Page 1 of 32 BEFORE THE ADJUDICATING OFFICER SECURITIES AND EXCHANGE BOARD OF INDIA [ADJUDICATION ORDER NO. PB/AO- 36/2012] __________________________________________________ UNDER SECTION 15-I OF SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH RULE 5 OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 In respect of Ms. Pooja Menghani (Pan No.: ANWPM1417C) FACTS OF THE CASE IN BRIEF 1. Securities and Exchange Board of India (hereinafter referred to as “SEBI”) conducted investigation in the trading of Ms. Pooja Menghani (hereinafter referred to as “PM/Noticee”) for the period from June 01, 2008 to January 12, 2009 (hereinafter referred to as “investigation period”). 2. The findings of the examination led to the allegation that the Noticee had violated the provisions of regulations 3(a), (b), (c), (d) and 4(1) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (hereinafter referred to as “PFUTP Regulations” ) and consequently, liable for monetary
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BEFORE THE ADJUDICATING OFFICER SECURITIES AND … · Page 3 of 32 (hereinafter referred to as “Live Star”), SRS Portfolio Limited (hereinafter referred to as “SRS”) and MSR
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UNDER SECTION 15-I OF SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH RULE 5 OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995
In respect of
Ms. Pooja Menghani
(Pan No.: ANWPM1417C)
FACTS OF THE CASE IN BRIEF
1. Securities and Exchange Board of India (hereinafter referred to as
“SEBI”) conducted investigation in the trading of Ms. Pooja
Menghani (hereinafter referred to as “PM/Noticee”) for the period
from June 01, 2008 to January 12, 2009 (hereinafter referred to as
“investigation period”).
2. The findings of the examination led to the allegation that the Noticee
had violated the provisions of regulations 3(a), (b), (c), (d) and 4(1) of
SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to
Securities Market) Regulations, 2003 (hereinafter referred to as
“PFUTP Regulations” ) and consequently, liable for monetary
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penalty under section 15HA of the Securities and Exchange Board of
India Act, 1992 (hereinafter referred to as “SEBI Act”).
APPOINTMENT OF ADJUDICATING OFFICER
3. The undersigned has been appointed as Adjudicating Officer vide
order dated March 30, 2011 under section 15 I of the SEBI Act read
with rule 3 of SEBI (Procedure for Holding Inquiry and Imposing
Penalty by Adjudicating Officer) Rules, 1995 (hereinafter referred to
as the ‘Rules’) to inquire into and adjudge under section 15HA of
the SEBI Act.
SHOW CAUSE NOTICE, REPLY AND PERSONAL HEARING
4. Show Cause Notice No. EAD-7/PB/SS/19651/2011 dated June 20,
2011 (hereinafter referred to as “SCN”) was issued to the Noticee
under rule 4 of the Rules to show cause as to why an inquiry should
not be initiated and penalty be not imposed under section 15HA of
SEBI Act for the violation as alleged in the SCN.
5. It was alleged in the SCN that Noticee had bought and sold equal
quantities of shares in large volume in four scrips, namely Amtek
Auto Ltd (hereinafter referred to as “Amtek Auto”), Amtek India Ltd
(hereinafter referred to as “Amtek India”), Monnet Ispat Ltd
(hereinafter referred to as “Monnet Ispat”) and Ahmednagar
Forgings Limited (hereinafter referred to as “Ahmednagar Forging”)
through Religare Securities Limited (hereinafter referred to as
“Religare”), ISF Securities Limited (hereinafter referred to as “ISF”),
India Infoline Securities Limited (hereinafter referred to as “India Infoline”) and Narayan Securities Private Limited (hereinafter
referred to as “Narayan”). Further, Live Star Marketing Pvt. Ltd
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(hereinafter referred to as “Live Star”), SRS Portfolio Limited
(hereinafter referred to as “SRS”) and MSR Marketing Pvt. Ltd.
