Case: Securities and Exchange Board of India and Ors Vs. Kanaiyalal Baldevbhai Patel and Ors

N.V. Ramana, J. 1. The important question of law, arising in these batch of cases, being similar and the facts involved being largely comparable, all the appeals were heard together and are being decided by this common judgment. 2. This case revolves round the legality of non-intermediary front-running in security market under the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 [hereinafter FUTP 2003 for brevity]. As SEBI Appellate Tribunal [hereinafter SAT for brevity] has taken two different views in different cases appealed herein, Securities and Exchange Board of India [herein after SEBI for brevity] as well as private individuals, who are alleged to have been involved in front running, are in appeal before us. 3. A brief factual background would be necessary before we deal with the question of law that has arisen in this case instant. Broadly to understand the issue at hand, the facts in Civil Appeal No. 2595 of 2013 and 2596 of 2013 (related cases) may be stated in brief. SEBI investigated into the activities of Shri Kanaiyalal Baldevbhai Patel [herein after KB for brevity] an individual trader. During the investigation, it was found that KB was putting orders ahead of orders placed by Passport India Investment (Mauritius) Ltd. [herein after PII for brevity]. One Dipak Patel, was the portfolio manager of PII, who also happens to be a cousin of KB and one Shri Anandkumar Baldevbhai Patel [herein after AB for brevity]. It was alleged that Dipak Patel provided information to KB and AB regarding forthcoming trading activity of the PII. It is to be noted that trades were executed using the telephone number registered in the name of AB at the common residential address of KB and AB. Taking advantage of the information received from Dipak Patel, KB had indulged in trading before the PII and consequently squared off the position when the order of PII were placed in the market. It was estimated that the KB earned a total profit of Rs. 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. 4. In Civil Appeal No. 2666 of 2013, Sujit Karkera and Group were trading through B.P. Equity Pvt. Ltd. SEBI alleges that they were trading ahead of the trades of CITIGROUP Global Markets Mauritius Pvt. Ltd.(CGMMPL) on the basis of information provided by Suresh Menon (trader of CGMMPL) who was in possession of the orders of CGMMPL for 6 scrip days. SEBI in its investigation had found that there were several calls made between Suresh Menon and his family friend Sujit Karkera during this time period of 6 days. In these telephonic conversations, it was alleged that there was exchange of information related to scrip name, order quantity, order timing, and order price of the orders placed by Suresh Menon for CGMMPL. Sujit Karkera utilized the information provided by Suresh Menon to trade thereby making huge profits. 5. In Civil Appeal No. 11195-96 of 2014, Jitendra Kumar Sharma was an equity dealer employed by the Central Bank of India. His responsibilities entailed preparation of charts for the chief equity dealer and placing of orders based on instructions of the chief equity dealer. Vibha Sharma, who is the wife of Jitendra Kumar Sharma, was a regular trader in the stock market and this fact was disclosed to Central Bank of India as a good practice of making disclosure to the employer. It is the allegation of SEBI that Vibha Sharma engaged herself in front running Central Bank of Indias large scale orders allegedly with the knowledge obtained from her husband. Further the SEBI had alleged that Vibha Sharmas trades substantially matched with the trades of the bank during the relevant period thereby violating Regulations 3(a), (b), (c), (d) and 4(1) of FUTP 2003. 6. In Civil Appeal No. 5829 of 2014, facts of the case are that Appellant used to trade in scrips of four companies namely Amtek Auto Ltd., Amtek India Ltd., Monnet Ispat Ltd. and Ahmednagar Forgings Ltd. through Religare Securities Ltd., ISF Securities Ltd., India Infoline Securities Ltd. and Narayan Securities Private Ltd. It is alleged against the Appellant that, she had bought and sold equal quantities of shares in large volume in these four scrips by utilizing the information provided by Deepak Khurana who was privy to certain confidential information of Religare. SEBI conducted an investigation in the trading of Appellant from June 1, 2008 to January 12, 2009. During 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 Appellants 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 disclosure, to prevent exploitation against the competition afforded by dishonest securities offered to the public and to restore the confidence of the prospective investor in his ability to select sound securities. 