Case: S.E.B.I Vs. Sujit Karkera

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 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]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.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.Although unfair trade practice has not been defined under the regulation, various other legislations (Monopolies and Restrictive Trade Practices Act, 1969, Section 36A; The Consumer Protection Act, 1986, Section 2(1)(r); The Competition Act, 2002, Section 3; The Food Security and Standards Act, 2006, Section 24(2); Specific Relief Act, 1963, Section 20; Usurious Loans Act, 1918, Section 3.]) 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.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.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. Aapproach 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(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. (Securitiesand Exchange Commission v. National Securities, Inc., et al., 393 U.S. 453(1969)`Although section 10(b) and 10may well be the most litigated provisions in the federal securities laws, this is the first time this Court has found it necessary to interpret them. We eneter the virgin territory cautiously...]) 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 ain a Journals investment advice column, entered into a deal with a stock broker wherein he providedinformation 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 followingNow 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,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 theinformation under confidence, further such breach of duty was known to the tippee and he still trades thereby defrauding the person, whose orders wereby 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