Category: Famous Cases


Is First International Group, a company that has offered to buy Electrosteel Steels Ltd from a group of banks, a front for Dharmesh Doshi, a shadowy figure from the second big stock exchange scandal to roil Indian markets?

Indeed, experts have already red-flagged this as one of the factors that banks have to watch out for when they acquire control of companies that are unable to repay their loans.

The story begins earlier this year when a consortium of lenders to Electrosteel Steels set out to identify a buyer for the 50% equity they received in the company in return for Rs.2,500 crore in unpaid debt through a conversion under the strategic debt restructuring scheme.

An unlikely candidate emerged as a possible buyer.

Its name was First International Group Plc. (which quaintly abbreviates as FIG). The only other contender was Tata Steel Ltd. Since FIG was offering Electrosteel creditors a better deal, they were leaning towards a sale to it.

FIG approached SBI Capital Markets, which was working on behalf of lenders, with an expression of interest in Electrosteel Steels, said a banker familiar with the negotiations who spoke on condition of anonymity

As news of the likely deal spread, the question on everyone’s mind was—what is FIG? A glance at the company’s website shows that it is a London-based entity which deals in securities.

Next question—why is a securities company interested in buying an Indian steel company?

To this the bankers had no answer.

Bankers asked the local arm of audit firm Deloitte India to conduct forensic due diligence exercise on the company. The deal is currently in cold storage pending the results of this audit.

Meanwhile, documents accessed by Mint suggest close links between FIG and Doshi, an associate of stock broker Ketan Parekh, who was banned from the Indian markets in 2001. They also show that FIG had extensive dealings with both Doshi and his company, Jermyn Capital Partners, which, in turn, had some dealings with Electrosteel.

Doshi, along with Ketan Parekh, was one of the key accused in the stock market scam of 2001 and had been barred from the Indian markets for life. That was the second major scam to roil Indian markets; the first took place in the early 1990s and was masterminded by Harshad Mehta, Parekh’s mentor.

The Securities and Exchange Board of India (Sebi) found links between Jermyn Capital Llc., London-based Jermyn Capital Partners Plc. and Doshi. In a 13 January 2006 order, Sebi noted that “Jermyn Capital Partners Plc was formerly known as Triumph Securities UK Plc which was a 100% subsidiary of Triumph International Finance (India) Ltd (TIFIL) through its Mauritius based subsidiary International Holdings (Triumph) Ltd”.

“SEBI had earlier conducted investigations in the wake of the ‘Stock Market Scam of 2001’ and initiated various punitive actions against TIFIL and its directors including Mr. Ketan V. Parekh, Mr. Kartik K. Parekh, Mr. Dharmesh Doshi, Mr. Jatin R. Sarvaiya and Mr. A.R Kapadia. While Mr. Ketan Parekh and three other Directors of TIFIL were arrested in May 2002, Mr. Dharmesh Doshi evaded arrest and is still absconding,” said the 13 January 2006 order.

While Jermyn Capital Partners Plc. was barred from the Indian Securities market, it continued to remain active in the UK. In 2010, the company changed its names to Orbit Investment Securities Services Plc. It continues to function under that name.

Arundhati Bhattacharya, chairperson of State Bank of India, which heads the consortium of lenders to Electrosteel Steels, did not respond to an e-mail seeking comment.

Bankers must exercise due caution while working with potential buyers of stressed assets, said an expert.

“In its most recent guidelines on SDR, the regulator has stated very clearly that banks are required to do additional due diligence on the new buyers and establish that they are not related or are associates of the current promoter group. The onus of finding out all possible details about the buyer remains with the banks. They must consider any red flags which are raised in respect of a potential buyer and should be cautious in who they are dealing with,” said Dinkar V., partner, transaction advisory services, at global consulting firm EY.

Dinkar, who also heads the restructuring and stressed asset turnaround unit of EY, was not commenting on the Electrosteel case in particular.

 

 

Source:

http://www.livemint.com/Money/OvK6BEVABPdtfCUlNFMNsM/Is-First-International-Group-a-front-for-Dharmesh-Doshi.html

 

Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) conducted an investigation into the scrip of Palred Technologies Limited (hereinafter referred to as ‘PTL’ or ‘the Company’) for the period of September 18, 2012 to November 30, 2013 (hereinafter referred to as ‘the investigation period’), to ascertain the possible violation of the provisions of the SEBI Act, 1992 (hereinafter referred to as ‘SEBI Act’) and SEBI (Prohibition of Insider Trading) Regulations, 1992 (hereinafter referred to as ‘PIT Regulations’).