9. FUTP 2003 has three chapters, namely preliminary, prohibition of fraudulent and unfair trade practices relating to securities market and investigation. Regulation 1 contains the short title and commencement. Regulation 2 consists of certain definitions. Clause (b) of Regulation 2 defines dealing in securities which includes an act of buying, selling or subscribing pursuant to any issue of any security or agreeing to buy, sell or subscribe to any issue of any security or otherwise transacting in any way in any security by any person as principal, agent or intermediary referred to in Section 12 of the SEBI Act. Clause (c) of Regulation 2 defines fraud in the following manner- 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 while dealing in securities in order to induce another person or his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss, and shall also include- (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 any other law specifically declares to be fraudulent, (7) deceptive behaviour by a person depriving another of informed consent or full participation. (8) a false statement made without reasonable ground for believing it to be true. (9) The act of an issuer of securities giving out misinformation that affects the market price of the security, resulting in investors being effectively misled even though they did not rely on the statement itself or anything derived from it other than the market price. And fraudulent shall be construed accordingly; Nothing contained in this Clause shall apply 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- TABLE 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 survive the legal gambits. Before embarking upon the necessary discussions, I would like to record my views on a somewhat unclear picture that emerge from undefined concepts contained in the Act and the Regulations framed there under, a comprehensive legislation can bring about more clarity and certainty on these aspects. 13. Submissions of Mr. K.T.S. Tulsi, learned senior advocate, appearing on behalf of the Appellant in Civil Appeal No. 5829 of 2014. The finding with regard to the Appellant being guilty of fraud Under Regulations 3 and 4 of FUTP 2003 is contrary to the definition of fraud as contained in Regulation 2 (1) (c) of the said Regulations. Sub-clauses (i), (j), (l), (m), (p), (o) and (q) of Clause (2) of Regulation 4 expressly make themselves applicable only to the case of intermediaries and not to individual buyers or sellers. The rest of the sub-clauses being part of the scheme which seeks to regulate the conduct of intermediaries, will be deemed on their face, to pertain to activities undertaken by intermediaries. Thus, the whole of Regulation 4 seems to be inapplicable to the case of the applicant. Submissions of Mr. Arvind P. Datar, learned senior advocate, appearing on behalf of SEBI- That the ambit of FUTP Regulations has been substantially increased from 1995 to 2003. That inclusion of specific prohibition of front-running with respect to intermediaries Under Regulation 4 (2)(q) should not whittle the scope of Regulation 4 of the FUTP 2003. Moreover, Expressio Unius Est Exclusio Alterius may not be a safe principle to oust the liability for non-intermediary front-running. 14. Other learned Counsels appearing for parties have either adopted the submissions made by the above named advocates or provided alternative reasons for the conclusions reached by the abovementioned advocates. 15. The question which has arisen for our consideration is whether front running by non-intermediary is a prohibited practice Under Regulations 3 (a), (b), (c) and (d) and 4(1) of FUTP 2003? 16. As this case involves practice of front-running in security market, a reference may be made to various definitions and meanings of front-running- Major Law Lexicon by P. Ramanatha Aiyar (4th Ed. (2010) Front running.-Buying or selling securities ahead of a large order so as 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 Blacks Law dictionary (9th Ed.) Front running, n. Securities. A brokers or analysts 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 front-runner is someone who gains an unfair advantage with inside information 17. SEBI has defined front-running in one of its circular (Circular CIR/EFD/1/2012, dated 25.05.2012.) in the following manner- Front-running; for the purpose of this circular, front running means usage of non public information to directly or indirectly, buy or sell securities or enter into options or futures contracts, in advance of a substantial order, on an impending transaction, in the same or related securities or futures or options contracts, in anticipation that when the information becomes public; the price of such securities or contracts may change. 