(hereinafter referred to as “MSR”) were also the clients of Religare.
The aforesaid entities i.e. Live Star, SRS, MSR have also traded in
the said scrips during the investigation period. Further, it was alleged
that Noticee has traded in the above mentioned scrips ahead of Live
Star, SRS and MSR with prior knowledge of the buy orders of
aforesaid entities and has done front running in the said scrips which
resulted in violation of provisions of regulations 3(a), (b), (c), (d) and
4(1) of PFUTP Regulations.
6. The aforesaid SCN was sent to the Noticee through SPAD. The said
notice was delivered to the Noticee. However, the Noticee did not
submit reply to the SCN.
7. In the interest of natural justice and in order to conduct an inquiry in
terms of rule 4(3) of the Rules, an opportunity of personal hearing
was granted on September 22, 2011 vide notice dated September
06, 2011. An adjournment of hearing was sought by eight weeks vide
letter dated September 20, 2011. Acceding to the request, another
opportunity of hearing was granted on December 15, 2011 vide
notice dated November 28, 2011. An adjournment of hearing was
sought by six to ten weeks vide letter dated nil received on December
12, 2011. It was further requested to shift the place of hearing from
Mumbai to Delhi. Acceding to the request, another opportunity of
hearing was granted on February 10, 2012 vide notice dated January
12, 2012 at Securities and Exchange Board of India, Northern
Authorized Representative (hereinafter referred to as “AR”) of the
Noticee vide letter dated February 10, 2012 submitted that. T.P.
Singh will appear on behalf of them on the date of hearing. AR
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appeared on February 10, 2010 and submitted the power of attorney
executed by the Noticee in favour of AR. Upon perusal of the power
of attorney, it was observed that power of attorney did not have the
reference of SEBI adjudication proceedings and date of power of
attorney. The AR undertook to submit the fresh power of attorney by
February 13, 2012. During the course of hearing the AR submitted
inter-alia as under:
“I hereby submit letter dated February 10, 2012 from M.G. Associates,
Advocates and Solicitors. It is submitted that we have been recently engaged
by the Noticee. We need some more time to prepare for the case. It is
requested that one month time may be granted to the Noticee to go through
the files and submit written submissions in the matter. It is submitted that no
further hearing is requested for by the Noticees and the Adjudicating officer
is requested to consider the written submissions which will be filed in one
month time and pass the final order on the basis of same.”
8. The Noticee requested one month’s time to submit the written
submissions. Acceding to the request of the Noticee, such time was
granted to the Noticee.
9. The Noticee vide letter dated March 03, 2012 submitted the Power of
Attorney. The Noticee further requested for four weeks time to submit
the written submissions. The Noticee vide letter dated April 05, 2012
filed the written submissions inter-alia as under:
“ Sir, going by your allegations listed above, it is clear that the basis of your allegations is that our client Ms Pooja was introduced by Sh Deepak Khurana to Religare and he might have passed on some advance information to our client to enter the deal which turned out to be lucrative., Sir with utmost modesty to our credit, we state that there is nothing on record to substantiate your allegations against our client Ms Pooja Menghani. It has nowhere been proved that there was a mischievous connivance between Deepak Khurana and Ms Pooja Menghani. The fact is that Ms Pooja Menghani was a random & innocent investor and was relying on her own competence, instincts or intuition before
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entering into the deals. It has nowhere been proved that Ms Pooja defied any norms or submitted wrong financials to the company. She went through KYC norms and it was for Religare to ensure and decide to whom to extend credit or not. The statements of both Pooja Menghani and Sh Deepak Khurana were recorded by your honour and nowhere the statements contradict their version. It has been squarely stated by Sh Deepak Khurana that he met Pooja Menghani during KYC norms and has nothing personal with her and these facts have been stated by Pooja Menghani too. It will not be out of place to mention that even Religare during its internal enquiry have not found anything amiss with the conduct of Sh Deepak Khurana, nor they have given a finding that Sh Deepak Khurana has extended any favors to our client Ms Pooja Menghani. It is very important to note that the penalty proceedings are quasi judicial proceedings and a penalty cannot be levied on assumptions. There is nothing on record to prove that proves that our client has rigged the deals. It is of vital importance to know that Ms Pooja Menghani belongs to a lower middle class who resides with her retired father and mother in a small flat in the refugee colony of New Delhi at Rajinder Nagar. She has been working with banking sector at junior level and is not a person of means or can afford or dare to violate any laws. Currently she is suffering from a mental agony and pain due to certain personal reasons. These facts are essential to mention because this proves that she cannot be scheming about frauds. Her father is a retired govt. servant, her mother (seriously ill) is a retired govt, teacher.
