First final hearing and order through Video Conferencing by SAT: Order ruling ex-Morgan Stanley employee guilty of insider trading upheld

In its first final hearing and order passed through video conferencing amid the COVID-19 pandemic, the Securities Appellate Tribunal (SAT) today upheld an order holding a former Morgan Stanley employee guilty of insider trading [Utsav Pathak v. SEBI]..The Tribunal headed by Presiding Officer Justice Tarun Agarwala upheld an order passed by the adjudicating officer (AO) of the Securities and Exchange Board of India (SEBI) in August last year. The AO had found the appellant Utsav Pathak guilty of insider trading in relation to Morgan Stanley’s acquisition of shares in CRISIL back in 2013..As per the facts of the case, a confidentiality agreement between McGraw Hill Asian Holdings and Morgan Stanley was executed in April 2013. Based on this agreement, Morgan Stanley was engaged by McGraw Hill Asian Holdings to work on the open offer assignment for the acquisition of the shares of CRISIL. This open offer was considered as sensitive information under the SEBI (Prohibition of Insider Trading) Regulations, 1992. Pathak was an employee of Morgan Stanley at the time, and was directly involved with the activities pertaining to the offer..McGraw Hill Asian Holdings later made an announcement of an open offer to acquire a 22.23% stake in CRISIL. The announcement of the public offer led to an increase in the price of the shares by almost 20%..This prompted SEBI to investigate the trading activities of CRISIL and submit an investigation report. Based on the report, notices were sent to Pathak directing him to show cause as to why penalty should not be imposed on him..The charges levelled against him included that he was privy to unpublished price sensitive information, and that he passed on such information to his family members, two of whom made a total profit of over Rs. 37 lakh..After hearing the appellant, the AO found that he was a ‘connected person’ under Regulation 2(c)(ii) of the SEBI Insider Trading Regulations, and an‛ insider’’ as per Regulation 2(e). While holding the appellant guilty of insider trading, the AO, however, did not impose any penalty..This prompted Pathak to approach the SAT in appeal. Appearing for Pathak, Advocate Somasekhar Sundaresan argued that the AO did not consider the statements given by Pathak’s sister, his brother-in-law and father-in-law of his sister, who were the tippees (beneficiaries of the tip) of the insider trading. He argued that if these statements were considered, one would find that the tippees were all independent professional persons who could take their own decisions logically. Further, their statements would adequately prove that the appellant was not having good terms with his sister and the family, Sundaresan submitted..Senior Advocate Gaurav Joshi, appearing for SEBI, contended that in a case of insider trading, there is hardly any direct evidence and that from the foundational facts, one can infer on a preponderance of probability or from circumstantial evidence as to whether a person is guilty of insider trading..After hearing the parties, the Tribunal noted that the appellant has not denied the fact that he was privy to the price sensitive information during the relevant period, and that he has also not denied the fact that he was a connected person as per Regulation 2(c)(ii) of the Regulations. Further, he did not deny the fact that he was an insider as defined under Regulation 2(e) or that he had close relationship with the tippees. Therefore, the tippees were persons deemed to be connected as per Regulation 2(h)(viii)..The Tribunal then delved into the definition of “insider” under Regulation 2(e)(i), noting that it has two parts. It stated,.“The first part has reference to any person which is connected with the company or is deemed to be connected with the company. In the instant case, the fact that the appellant is a connected person has not been denied.”.Finding that the second part of the definition was also satisfied, the Tribunal held, .“In this regard, there is ample evidence on record, namely, the statement of the Managing Director of Morgan Stanley who stated that the appellant was one of the employees who was working on the open offer assignment of CRISIL and was privy to the price sensitive information. Thus, in our view, both parts of the definition clause of ‚insider‛ as defined under Regulation 2(e)(i) are fully applicable upon the appellant.”Securities Appellate Tribunal.The SAT also cited Supreme Court decisions to conclude that proving of an allegation levelled against a person can be derived either from direct substantive evidence or can be inferred by a logical process of reasoning from the totality of attending facts and circumstances surrounding the allegations made and levelled..Having already found that the appellant was a connected person, and insider, and was privy to the price sensitive information, the SAT made the following observations:.The appellant had close relationship with the Tippees.During the investigation, the appellant made attempts to conceal his relationship with the Tippees, as well as tried to dilute his role in the open offer process.The trading pattern of the Tippees makes it apparently clear that the Tippees had prior information with regard to the open offer…The Tippees only traded in the shares of CRISIL and did not trade in any other shares.Purchase of large chunks of shares and selling it immediately after announcement of the open offer without any plausible cause is suspicious.The Tippees were also charged for insider trading and violation of the PIT Regulations. The Tippees filed a Settlement Application which was allowed on payment of an amount..Taking into account all these facts, the SAT held that an irresistible inference can be drawn that the appellant had passed on the price sensitive information regarding the open offer to the tippees..Thus, the SAT dismissed the appeal and upheld the AO’s order..Somasekhar Sundaresan was briefed by Shruti Rajan and Rohan Banerjee from Cyril Amarchand Mangaldas..Senior Advocate Gaurav Joshi was briefed by ELP lawyers Abhiraj Arora and Vivek Shah..Speaking to Bar & Bench on the order, Justice Agarwala confirmed that this was the first matter to be listed for final hearing through video conferencing in which an order has been passed by the SAT.Initially, the SAT was taking up only urgent matters, but from June 2 onwards, the Tribunal has been hearing all types of matters, provided lawyers are willing to appear.Justice Agarwala also told Bar & Bench that holding hearings via video conferencing has been challenging, as the Tribunal Members are working from their homes without support staff. .[Read the order]