18. Further a consultative paper (Consultative Paper issued by SEBI, pursuant to a Press release No. 34/95 dated March 16, 1995.) issued by SEBI had grouped front running to be an undesirable manipulative practice in the following manner- However, SEBI Act does not prescribe or specify as to which practice would be considered to be fraudulent and unfair trade practices. While the fraudulent and unfair trade practices are commonly understood, it would be desirable if these practices are defined specifically. ..this will bring about clarity among the intermediaries, issuers, investors and other connected persons in the securities markets about the practices that are prohibited, fraudulent and unfair. ...The draft defines fraudulent and unfair trade practices. These Regulations seek to cover market manipulation on the stock exchanges also. Practices like wash sales, front-running, price rigging, artificial increasing or decreasing the prices of the securities are brought within the ambit of the Regulations. (emphasis added) 19. In actuality, front-running is more complicated than these definitions suggest. It comprises of at least three forms of conduct. They are: (1) trading by third parties who are tipped on an impending block trade (tippee trading); (2) transactions in which the owner or purchaser of the block trade himself engages in the offsetting futures or options transaction as a means of hedging against price fluctuations caused by the block transaction (self-front-running); and (3) transactions where a intermediary with knowledge of an impending customer block order trades ahead of that order for the intermediarys own profit (trading ahead). In this batch of appeals we are concerned with the first 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 intended to preempt manipulative trading and check all kinds of impermissible conduct in order to boost the investors confidence in the Capital market. The primary purpose of the statutory enactments is to provide an environment conductive to increased participation and investment in the securities market which is vital to the growth and development of the economy. The provisions of the SEBI Act and the Regulations will, therefore, have to be understood and interpreted in the above light.(SEBI v. Kishore R. Ajmera, (2016) 6 SCC 368 ) 21. The object and purpose of FUTP 2003 is to curb market manipulations. Market manipulation is normally regarded as an unwarranted interference in the operation of ordinary market forces of supply and demand and thus undermines the integrity and efficiency of the market.(almers Company Law, 25th Edition (2010), Volume 2 at page 11097; Gower & Davies – Principles of Modern Company Law, 9th Edition (2012) at page 1160.) This Court in N. Narayanan v. adjudicating Officer, SEBI (2013) 12 SCC 152 , has laid down that- Prevention of market abuse and preservation of market integrity is the hallmark of Securities Law. Section 12A read with Regulations 3 and 4 of the Regulations 2003 essentially intended to preserve market integrity and to prevent Market abuse. The object of the SEBI Act is to protect the interest of investors in securities and to promote the development and to regulate the securities market, so as to promote orderly, healthy growth of securities market and to promote investors protection. Securities market is based on free and open access to information, the integrity of the market is predicated on the quality and the manner on which it is made available to market. Market abuse impairs economic growth and erodes investors confidence. Market abuse refers to the use of manipulative and deceptive devices, giving out incorrect or misleading information, so as to encourage investors to jump into conclusions, on wrong premises, which is known to be wrong to the abusers. The statutory provisions mentioned earlier deal with the situations where a person, who deals in securities, takes advantage of the impact of an action, may be manipulative, on the anticipated impact on the market resulting in the creation of artificiality. 22. From the line of decisions cited herein above, it can 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. For a transaction to be termed as dealing in securities, following ingredients need to be satisfied- 1. includes an act of buying, selling or subscribing pursuant to any issue of any security, or 2. Agreeing to buy, sell or subscribe to any issue of any security, or; 3. Otherwise transacting in any way in any security by any person as principal, agent or intermediary referred to in Section 12 of the Act. 25. The definition of dealing in securities is broad and inclusive in nature. Under the old regime the usage of term to mean has been changed to includes, which prima facie indicates that the definition is broad. Moreover, the inclusion of term otherwise transacting itself provides an internal evidence for being broadly worded so as to include situations such as the present one. 26. There is no dispute as to the fact that fraud is jurisprudentially very difficult to define or cloth it with particular ingredients. A generalized meaning may be difficult to be attributed, as human ingenuity would invent ways to bypass such behaviour. It is to be noted that fraud is extensively used in various regulatory framework which mandates me to take notice of the conceptual and definitional problem it brings along. Fraud is among the most serious, costly, stigmatizing, and punitive forms of liability imposed in modern corporations and financial markets. Usually, the antifraud provisions of the security laws are not coextensive with common-law doctrines of fraud as common-law fraud doctrines are too restrictive to deal with the complexities involved in the security market, which is also portrayed by the changes brought in through the 2003 Regulation to the 1995 Regulation. 