As regards the matching of buy order with that of another broker's sale order could be a matter of chance, coincidence or matching sale/ purchase order by the buyer or seller as obvious from the net. You must appreciate that Religare was the buyer's as well as seller's broker in Ahmednagar Forging and Amtek Auto which goes to prove that Religare would not side/pitch one investor against the other investor.
It is further submitted that there was no intention to commit any fraud, there is no connivance with the broker, or the investee company resulting into extra ordinary gains.
Our client Pooja Menghani is a bonafide investor who is a client of Religare and has complied with KYC norms. The investments made are by selecting randomly from the scrip by gathering market information and have got nothing to do with any manipulations.
The fund invested is from personal savings about which proper Income Tax returns have been regularly filed.
It is hoped that your honour will find the above in order and will proceed to close the matter or if necessary a personal hearing be accorded to us to explain the matter personally.”
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CONSIDERATION OF ISSUES AND FINDINGS
10. The issues that arise for consideration in the present case are :
a) Whether the Noticee had violated regulations 3(a), (b), (c), (d) and
4(1) of PFUTP Regulations?
b) Does the violation, if any, on the part of the Noticee attract
monetary penalty under sections 15 HA of SEBI Act?
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?
11. Before moving forward, it will be appropriate to refer to the relevant
provisions of PFUTP Regulations, which reads as under:
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;
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(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.
12. Upon perusal of the documents available on record, I find the
following:
Findings in respect of trading of Noticee in the scrip of Amtek Auto
i. It is observed from NSE trade log that, Noticee has traded in the
scrip of Amtek Auto on the following days during the investigation
in Religare, Shri Ravi, Shri Leela in Narayan Securities and Shri
Rakesh/ Suresh in ISF.
The Noticee has admitted that she has received calls from Deepak
Khurana, Branch Head of Religare, Pritampura Branch, New Delhi,
before her buy orders in the aforesaid four scrips. The Noticee also
admitted that she has received calls from Deepak Khurana before
her sell orders in the aforesaid four scrips wherein Deepak Khurana
used to inform her about the current price and market behavior.
Also she used to place the sell order. In her tradings through
Religare, she has placed orders through Deepak Khurana.
xxx. The statement of Deepak Khurana was recorded by SEBI during
the course of investigation. In his statement Deepak Khurana has
admitted that SRS, Live Star and MSR are registered with Religare
as clients and Deepak Khurana has placed orders in the exchange
system for them. Further, Deepak Khurana has admitted in his
statement that he has placed the orders in the exchange system for
the Noticee.
xxxi. The broker Religare vide letters dated February 20, 2009, October
28, 2009 and June 24, 2010 and the examination report conducted
by Religare has submitted the following:
The Noticee was registered as a client on June 04, 2007 and
was introduced by Deepak Khurana. As per KYC her income
was in the range of Rs.5 to 10 lakh per annum.
The Noticee and Live Star were its clients.
Deepak Khurana and Anand Sagar were the common dealers
for Live Star, SRS and MSR who had received and placed
orders on their behalf.