2. PTL was incorporated in the year 1999. The Company had changed its name from Four Soft Limited to PTL w.e.f. December 09, 2013. The scrip of Palred is listed on National Stock Exchange Limited (hereinafter referred to as ‘NSE’) and Bombay Stock Exchange (hereinafter referred to as ‘BSE’).

The investigation alleged that Mr. Palem Srikanth Reddy, who is also the Chairman and Managing Director (CMD) of PTL, Ms. P. Soujanya Reddy, Mr. Ameen Khwaja, Ms. Noorjahan Khwaja, Mr. Ashik Ali Khwaja, Ms. Rozina Hirani Khwaja, Ms. Shefali Ameen Khwaja, Mr. Shahid Khwaja, Ms. Kukati Parvathi, Mr. Pirani Amyn Abdul Aziz, Mr. Karna Ramanjula Reddy, Mr. Umashankar S, Ms. Raja Lakshmi Srivaiguntam, Mr. Prakash Lohia and Mr. Mohan Krishna Reddy Aryabumi had traded in the scrip of PTL during the investigation period, while in possession of ‘price sensitive information’ (hereinafter also referred to as ‘PSI’).

The Company, in its e-mail dated June 20, 2014 had informed SEBI that Mr. Palem Srikanth Reddy (the Chairman and Managing Director of PTL), Mohan Krishna Reddy and P. Soujanya Reddy were the persons privy to the ‘slump sale of software solutions business to Kewill group’. Mr. Palem Srikanth Reddy was also privy to the information about the declaration of dividend. Mr. Palem Srikanth Reddy being the connected person within the meaning of Regulation 2(c)(i) of the PIT Regulations and having access to the UPSI, as detailed above, is alleged to be an ‘insider’ in terms of the Regulation 2(e) read with Regulation 2(c) of the PIT Regulations.

The investigations have revealed that Mr. Palem S. Reddy had communicated/ counselled, directly or indirectly the UPSI to one Mr. Ameen Khwaja, his relative Ms. Kukati Parvathy and others (hereinafter collectively referred to as the ‘suspected entities’). The details of the connections of suspected connected entities with Mr. Palem S. Reddy are as under:

Mr. Palem Srikanth Reddy and Mr. Ameen Khwaja were the common directors of one Pal Premium Online Media Pvt. Limited (hereinafter referred to as ‘Pal’). The names of both Mr. Palem Srikanth Reddy and Mr. Ameen Khwaja appear in the promoter category of Pal. It was found that Pal had provided services relating to ‘search engine’ to PTL during the period September 2011 to May 2013 (i.e. during the period of UPSI). Further, after the ‘slump sale of business’ by PTL to Kewill group, discussions pertaining to the merger of Palred Media and Entertainment Pvt. Limited and Pal with PTL had begun on December 19, 2013, which later got approved by the Board of Directors of the Company. In view of the same, Mr. Ameen Khwaja is also alleged to be an ‘insider’ and ‘connected person’ in terms of the Regulations 2(e) and (c) of the PIT Regulations.

Mr. Ameen Khwaja appears to have not traded in the scrip of PTL during the period of investigation. However, his immediate family members namely Ms. Noorjahan A. Khwaja, Mr. Ashik Ali Khwaja, Ms. Rozina Hirani Khwaja, Ms. Shefali Ameen Khwaja and Mr. Shahid Khwaja (hereinafter collectively referred to as ‘Khwaja group’) were found to be trading in the scrip of PTL during the UPSI period.

The trading pattern of Khwaja group entities was found to be in clear deviation from their established trading pattern. Except Ms. Noorjahan Khwaja, no other Khwaja group entity had traded in the market since April 01, 2011 to September 17, 2012. Even the maximum purchase value of Ms. Noorjahan Khwaja at BSE/ NSE was only 2.13 lakh in seven scrips, the same is in sharp contrast to the amount of 16.62 lakh, she had invested in the scrip of PTL (a not-so-frequently traded scrip during the relevant period). Further, it has also been revealed that the trading accounts of four members of Khwaja group were opened only on June 26, 2013, June 27, 2013, July 10, 2013 and July 12, 2013 i.e. during the UPSI period.

