Securities Appellate Tribunal: In the instant appeal filed against the ex parte ad-interim order passed by the Whole Time Members (WTM) of Securities Exchange Board of India (‘SEBI’) in Arshad Warsi’s case, the two-member bench of Tarun Agarwal, J. (Presiding Officer) and Meera Swarup (Technical Member), of Securities Appellate Tribunal, Mumbai, set aside the order passed by WTM and partly allowed the appeal along with other directions.
In the present case, the regulator had barred the appellant and his wife for manipulation of Sadhna Broadcast shares via YouTube videos in Sadhna Broadcast Limited, In Re, WTM/AN/ISD/ISD-SEC-1/24333/2022-23. A sum of Rs. 1,17,99,684/- was invested by them for shares purchased in an around July 2022 from the other noticees in the impugned order and are also depicted as volume creators. The appellants sold most of the shares in August 2022 and eventually made a profit of Rs. 76,34,728/-. A sum of Rs. 1,17,99,684/- was invested by them for shares purchased in July 2022 from the other noticees in the impugned order and are also depicted as volume creators. The appellants sold most of the shares on August 2022 and eventually made a profit of Rs. 76,34,728/-.
It transpires that some complaints were received by SEBI regarding price manipulation and offloading of shares by certain entities in the scrip of Sadhna. It was alleged that misleading YouTube videos with false contents were being uploaded to lure unsuspecting investors to trade in the scrip of Sadhna.
Eventually an ex parte, ad interim order was passed against 31 noticees directing the noticees to deposit the unlawful gains in an escrow account in a nationalized bank towards illegal gains along with other directions.
4noticees out of 31 have questioned the validity and legality of these impugned orders issued under Sections 11(1), 11(4) and 11-B of the Securities and Exchange Board of India Act, 1992 for, prima-facie, finding a violation of Section 12-A of the Act, 1992 read with Regulations 3 and 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trading Practices relating to Securities Market) Regulations, 2003.
Findings of WTM:
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Various noticees collectively helped to create trading volumes and interest in the scrip and spread false and misleading YouTube videos hence, induced unsuspecting investors to buy the scrip of Sadhna at elevated prices, thereby, prima-facie, violating the provisions of the PFUTP Regulations.
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Modus operandi indicates that the noticees were engaged in the coordinated scheme to induce unsuspecting investors to acquire securities in the scrip in question to buy at inflated price thereby making illegal gains at the cost of new investors and accordingly, prima-facie, found violation of Section 12A of the SEBI Act and Regulations 3 and 4 of the PFUTP Regulations.
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All the noticees are individually liable to disgorge the illegal gains.
Contentions:
Appellants vehemently argued that they were not part of the orchestrated scheme and did not induce any unsuspecting investors to trade in the shares of the scrip in question nor featured in the alleged videos which were uploaded on YouTube channels nor participated, in any manner, in the alleged scheme. Further argued, that the principle of attachment of property before judgment under O. 38 R. 5 is applicable in the instant case in as much as, in the absence of any cogent evidence, impounding order was passed on imaginary reasons.
On the contrary the respondent argued that it was a classic case of pump and dump scheme whereby through an orchestrated scheme, the noticees in the impugned order including the appellants through a coordinated involvement have made illegal gains by way of alleged fraudulent and manipulative scheme and violated the said provisions. The respondent further tagged the appellants as volume creators who have induced unsuspecting investors to deal in the scrip.
Findings of SAT:
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While granting relief to the appellants, it was held by the Appellate Tribunal that, “ A person dabbles in the stock exchange to make profits and there is no harm if a person buys and sells the shares to make profits.”
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The Appellant Tribunal observed that the only allegation against the appellants were that they are volume creators and are connected to noticee no. 1, it was held that, the appellants by selling the shares have made profit was not at the expense of any unsuspecting gullible investor.
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It was found by the Tribunal on facts that appellant Arshad Warsi admits that he is connected to noticee no. 1 in connection with another professional assignment with regard to the movie, however, apart from the aforesaid, there is no other connection of the appellants with the other noticees named in the impugned order except the appellants.
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The appellants were not involved in the making / distribution or uploading of the videos on the YouTube channels nor do the appellants feature in such videos.
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No finding that the appellants are connected to the company, its shareholders or key managerial personnel.
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Appellants are not connected with other volume creators or net sellers other than noticee no. 1 who is connected only to Mr. Warsi.
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No evidence to indicate that the appellants had induced unsuspecting investors to buy the scrip in question.
It was observed that SEBI was passed in haste without considering the essential facts there is no iota of evidence against the appellants to show that they were engaged in a coordinated scheme to induce unsuspecting investors.
Hence, the direction issued by the WTM against the appellants were termed as harsh and unwarranted and cannot be sustained.
[Arshad Hussain Warsi v. SEBI, Appeal No. 284 of 2023, decided on 27-03-2023]
Advocates who appeared in this case :
For the Appellant: Advocate Sumit Agrawal, Advocate Amit Agrawal, Advocate Rushin Kapadia, Advocate Krithika Kataria, Advocate Atharv Kotwal;
For the Respondent:Advocate Sumit Rai, Advocate Mihir Mody, Advocate Arnav Misra, Advocate Mayur Jaisingh.
*Aastha Sharma, Senior Editorial Assistant has reported this brief.