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13. The arguments put forward by the Noticee in the letter dated April 05,
2012 and my findings thereon are as under:
I. “……It has nowhere been proved that there was a mischievous
connivance between Deepak Khurana and the Noticee. The fact is that
the Noticee was a random and innocent investor and was relying on her
own competence, instincts or intuition before entering the deals. The
investments made are by selecting randomly from the scrip by gathering
market information and have nothing to do with any manipulations……”
II. I find that Deepak Khurana has introduced the Noticee to
Religare. The Noticee has herself admitted in her statement
before SEBI that she has received the calls from Deepak Khurana
before both buy and sell orders. The price of Amtek Auto, Amtek
India, Ahmednagar Forging and Monnat Ispat has fallen during
the investigation period. Moreover, the net profit of Amtek Auto,
Amtek India, Ahmednagar Forging has fallen during the
investigation period. Therefore, contention of the Noticee that
investments were made in the said scrips by gathering the market
information does not get justified. Therefore, in a period when
price of the above mentioned scrips were falling substantially on a
daily basis, modus operandi of first large scale buying during the
day and subsequently placing sell orders at a limit price above
LTP but close to the highest price of the day which was also close
to the buy limit price of MSR/Live Star/SRS, reveals that the
Noticee had a prior knowledge of impending large scale buy
orders of MSR/Live Star/SRS at a higher price. Thus, in view of
the same, the contention of the Noticee does not hold any merit.
III. “……As regards the matching of buy order with that of another
brokers’s sale order could be matter of chance, coincidence or matching
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sale/purchase order by the buyer or seller as obvious from the net. You
must appreciate that Religare was the buyer’s as well as sellers’s broker
in Ahmednagar Forging and Amtek Auto which goes to prove that
Religare would side/pitch one investor against the other investor……”
IV. I find that the Noticee has traded on 49 days with MSR, SRS and
Live Star in the aforesaid four scrips on NSE. It cannot be a
coincidence that on so many occasions trading has been done in
the same scrips by the aforesaid entities which are purportedly
not even connected. The only logical inference is that there was a
pre-existing knowledge about MSR, SRS and Live Star’s trades
with the Noticee. The matched trades between MSR, SRS and
Live Star and the Noticee signify that the Noticee was well aware
of orders to be/ being placed by MSR, SRS and Live Star.
Further, from the data it is observed that though a number of
brokers were involved on both the sides of trades for the Noticee
and major buyers i.e. MSR, SRS & Live Star, still Religare was
the broker substantially carrying out the orders for both the major
buyers and the Noticee. I find that the Noticee has squared off the
position on the same day. Merely squaring up large volumes
cannot lead to any allegation or suspicion, however, the number
of “coincidences” involved in trading of the Noticee and MSR,
SRS and Live Star make it difficult to believe that all the trading
was done by the Noticee on her own. Apart from squaring up the
trades, such pattern of order placement and execution leads to
the inference that the trading was done on the basis of
information provided by Deepak Khurana with regard to the buy
orders received from MSR, SRS and Live Star and can
appropriately be called ‘Front Running’. Front running has been
defined in Farlex Financial Dictionary as “The act of entering a
trade, either with a long or short position, knowing that other investors
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are about to take a position that will positively influence one's own.” * In
the present case, the Noticee was well aware of the forthcoming
orders of MSR, SRS and Live Star and she accordingly took a
long or short position so that she could benefit from the price
movement caused due to the orders of MSR, SRS and Live Star.
Thus, this is a classic case of front running. The Noticee and
Deepak Khurana were an essential part of this collusive trading
as she used the sensitive information about MSR, SRS and Live
Star’s forthcoming trades and hence is responsible for the front
running. Thus, the contention made by the Noticee does not hold
any merit.
