SEBI Bans Five Entities from Securities Market in LIC Front Running Trade Case

SEBI Bans Five Entities from Securities Market in LIC Front Running Trade Case

The Securities Exchange Board of India (SEBI) has barred five entities, including an employee of Life Insurance Corporation of India, from the securities market and impounded illegal gains of Rs. 244.09 lakhs made by them, in a case pertaining to front-running the trades of the state-owned insurer.

The five entities prohibited by SEBI are namely Yogesh Garg (Noticee no. 1), who was working in the investment department of LIC through which trades on behalf of the insurer were placed; his mother, Sarita Garg; his mother-in-law Kamlesh Agarwal; Ved Prakash HUF and Sarita Garg HUF, the capital markets regulator said in its interim order.

The brief background of the case is that the alert system of SEBI generated front running alerts for the months of January to March, 2022 against 5 entities suspected to be front running the trades of Life Insurance Corporation of India (“LIC”/ “Big Client”).

Based on the aforesaid alerts, an examination was conducted by SEBI for the period 1 January, 2020 to 15 March, 2022 to examine possible violations of provisions of the Securities and Exchange Board of India Act, 1992 (SEBI Act) and various regulations framed thereunder including SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (PFUTP Regulations) by the suspected entities.

The SEBI based on the preliminary examination found, Noticee no. 1 was an employee of LIC since 8 November, 2011. During the Examination Period, he was working in the investment department of LIC through which trades on behalf of LIC were placed.

The trading pattern of the alleged front runners during the Examination Period showed that orders for the first leg of their intraday trades were placed and executed just prior to the impending orders of LIC (where Noticee 1 was employed) and the orders for squaring off their trades i.e., second leg sell/ buy orders were placed at a limit price which was less or more than the buy or sell order limit price of LIC, warranting that such sell or buy orders would get matched with the buy or sell orders of LIC.

The SEBI prima facie observed that the aforesaid trades were executed in Buy-Buy-Sell (“BBS”) and/ or Sell-Sell-Buy (“SSB”) pattern, through which the accounts of the alleged front runners were able to generate substantial profit (discussed in detail later). By adopting the aforesaid mechanism, Noticees had prima facie engaged in a scheme of front running LIC’s orders thereby prima facie violating the provisions of SEBI Act and PFUTP Regulations, the SEBI opined.

The Whole Time Member (WTM) Ananth Narayan G, on perusal of the relevant provisions observed that, even though the SEBI Act or the PFUTP Regulations does not mention the term ‘front running,’ regulation 4(2)(q) of PFUTP Regulations specifically covers front running transactions.

In this regard the WTM stated that the regulation 4(2)(q) of PFUTP Regulations requires satisfaction of the following two elements:

(i) existence of non-public information regarding the substantial order of big client for dealing in securities; and

(ii) orders placed by the alleged front runner (directly or indirectly) in advance of the substantial impending order to be placed by big client, while being in possession of the said nonpublic information.

The SEBI opined that in suspected front running trades involving family members, direct evidence may not always be present, as passing on non-public information to family members regarding the impending orders of big client may happen in a private manner, which may not leave any trail of evidence.

Therefore, SEBI asserted that in absence of direct evidence, the communication or acting on the non-public information must be inferred from proximate facts and circumstances surrounding the event.

The SEBI found that each of the Noticees had a distinct role to play in the fraudulent scheme devised for front running the orders of LIC. It was prima facie observed that Noticee no. 1 being a dealer in LIC was in possession of non-public information regarding impending orders of LIC and inter alia acted as an information carrier. With respect to Noticees 2 to 5, they or their accounts were found prima facie instrumental in front running trades of LIC, observed the WTM.

SEBI from the available records, reckoned that the Noticees had made illegal gains by way of the prima facie front-running activity amounting to Rs. 244.09 lakhs.

Hence, it was prima facie concluded by SEBI that Noticees 1 to 5 were involved in a scheme to front run the trades of the Big Client and therefore they were prima facie jointly and severally liable for the proceeds generated from the front running trades.

Consequently, SEBI restrained the Noticees from buying, selling, or dealing in securities, either directly or indirectly, in any manner whatsoever until further orders.

Furthermore, the SEBI ordered that the Noticees 1 to 5 shall cease and desist from, directly or indirectly, engaging in any fraudulent, manipulative, or unfair trade practice including front running thereby committing or causing violation of any provision of the SEBI Act and the PFUTP Regulations.