Friday, November 16, 2012

Front-running is no crime, says SAT

The Securities Appellate Tribunal has given an interesting ruling that front running by an investor (who is not an intermediary) is not a violation of the SEBI FUTP Regulations 2003. It held this essentially on two grounds. Firstly, it held that the 2003 Regulations consider front running as a violation only if it is carried out by an intermediary but not if carried out by others. Secondly, even otherwise, it neither amounts to manipulation nor a fraud on the market. The orders levying penalties on the appellants were thus set aside.

While this case and relevant facts will be discussed in a separate detailed article here later, a quick and brief background may be made here as a summary. The appellant was a portfolio manager of a foreign institutional investor (FII). It was alleged that the appellant, along with other parties, carried out front running of the trades of the FII. That is to say, the appellant was alleged to have carried out trades before and in anticipation of the trades of the FII and then reversed the trades when the FII actually carried out such trades. Thus, he - in concert with his alleged associates - purchased shares when he anticipated that the FII will purchase shares. When the FII actually purchased shares, he sold the shares. He was thus able to profit from such transactions. He and his alleged associates were charged with front running and thus violation of the SEBI FUTP 2003 and penalties were levied. However, these orders were reversed by the SAT.

5 comments:

Anonymous said...

“... alleged to have carried out trades BEFORE AND IN ANTICIPATION OF.. and THEN REVERSED THE TRADES WHEN THE FII ACTUALLY CARRIED OUT such trades. Thus, he - IN CONCERT WITH HIS ALLEGED ASSOCIATES - purchased shares WHEN HE ANTICIPATED that the FII will purchase shares. ....”
“.. a violation ONLY IF IT IS CARRIED OUT BY AN INTERMEDIARY BUT NOT IF CARRIED OUT BY OTHERS. SECONDLY, EVEN OTHERWISE, IT NEITHER AMOUNTS TO MANIPULATION NOR A FRAUD ON THE MARKET. ..”
For any independent study and application of mind, on the first blush one feels, may have to focus on the portions selectively highlighted above.
The clinching points requiring to ponder are mainly these:
1. What the crucial word ‘intermediary’ is intended to mean or cover ?; should not its interpretation be in a purposeful manner so as to ascertain its contextual meaning (as opposed to a simple meaning); further, as to promote the objective behind prohibiting any ‘front running’?
2. Should , whether or not there has been any ‘manipulation’ or ‘fraud on the market’ (which seems to be really the allegation), be required to be deduced and decided after taking into consideration in totality, all the attendant facts and circumstances; particularly, significant variations, and seemingly unusual or not ordinary, if any, in the market prices at the relevant points in time ?
For knowing the pleas actually advanced and dealt with by the SAT, it is worthwhile to go through the full text of its Order.
(Incidentally, need to inquire and know whether the SAT has now the heading judicial member).

According to views from knowledgeable circles floated around, -
1. “Front running is one of the most heinous crimes in the securities markets. ... on the organisation to prove that there was no insider trading or front running”. AND
2.” Front running qualifies as management fraud” (look up the websites)
For knowing the pleas actually advanced and dealt with by the SAT, it is worthwhile to go through the full text of its Order.
It may be interesting to watch for further developments, if and when they take place.

Anonymous said...

It would have been helpful,had the full text of the Order of SAT or connecting link been made available.

vswami

Anonymous said...

It seems the link provided in the post is to a different order (relating to the IPO scam). Can you please mention the parties' names?

Thanks.

Mangesh Patwardhan

Jayant Thakur, CA said...

My apologies to all the above and others too. An incorrect link was inadvertently provided which has now been corrected.

Jayant Thakur, CA said...

@Anonymous in comment 1

Agree...those are some crucial points in the order. Am studying the order and related provisions/other orders and will revert with a detailed article.