Mr. Pirani Amyn Abdul Aziz is also found to be connected to Mr. Ameen Khwaja through mutual friends on ‘Facebook’. He was employed with Deloitte Tax Services India Pvt. Limited (a group company of Deloitte Touche Tohmatsu India Pvt. Limited, which had conducted the due diligence of PTL during the slump sale). During the course of investigation, Mr. Pirani Amyn Abdul Aziz failed to reply to the specific details, as sought by SEBI.

His trading pattern was found in deviation from the established trading pattern. It was found that he had transacted only in the scrip of ‘Cummins India Limited’ for a quantity of only three shares for a consideration of 1,330,which he had purchased and sold during July 2013. Further, he was not found trading in any other scrip since April 2011 except that of investing about 5 lakh in PTL shares from June 2013 onwards, i.e., during the UPSI of ‘slump sale’. The proportion of his investment in PTL shares when considered in relation to his income and that too in a scrip which was not frequently traded (during the relevant period), is not commensurate with the usual investment behavior

It was found that he had opened his trading account with HDFC Securities Limited on June 25, 2013, i.e. just one day prior to his trading (i.e. June 26, 2015), in the scrip of PTL. Further an analysis of his bank account details revealed that he had received a series of cash deposits, prior to each payment to his broker for transacting in the shares of PTL. Mr. Pirani Amyn Abdul Aziz has not furnished any detail of the source of such cash deposits. The same raises serious suspicion on his transactions.

TABLE – 5

Trades during the UPSI of ‘slump sale’

(i.e. between September 18, 2012 –August 10, 2013) S.No.

Name

During 18/09/2012 to 10/08/2013

During 18/08/2013 to 20/08/2013

Total

Buy

Sell

Buy

Sell

Buy

Sell

1

Srikanth Palem Reddy

2,09,968

5,399

0

0

2,09,968

5,399

2

Noorjahan A Khwaja

1,20,972

2,456

0

0

1,20,972

2,456

3

Ashik Ali Khwaja

64,193

0

0

0

64,193

0

4

Rozina Hirani

43,014

0

0

0

43,014

0

5

Shefali Ameen Khwaja

45,000

0

0

0

45,000

0

6

Shahid Khwaja

50,822

0

0

0

50,822

0

7

Pirani Amyn Abdul Aziz

32,305

0

0

0

32,305

0

8

Karna Ramanjula Reddy

13,954

0

0

0

13,954

0

9

Umashankar S.

6,000

5,000

0

0

6,000

5,000

10

Raja Lakshmi Srivaiguntam

16,955

200

0

0

16,955

200

11

Rajpal Suresh Chandra

15,000

5,260

0

0

15,000

5,260

12

K. Parvathi

34,900

0

0

0

34,900

0

13

Prakash Lohia

25,972

2,000

3,500

0

29,472

2,000

14

Soujanya Reddy

17,500

0

0

0

17,500

0

TABLE – 7 Profit/losses incurred by suspected entities during their trading in PTL

Buy Vol.

Buy value in

Sell Vol.

Sell value in

Remaining shares unsold till UPSI 14.10.2013

Closing price on day of PSI

Notional sell value of shares

Gain (₹)

A

B

C

D

E=A-C

F

G=E*F

H=G+D-B

Srikanth Palem Reddy

209968

2799682

5399

91651

204569

39.2

8019105

5311074

Noorjahan A Khwaja

120972

1661672

2456

52634

118516

39.2

4645827.2

3036789

Khwaja Ashik Ali

64193

1010859

0

0

64193

39.2

2516365.6

1505507

Rozina Hirani

43014

636791

0

0

43014

39.2

1686148.8

1049358

Shefali Ameen Khwaja

45000

701666

0

0

45000

39.2

1764000

1062334

Shahid Khwaja

50822

914136

0

0

50822

39.2

1992222.4

1078086

Pirani Amyn Abdul Aziz

32305

499986

0

0

32305

39.2

1266356

766370

Mohankrishna Reddy Aryabumi

9300

273005

0

0

9300

39.2

364560

91555

Karna Ramanjula Reddy

16250

296240

0

0

16250

39.2

637000

340760

Umashankar S.

10450

230004

5000

71746

5450

39.2

213640

55382

Raja Lakshmi Srivaiguntam

16955

282090

200

3360

16755

39.2

656796

378066

K. Parvathi

35800

593167

0

0

35800

39.2

1403360

810193

Prakash Lohia

25972

374023

2000

37900

23972

39.2

939702.4

603579

Soujanya Reddy

17500

215924

0

0

17500

39.2

686000

470076

Total

698501

15055

683446

16559129

TABLE – 8 S.No.

