Securities frauds such as insider trading and front running raise insurmountable hurdles for regulators because there is often no evidence, not even a smoking gun. Hence, regulators bear the burden of painstakingly piecing together several bits of circumstantial evidence that, as a whole, might be sufficient to convince a court or tribunal of the elements of a breach of the appropriate regulations. The task is harder in criminal cases that the regulator must prove beyond reasonable doubt, whereas it is far less onerous in civil proceedings where the onus is a preponderance of probabilities. In this background, an ad interim ex parte order dated December 4, 2019 by a whole time member of the Securities and Exchange Board of India (SEBI) in a front running case involving various funds of the Fidelity Group piqued our interest.
Briefly, front running is an activity whereby a person trades with the information that another person (such as an institutional investor) is likely to effect a large trade that will move the market price in favour of the trader, who then benefits from such price movement by entering into a similar trade before the large trade occurs. The informational advantage the trader has is that a large transaction is in the offing.
In this background, facts of the present case (as the SEBI order outlines) indicates an archetypal case of front running. SEBI conducted investigations in relation to certain trades during the period between May 29, 2019 and August 23, 2019. It found that two individuals, Mr. Alka Dhadda and Ms. Arushi Dhadda had undertaken several trades (both buy and sell orders) immediately prior to large orders posted by several entities under the Fidelity Group. The regulator also came to know that one Mr. Avi Dhadda carried out the trades on behalf of the Fidelity Group. It therefore remained for SEBI to draw the various connections to establish whether there was indeed an instance of front running that is proscribed under various regulations issued by SEBI.
SEBI raised a series of questions, and answered them using the evidence available before it. The first question was whether Avi was privy to the information regarding the Fidelity Group’s trades. In correspondence with the National Stock Exchange, the Fidelity Group had indicated that Avi was the trader for all the entities involved. Hence, SEBI prima facie concluded that Avi was privy to information regarding trades by the Fidelity Group, even before they occurred.
The second question, and one that is most interesting for the purpose of our analysis, relates to whether Avi is related to Alka and Arushi. In other words, SEBI is seeking to establish that Avi (as the trader for Fidelity Group, and possessor of information regarding the Group’s transactions) is related to the two alleged front runners, Alka and Arushi. Here, SEBI relied entirely on KYC documents and publicly available information regarding these individuals, and sought to stitch together their relationships. Matters become compounded because one Mr. Vaibhav Dhadda enters the picture during SEBI’s survey of public information, only for SEBI to find that Vaibhav and Avi are indeed the same person. It is worth appreciating these linkages through SEBI’s own words:
Mr. Avi Dhadda – Ms. Alka Dhadda
8. It is observed from the KYC details of Alka that her email id is [email protected], which is matching with the name of the trader of Fidelity Group i.e. Mr. Avi Dhadda. Further, her husband’s name is Mr. Virender Dhadda and her address is of Jaipur. It is also observed from the details of the PAN of Mr. Avi Dhadda (DFAPD6039C) as available on the Income Tax Department’s website that the said PAN is registered in the name of Mr. Vaibhav Dhadda and the jurisdiction details of the said PAN is of Jaipur. The passport details of Mr. Vaibhav Dhadda reveals that his parents are Mr. Virender Dhadda and Ms. Alka Dhadda. Additionally, the matrimonial website (www.jainshubhbandhan.com) profile mentions Mr. Vaibhav Dhadda as son of Mr. Virender Dhadda and Ms. Alka Dhadda.
9. In view of the above discussion, it is prima facie established that Mr. Avi Dhadda is also known as Mr. Vaibhav Dhadda and is the son of Ms. Alka Dhadda. It is also noted from the material available on record that both Mr. Avi Dhadda and Ms. Alka Dhadda have Hong Kong Permanent Identity Cards.
Mr. Avi Dhadda – Ms. Arushi Dhadda
10. It is observed from the nomination details filed in the account opening form of Ms. Arushi Dhadda with ICICI Bank Ltd. that Ms. Alka Dhadda has been mentioned as ‘mother’ of Ms. Arushi Dhadda. Further, from her PAN details, it is observed that Mr. Virender Dhadda is her ‘father’. Thus, Ms. Arushi Dhadda is the daughter of Ms. Alka Dhadda and Mr. Virender Dhadda. Hence, Ms. Arushi Dhadda is the sister of Mr. Vaibhav Dhadda (alias Mr. Avi Dhadda).
SEBI relied on usual information and documentation such as KYC records, passport details, and income tax PAN. Curiously enough, it also relied upon the listing in a matrimonial website to establish the identity of Avi, and the relationship between Avi and Alka. Unusual as it may seem, SEBI has previously embarked on similar exercises in establishing relationships in insider trading and front running cases, including by examining “friendships” on Facebook, as previously discussed on this Blog. This is inevitable given SEBI’s need to establish its case using several bits of circumstances evidence that are not material individually, but could work in the aggregate to prove one of the elements of a securities law violation at hand.
After answering the relationship question above, SEBI went on to consider the third issue of whether the trades by Alka and Arushi had in fact “front run” the Fidelity Group’s trades. Here, SEBI found that the trades by Alka and Arushi preceded the Fidelity Group’s trades during at least 68 instances, which SEBI has listed out in its order. SEBI also explained the pattern of trading using some specific illustrations. Furthermore, SEBI meticulously constructed its case using several bits of circumstantial evidence, some of which are set out below:
- Alka opened a trading account only around the period when the trades in question were executed;
- Similarly, a bank account relating to Alka’s trading account too was opened only close to that period;
- SEBI even examined the IP addresses of the computers from which trades were placed, some of which led to Hong Kong, where Avi works from;
- The pattern of trading of Alka and Arushi match that of the Fidelity Group;
- Prior to the period, Alka and Arushi had not instances of trading any other securities through any trading account.
SEBI used the cumulative effect of all the above information, based on a preponderance of probabilities, to conclude that trades by Alka and Arushi would not have been carried out unless they, along with Avi, had information about the Fidelity’s Groups then prospective trades.
The fourth issue relates to the persons who would be liable for front running. Here, SEBI’s order trains its guns on Avi, who is alleged to have had access to Alka’s and Arushi’s trading accounts and carried out the front running activity. Hence, the SEBI order finds him liable for front running. It also finds Alka and Arushi liable for front running as they allowed their trading accounts to be used for the purpose, and they were also part of the scheme or device that was constructed for the purpose of profiting from the prior information regarding the trades by the Fidelity Group.
Based on these findings, SEBI directed Avi, Alka and Arushi from dealing in the securities market until further directions. SEBI’s computation indicates that they made profits of Rs. 1,86,04,343, which they are asked to deposit into an escrow account. Moreover, the order prevents them from alienating their property except with the prior permission of SEBI. Given the ad interim ex parte nature of the order, SEBI’s goal is to protect the sanctity of the market from the actions of these individuals.
Although it is an early stage decision of SEBI that is bound to be appealed, the order highlights issues involved in constructing evidence in cases involving insider trading and front running. Circumstantial evidence takes on greater prominence than usual, and it places the burden on SEBI to establish a proper case.