27. On a comparative analysis of the definition of fraud as existing in the 1995 Regulation and the subsequent amendments in the 2003 Regulations, it can be seen that the original definition of fraud under the FUTP Regulation, 1995 adopts the definition of fraud from the Indian Contract Act, 1872 whereas the subsequent definition in the 2003 Regulation is a variation of the same and does not adopt the strict definition of fraud as present under the Indian Contract Act. It includes many situations which may not be a fraud under the Contract Act or the 1995 Regulation, but nevertheless amounts to a fraud under the 2003 Regulation. 28. The definition of fraud 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 instances- (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 any other law specifically declares to be fraudulent, (7) deceptive behavior by a person depriving another of informed consent or full participation. (8) a false statement made without reasonable ground for believing it to be true. (9) The act of an issuer of securities giving out misinformation that affects the market price of the security, resulting in investors being effectively misled even though they did not rely on the statement itself or anything derived from it other than the market price. 29. Although unfair trade practice has not been defined under the Regulation, various other legislations in India have defined the concept of unfair trade practice in different contexts. A clear cut generalized definition of the unfair trade practice may not be possible to be culled out from the aforesaid definitions. Broadly trade practice is unfair if the conduct undermines the ethical standards and good faith dealings between parties engaged in business transactions. It is to be noted that unfair trade practices are not subject to a single definition; rather it requires adjudication on case to case basis. Whether an act or practice is unfair is to be determined by all the facts and circumstances surrounding the transaction. In the context of this Regulation a trade practice may be unfair, if the conduct undermines the good faith dealings involved in the transaction. Moreover the concept of unfairness appears to be broader than and includes the concept of deception or fraud. 30. Although learned Counsel for SEBI has admitted that there is no difference between fraud and unfair trade practice Under Regulation 4 (1), but we are of the opinion that such submission may not be conclusive. As these cases do not require further investigation, the question regarding the scope of prosecution for unfair trade practice is kept open. 31. Regulation 3 prohibits a person from committing fraud while dealing in securities. A reading of the aforesaid provision describes the width of the power vested with the SEBI to regulate the security market. In our view, the 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 on the information of substantial client order, if it involves fraud then the dealing in securities will be deemed to be fraudulent. 34. An argument has been introduced by the Mr. K.T.S. Tulsi, learned senior Counsel, that Sub-clause (q) of Regulation 4(2) includes only front-running by the intermediaries, by implication it means that any persons other than intermediaries are excluded from the rigors of law. In our opinion such submission cannot be sustained in the eyes of law as the intention of the legislation was to provide for a catchall provision and the deeming provision under Sub-clause (q) of Regulation 4(2) was specifically provided as the intermediary are in fiduciary relationship with the clients. There is no dispute as to the fact that a fiduciary must act in utmost good faith; he should not act for his own benefit or benefit of any third party without the informed consent of his client. The essential irreducible core of fiduciary duty is the duty of loyalty (SEBI (Stock Brokers and Sub-brokers) Regulations, 1992, Schedule II.). Such heightened standard demanded a deeming provision under the FUTP 2003. 35. The reliance on expressio unius est exclusio alterius may not be appropriate in this case instant as the intention of the Regulation is apparent in this case. Moreover, it has been well established that expressio unius est exclusio alterius is not a Rule of law but a tool of interpretation which must be cautiously applied. (Colquhoun v. Brooks, (1887) 19 Q.B.D. 400; Lowe v. Darling & Sons, (1906) 2 K. B. 772) In light of the above discussion, this Rule of interpretation does not help the case of the violators. 