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

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]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.