14. In conclusion, the findings can be summarized as under:
a) During the investigation period, the Noticee traded on 49 days in
above four scrips. Further, majority of trades of the Noticee were on
the days when large buy trades of Live Star and MSR were
undertaken through the broker Religare and of SRS through the
broker Sunglow.
b) Though a number of brokers were involved on both the sides of
trades for the Noticee and major buyers i.e. MSR, SRS & Live Star,
still Religare was the broker substantially carrying out the orders for
both the major buyers and the Noticee. Details of the same are
given below:
Scrip
No. of Days Pooja Menghani Traded
Presence of Religare Remark
Amtek Auto 15 10On 6 days Religare was present on both the sides of the trade
Amtek India 10 9 Pooja Menghani has traded through ISF and MSR has
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traded through Religare Ahmednagar Forging 16 8
On 4 days Religare was present on both the sides of the trade
Monnet Ispat 8 7
Pooja Menghani has traded through Narayan/India Infoline/Religare and Live Star has traded through Religare
Total 49 34
c) Further, Deepak Khurana was the common dealer taking
instructions and putting orders in the system for both the sides.
d) Deepak Khurana has also introduced the Noticee to Religare.
e) The Noticee has received calls from Deepak Khurana before both
buy orders and sell orders of MSR, SRS & Live Star. While her
investment during the year 2008-09 in the market was not more
than ` 5 Lakh, still she was allowed to take large positions in the
scrips through Religare.
f) Deepak Khurana has aided and abetted the Noticee by
communicating the information with regard to the large buy orders
received from Live Star, MSR and SRS to the Noticee, and the
Noticee taking advantage of the said information, had placed buy
orders at lower prices and subsequently sold them at higher price
and thereby made gains in the scrip of Amtek Auto (purchased
369954 shares and sold 369914 shares ), Amtek India (purchased
6,29,286 shares and sold 6,29,286 shares), Monnet Ispat
(purchased 87,700 shares and sold 87,700 shares) and
Ahmednagar Forging (purchased 5,40,264 shares and sold
5,40,264 shares).
Thus, the Noticee has done front running in the scrips of Amtek
Auto, Amtek India, Monnet Spat and Ahmednagar Forging and
benefited from trading ahead of buy trades of Live Star, SRS and
MSR.
15. In order to establish the fraudulent nature of trades indulged in by the
Noticee, reference may also be made to the definition of fraud laid
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down in regulation 2 (1) (c) of the PFUTP Regulations, which reads
as follows:
"2 (1)(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 to deal in securities, whether or not there is any wrongful gain or avoidance of any loss, … …”
16. Regulation 3(a) of PFUTP Regulations prohibits a person directly or
indirectly to buy, sell or otherwise deal in securities in a fraudulent
manner. Regulation 3(b) of PFUTP Regulations prohibits a person
directly or indirectly to 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 thereunder. Regulation 3(c) of PFUTP
Regulations prohibits a person directly or indirectly to 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; Regulation 3(d) of PFUTP Regulations
prohibits a person directly or indirectly to 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 thereunder. Regulation 4(1) of
PFUTP Regulations prohibits a person from indulging in a fraudulent
or an unfair trade practice in securities.
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17. In view of the foregoing, the allegation of violation of regulations 3(a),
(b), (c), (d) and 4(1) of PFUTP Regulations by the Noticee stands
established.
18. 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…”.
19. Thus, the aforesaid violations by the Noticee make her liable for
penalty under 15HA of the 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.
20. While determining the quantum of penalty under section 15HA, it is
important to consider the factors stipulated in section 15J of the 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.”
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21. The details of shares purchased, sold and profit earned by the
Noticee during the investigation period in the scrips of Amtek Auto,
Amtek India, Ahmednagar Forging and Monnat Ispat are as under:
Name of Scrips
Buy quantity (Shares)
Buy value
(`)
Sale quantity (Shares)
Sale value
(`)
Profit
(`)
Amtek Auto 369914 30123257 369914 31326527 12,03,270
Amtek India 629286 15446078 629286 16424409 9,78,330