36. A crucial aspect which needs to be observed at this point is the element of causation which is embedded Under Regulation 2(1)(c) read with Regulations 3 and 4. In order to establish the aforesaid charges in this case, it is required by the SEBI to establish that the harm was induced by the materialization of a risk that was not disclosed because of the tippees fraudulent practice. Further the charges under the FUTP 2003 needs to be established as per the applicable standards rather than on mere conjectures and surmises. 37. It should be noted that the provisions of Regulations 3 (a), (b), (c), (d) and 4(1) are couched in general terms to cover diverse situations and possibilities. Once a conclusion, that 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. In David Carpenter, Kenneth P. Felis and R. Foster Winans, v. United States 484 U.S. 19, the United States Supreme Court dealt with the matter of fraud Under Section 10(b). In this case, the Petitioner, who was a co-author in a Journals investment advice column, entered into a deal with a stock broker wherein he provided pre-publication information on the content of the column. Further the stockbroker bought and sold shares based on such information and shared the profits made therein with the Petitioner. The Court, while convicting the Petitioner, elaborated the meaning of fraud in following manner- We cannot accept Petitioners further argument that Winans conduct in revealing prepublication information was no more than a violation of workplace Rules and did not amount to fraudulent activity that is proscribed by the mail fraud statute. Sections 1341 and 1343 reach any scheme to deprive another of money or property by means of false or fraudulent pretenses, representations, or promises. As we observed last Term in McNally, the words to defraud in the mail fraud statute have the common understanding of wronging one in his property rights by dishonest methods or schemes, and usually signify the deprivation of something of value by trick, deceit, chicane or overreaching. 483 U.S., at 358, 107 S. Ct., at 2881 (quoting Hammerschmidt v. United States,265 U.S. 182, 188, 44 S. Ct. 511, 512, 68 L. Ed. 968 (1924)). The concept of fraud includes the act of embezzlement, which is the fraudulent appropriation to ones own use of the money or goods entrusted to ones care by another. Grin v. Shine, 187 U.S. 181, 189, 23 S. Ct. 98, 102, 47 L. Ed. 130 (1902). Elaborating on the fiduciary relationship between the employee of a firm to safeguard the confidential information owned by the firm, the court observed as under- The District Court found that Winans undertaking at the Journal was not to reveal prepublication information about his column, a promise that became a sham when in violation of his duty he passed along to his coconspirators confidential information belonging to the Journal, pursuant to an ongoing scheme to share profits from trading in anticipation of the Heard columns 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 the Journals confidential information is not outside the reach of the mail and wire fraud statutes, provided the other elements of the offenses are satisfied. The Journals business information that it intended to be kept confidential was its property; the declaration to that effect in the employee manual merely removed any doubts on that score and made the finding of specific intent to defraud that much easier. Winans continued in the employ of the Journal, appropriating its confidential business information for his own use, all the while pretending to perform his duty of safeguarding it. In fact, he told his editors twice about leaks of confidential information not related to the stock-trading scheme, 612 F. Supp., at 831, demonstrating both his knowledge that the Journal viewed information concerning the Heard column as confidential and his deceit as he played the role of a loyal employee. 39. In Vincent F. Chiarella v. United States 445 U.S. 222 (1980), the United States Supreme Court was seized of the matter relating to securities fraud Under Section 10b of the Securities Exchange Act, 1934. The Petitioner therein was a printer of some corporate takeover bids. Despite attempts by the companies to conceal the names of the takeover targets, Chiarella was able to deduce, and he traded shares of the companies he knew were involved. Consequently he was convicted by the lower forum as he traded in target companies without informing its shareholders of his knowledge of proposed takeover. The Supreme Court while reversing his conviction, observed as under- the Petitioner employee could not be convicted on theory of failure to disclose his knowledge to stockholders or target companies as he was under no duty to speak, in that he had no prior dealings with the stockholders and was not their agent or fiduciary and was not a person in whom sellers had placed their trust and confidence, but dealt with them only through impersonal market transactions. On the issue of General Duty between all participants (Tippees), the Court stated that: Formulation of a general duty between all participants in market transactions for forego actions based on material, nonpublic information, so as to give rise to liability Under Section 10(b) of Securities Exchange Act for failure to disclose, would depart radically from established doctrine that a 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 thereby inducing an inequitable result for others. 