrimental to the investors’ interest or which

leads to the interference with the fair and smooth functioning of

the securities market. The synchronized reversal/ circular trades

executed by the Noticee as explained hereinabove in detail

created a misleading appearance of trading and artificial volume

in the shares of AIL. It further shows that the Noticee had not

maintained high standards of integrity, promptitude, and fairness

in the conduct of its business. Moreover, the transactions of the

Noticee in AIL were synchronized and there does not appear to

be any genuine trading activity on the part of the clients. Further,

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the trades of the Noticee as explained hereinabove in detail

would establish that the same created a misleading appearance

of trading, artificial volume in the scrip of AIL which is a

manipulative activity.

19. I am of the view that the facts of the present case clearly bring

out an element of fraud and unfair trade practices indulged in by

the Noticee. Therefore, I hold that the charges leveled against

the Noticee are proved and that the allegation of violation of

provisions of regulations 3, 4(1), 4(2) (a) & 4(2) (b) of PFUTP

and Clauses A(1), D(4) & D(5) of the Broker Regulations by the

Noticee stand established.

20. The Hon’ble Supreme Court of India in the matter of SEBI Vs.

Shri Ram Mutual Fund [2006] 68 SCL 216(SC) held that “In our

considered opinion, penalty is attracted as soon as the contravention

of the statutory obligation as contemplated by the Act and the

Regulations is established and hence the intention of the parties

committing such violation becomes wholly irrelevant…”.

21. Thus, the aforesaid violations by the Noticee make him liable for

penalty under Section 15HA & 15 HB of SEBI Act, 1992 which

read as follows:

“15HA.Penalty for fraudulent and unfair trade practices

If any person indulges in fraudulent and unfair trade practices relating

to securities, he shall be liable to a penalty of twenty-five crore rupees

or three times the amount of profits made out of such practices,

whichever is higher.

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15HB.Penalty for contravention where no separate penalty has been provided.-

Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.”

22. While determining the quantum of penalty under section 15HA

and 15HB, it is important to consider the factors stipulated in

section 15J of SEBI Act, which reads as under:-

“15J - Factors to be taken into account by the adjudicating officer

While adjudging quantum of penalty under section 15-I, the

adjudicating officer shall have due regard to the following

factors, namely:-

(a) the amount of disproportionate gain or unfair advantage,

wherever quantifiable, made as a result of the default;

(b) the amount of loss caused to an investor or group of

investors as a result of the default;

(c) the repetitive nature of the default.”

23. It is difficult, in cases of this nature, to quantify exactly the

disproportionate gains or unfair advantage enjoyed by an entity

and the consequent losses suffered by the investors. I have

noted that the investigation report also does not dwell on the

extent of specific gains made by the clients or the sub-broker. It

may suffice to state that keeping in mind the practices indulged

in by the Noticee, gains per se were made by the Noticee in that

he executed trades in the scrip of AIL in a manner meant to

create artificial volumes and liquidity which is an important

criterion, apart from price, capable of misleading the investors

while making an investment decision. In fact, liquidity/volumes in

particular scrip raise the issue of ‘demand’ in the securities

market. The greater the liquidity, the higher is the investors’

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attraction towards investing in that scrip. Hence, general

investors could have been carried away by the unusual

fluctuations in the volumes and induced into investing in the said

scrip. Besides, this kind of activity seriously affects the normal

price discovery mechanism of the securities market. People who

indulge in manipulative, fraudulent and deceptive transactions,

or abet the carrying out of such transactions which are

fraudulent and deceptive, should be suitably penalized for the

said acts. Considering the continuous effort of the Noticee in this

aspect where the synchronized circular / reversal trades were

carried out over a period of time, it can be said that the nature of

default was also repetitive.

ORDER

24. In terms of Section 15 (I) of the SEBI Act, 1992, I impose a

penalty of `1,50,000/- (Rupees one lakh fifty thousand only)

under Section 15 HA of SEBI Act and a penalty of `1,00,000/-

(Rupees one lakh only) under section 15HB of SEBI Act (total

` 2,50,000/-) on the Noticee, Praveen Kr Jain, for the violation of

regulations 3, 4(1), 4(2)(a), (b) of PFUTP Regulations, 2003 and

Clause A(1), D(4) & D(5) of the Code of Conduct specified under

Schedule II of Regulation 15 of the SEBI (Stock Brokers and

Sub-brokers) Regulations, 1992. Considering the facts and

circumstances of the case, this penalty will be commensurate

with the violations committed by the Noticee.

25. The Noticee shall pay the said amount of penalty by way of

demand draft in favour of “SEBI - Penalties Remittable to

Government of India”, payable at Mumbai, within 45 days of

receipt of this order. The said demand draft should be forwarded

to Mr. Ashish Kumar, Deputy General Manager, Investigations

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Department, SEBI, SEBI Bhavan, Plot No. C – 4 A, “G” Block,

Bandra Kurla Complex, Bandra (E), Mumbai – 400 051.

26. In terms of rule 6 of the Rules, copies of this order are sent to

the Noticee and also to the Securities and Exchange Board of

India.

Date: December 31, 2010 PIYOOSH GUPTA Place: MUMBAI ADJUDICATING OFFICER

BEFORE THE ADJUDICATING OFFICER SECURITIES AND … · 7. The Noticee along with Mr. Aditya...

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