42. The law of confidentiality has a bearing on this case instant. Confidential information acquired or compiled by a corporation in the course and conduct of its business is a species of property to which the corporation has the exclusive right and benefit, and which a court of equity will protect through the injunctive process or other appropriate remedy. (3 W. Fletcher, Cyclopedia of Law of Private Corporations § 857.1, p. 260 (rev. ed. 1986)) The information of possible trades that the company is going to undertake is the confidential information of the company concerned, which it has absolute liberty to deal with. Therefore, a person conveying confidential information to another person (tippee) breaches his duty prescribed by law and if the recipient of such information knows of the breach and trades, and there is an inducement to bring about an inequitable result, then the recipient tippee may be said to have committed the fraud. 43. Accordingly, non-intermediary front running may be brought under the prohibition prescribed Under Regulations 3 and 4 (1), for being fraudulent or unfair trade practice, provided that the ingredients under those heads are satisfied as discussed above. From the above analysis, it is clear that in order to establish charges against tippee, Under Regulations 3 (a), (b), (c) and (d) and 4 (1) of FUTP 2003, one needs to prove that a person who had provided the tip was under a duty to keep the non-public information under confidence, further such breach of duty was known to the tippee and he still trades thereby defrauding the person, whose orders were front-runned, by inducing him to deal at the price he did. 44. Taking into consideration the facts and circumstances of the case before us and the law laid down herein above and SEBI v. Kishore R. Ajmera (Supra) can only lead to one conclusion that 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.

Decision:
1[ds]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 disclosure, to prevent exploitation against the competition afforded by dishonest securities offered to the public and to restore the confidence of the prospective investor in his ability to select sound securities.11. It is important to note that SEBI has amended the Regulation, a number of times, to keep up with the technology and times.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 survive the legal gambits.Before embarking upon the necessary discussions, I would like to record my views on a somewhat unclear picture that emerge from undefined concepts contained in the Act and the Regulations framed there under, a comprehensive legislation can bring about more clarity and certainty on these aspects.19. In actuality, front-running is more complicated than these definitions suggest. It comprises of at least three forms of conduct. They are: (1) trading by third parties who are tipped on an impending block trade (tippee trading); (2) transactions in which the owner or purchaser of the block trade himself engages in the offsetting futures or options transaction as a means of hedging against price fluctuations caused by the block transaction (self-front-running); and (3) transactions where a intermediary with knowledge of an impending customer block order trades ahead of that order for the intermediarys own profit (trading ahead). In this batch of appeals we are concerned with the first 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.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 intended to preempt manipulative trading and check all kinds of impermissible conduct in order to boost the investors confidence in the Capital market. The primary purpose of the statutory enactments is to provide an environment conductive to increased participation and investment in the securities market which is vital to the growth and development of the economy. The provisions of the SEBI Act and the Regulations will, therefore, have to be understood and interpreted in the above light.(SEBI v. Kishore R. Ajmera, (2016) 6 SCC 368 )21. The object and purpose of FUTP 2003 is to curb market manipulations. Market manipulation is normally regarded as an unwarranted interference in the operation of ordinary market forces of supply and demand and thus undermines the integrity and efficiency of the market.(almers Company Law, 25th Edition (2010), Volume 2 at page 11097; Gower & Davies – Principles of Modern Company Law, 9th Edition (2012) at page 1160.) This Court in N. Narayanan v. adjudicating Officer, SEBI(2013) 12 SCC 152 , has laid down that-Prevention of market abuse and preservation of market integrity is the hallmark of Securities Law. Section 12A read with Regulations 3 and 4 of the Regulations 2003 essentially intended to preserve market integrity and to prevent Market abuse. The object of the SEBI Act is to protect the interest of investors in securities and to promote the development and to regulate the securities market, so as to promote orderly, healthy growth of securities market and to promote investors protection. Securities market is based on free and open access to information, the integrity of the market is predicated on the quality and the manner on which it is made available to market. Market abuse impairs economic growth and erodes investors confidence. Market abuse refers to the use of manipulative and deceptive devices, giving out incorrect or misleading information, so as to encourage investors to jump into conclusions, on wrong premises, which is known to be wrong to the abusers. The statutory provisions mentioned earlier deal with the situations where a person, who deals in securities, takes advantage of the impact of an action, may be manipulative, on the anticipated impact on the market resulting in the creation of artificiality.22. From the line of decisions cited herein above, it can 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. For a transaction to be termed as dealing in securities, following ingredients need to be satisfied-1. includes an act of buying, selling or subscribing pursuant to any issue of any security, or2. Agreeing to buy, sell or subscribe to any issue of any security, or;3. Otherwise transacting in any way in any security by any person as principal, agent or intermediary referred to in Section 12 of the Act.25. The definition of dealing in securities is broad and inclusive in nature. Under the old regime the usage of term to mean has been changed to includes, which prima facie indicates that the definition is broad. Moreover, the inclusion of term otherwise transacting itself provides an internal evidence for being broadly worded so as to include situations such as the present one.26. There is no dispute as to the fact that fraud is jurisprudentially very difficult to define or cloth it with particular ingredients. A generalized meaning may be difficult to be attributed, as human ingenuity would invent ways to bypass such behaviour. It is to be noted that fraud is extensively used in various regulatory framework which mandates me to take notice of the conceptual and definitional problem it brings along. Fraud is among the most serious, costly, stigmatizing, and punitive forms of liability imposed in modern corporations and financial markets. Usually, the antifraud provisions of the security laws are not coextensive with common-law doctrines of fraud as common-law fraud doctrines are too restrictive to deal with the complexities involved in the security market, which is also portrayed by the changes brought in through the 2003 Regulation to the 1995 Regulation.27. On a comparative analysis of the definition of fraud as existing in the 1995 Regulation and the subsequent amendments in the 2003 Regulations, it can be seen that the original definition of fraud under the FUTP Regulation, 1995 adopts the definition of fraud from the Indian Contract Act, 1872 whereas the subsequent definition in the 2003 Regulation is a variation of the same and does not adopt the strict definition of fraud as present under the Indian Contract Act. It includes many situations which may not be a fraud under the Contract Act or the 1995 Regulation, but nevertheless amounts to a fraud under the 2003 Regulation.28. The definition of fraud 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 instances-(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 any other law specifically declares to be fraudulent,(7) deceptive behavior by a person depriving another of informed consent or full participation.(8) a false statement made without reasonable ground for believing it to be true.(9) The act of an issuer of securities giving out misinformation that affects the market price of the security, resulting in investors being effectively misled even though they did not rely on the statement itself or anything derived from it other than the market price.29. Although unfair trade practice has not been defined under the Regulation, various other legislations in India have defined the concept of unfair trade practice in different contexts. A clear cut generalized definition of the unfair trade practice may not be possible to be culled out from the aforesaid definitions. Broadly trade practice is unfair if the conduct undermines the ethical standards and good faith dealings between parties engaged in business transactions. It is to be noted that unfair trade practices are not subject to a single definition; rather it requires adjudication on case to case basis. Whether an act or practice is unfair is to be determined by all the facts and circumstances surrounding the transaction. In the context of this Regulation a trade practice may be unfair, if the conduct undermines the good faith dealings involved in the transaction. Moreover the concept of unfairness appears to be broader than and includes the concept of deception or fraud.30. Although learned Counsel for SEBI has admitted that there is no difference between fraud and unfair trade practice Under Regulation 4 (1), but we are of the opinion that such submission may not be conclusive. As these cases do not require further investigation, the question regarding the scope of prosecution for unfair trade practice is kept open.31. Regulation 3 prohibits a person from committing fraud while dealing in securities. A reading of the aforesaid provision describes the width of the power vested with the SEBI to regulate the security market. In our view, the 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.Under the provisions of Regulation 4(2)(q), only intermediary trading on the information of substantial client order, if it involves fraud then the dealing in securities will be deemed to be fraudulent.34. An argument has been introduced by the Mr. K.T.S. Tulsi, learned senior Counsel, that Sub-clause (q) of Regulation 4(2) includes only front-running by the intermediaries, by implication it means that any persons other than intermediaries are excluded from the rigors of law. In our opinion such submission cannot be sustained in the eyes of law as the intention of the legislation was to provide for a catchall provision and the deeming provision under Sub-clause (q) of Regulation 4(2) was specifically provided as the intermediary are in fiduciary relationship with the clients. There is no dispute as to the fact that a fiduciary must act in utmost good faith; he should not act for his own benefit or benefit of any third party without the informed consent of his client. The essential irreducible core of fiduciary duty is the duty of loyalty (SEBI (Stock Brokers and Sub-brokers) Regulations, 1992, Schedule II.). Such heightened standard demanded a deeming provision under the FUTP 2003.35. The reliance on expressio unius est exclusio alterius may not be appropriate in this case instant as the intention of the Regulation is apparent in this case. Moreover, it has been well established that expressio unius est exclusio alterius is not a Rule of law but a tool of interpretation which must be cautiously applied. (Colquhoun v. Brooks, (1887) 19 Q.B.D. 400; Lowe v. Darling & Sons, (1906) 2 K. B. 772) In light of the above discussion, this Rule of interpretation does not help the case of the violators.36. A crucial aspect which needs to be observed at this point is the element of causation which is embedded Under Regulation 2(1)(c) read with Regulations 3 and 4.In order to establish the aforesaid charges in this case, it is required by the SEBI to establish that the harm was induced by the materialization of a risk that was not disclosed because of the tippees fraudulent practice. Further the charges under the FUTP 2003 needs to be established as per the applicable standards rather than on mere conjectures and surmises.37. It should be noted that the provisions of Regulations 3 (a), (b), (c), (d) and 4(1) are couched in general terms to cover diverse situations and possibilities. Once a conclusion, that 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.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 thereby inducing an inequitable result for others.42. The law of confidentiality has a bearing on this case instant. Confidential information acquired or compiled by a corporation in the course and conduct of its business is a species of property to which the corporation has the exclusive right and benefit, and which a court of equity will protect through the injunctive process or other appropriate remedy. (3 W. Fletcher, Cyclopedia of Law of Private Corporations § 857.1, p. 260 (rev. ed. 1986)) The information of possible trades that the company is going to undertake is the confidential information of the company concerned, which it has absolute liberty to deal with. Therefore, a person conveying confidential information to another person (tippee) breaches his duty prescribed by law and if the recipient of such information knows of the breach and trades, and there is an inducement to bring about an inequitable result, then the recipient tippee may be said to have committed the fraud.43. Accordingly, non-intermediary front running may be brought under the prohibition prescribed Under Regulations 3 and 4 (1), for being fraudulent or unfair trade practice, provided that the ingredients under those heads are satisfied as discussed above. From the above analysis, it is clear that in order to establish charges against tippee, Under Regulations 3 (a), (b), (c) and (d) and 4 (1) of FUTP 2003, one needs to prove that a person who had provided the tip was under a duty to keep the non-public information under confidence, further such breach of duty was known to the tippee and he still trades thereby defrauding the person, whose orders were front-runned, by inducing him to deal at the price he did.44. Taking into consideration the facts and circumstances of the case before us and the law laid down herein above and SEBI v. Kishore R. Ajmera (Supra) can only lead to one conclusion that 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.