Entity Name

PAN

Profit (₹)

Interest 12% p.a.**

Total (₹)

1.

Mr. Palem Srikanth Reddy

AAMPP9497N

53,11,074

20,63,898

73,74,972

2.

Ms. Noorjahan A. Khwaja

ACAPK3460G

30,36,789

9,53,469

39,90,258

3.

Mr. Ashik Ali Khwaja

ADMPA1271E

15,05,507

4,67,243

19,72,750

4.

Ms. Rozina Hirani Khwaja

ABQPH3900B

10,49,358

3,25,675

13,75,032

5.

Ms. Shefali Ameen Khwaja

ADTPV2598L

10,62,334

3,29,003

13,91,337

6.

Mr. Shahid Khwaja

ATXPK3630J

10,78,086

3,29,629

14,07,715

7.

Mr. Pirani Amyn Abdul Aziz

AONPP0697R

7,66,370

2,39,107

10,05,477

8.

Mr. Mohan Krishna Reddy Aryabumi

ABLPA2405R

91,555

26,097

1,17,652

9.

Mr. Karna Ramanjula Reddy

APAPK7847J

3,40,760

1,12,031

4,52,791

10.

Mr. Umashankar S.

ANUPS2006D

55,382

17,498

72,880

11.

Ms. Raja Lakshmi Srivaiguntam

BOPPS3150H

3,78,066

1,16,216

4,94,282

12.

Ms. Kukati Parvathi

ACIPP8586G

8,10,193

3,02,857

11,13,050

13.

Mr. Prakash Lohia

ABTPL5701F

6,03,759

1,91,095

7,94,674

14.

Ms. P. Soujanya Reddy

AAQPP2729R

4,70,076

1,81,436

6,51,512

TOTAL

1,65,59,129

56,55,254

2,22,14,383

* Interest calculated on illegal gains from the individual date of buy transaction till January 31, 2016

10. Considering the facts and circumstances of the case, the balance of convenience lies in favour of SEBI. With the initiation of investigation and quasi-judicial proceedings, it is possible that the noticees may divert the unlawful gains (subject to the adjudication of the allegation on the merits in the final order), which may result in defeating the effective implementation of the direction of disgorgement, if any to be passed after adjudication on merits. Non-interference by the Regulator at this stage would therefore result in irreparable injury to interests of the securities market and the investors.

In view of the foregoing, I, in exercise of the powers conferred upon me by virtue of Section 19 read with Sections 11(1), 11(4)(d) and 11(B) of the SEBI Act, 1992, hereby order to impound the alleged unlawful gains of a sum of 2,22,14,383 (alleged gain of 1,65,59,129 + interest of 56,55,254 from the date of buy transactions to January 31, 2016), jointly and severally from the persons tabulated in the paragraph above. If the funds are found to be insufficient to meet the figure of unlawful gains, as directed above, then the securities lying in the demat account of these persons shall be frozen to the extent of the remaining value.

Source:

http://www.sebi.gov.in/cms/sebi_data/attachdocs/1454682584239.pdf

US Second Circuit Court of Appeals yesterday dismissed Gupta’s appeal
Gupta, 67, had moved the court seeking a “certificate of appealability” but in the ruling the court “denied” the motion and “dismissed” his appeal.

“Appellant has not shown that ‘jurists of reason would find it debatable whether the district court was correct in its procedural ruling’ …as to whether Appellant’s claim was procedurally defaulted,” Circuit Judges Susan Carney and Christopher Droney said in their ruling.

Gupta’s two-year prison term ends in March next year and ever since his conviction in June 2012, he has filed several appeals, including to the US Supreme Court, to overturn his conviction and prison term but the courts have rejected his arguments and affirmed his sentence.

The former McKinsey chief is currently serving his prison term in a federal prison in Ayer, Massachusetts.

Gupta had last filed an appeal in August in the US Court of Appeals against the July ruling by Jed Rakoff who had rejected Gupta’s appeal saying his argument that the evidence of personal benefit presented at trial was insufficient to sustain his conviction is “both too late and too little”.

In his appeals, Gupta cited a recent landmark decision by the appeals court that had said that for an insider-trading conviction prosecutors must show that a defendant received a personal benefit for passing illegal tips.

Gupta sought to vacate his sentence and the judgment against him on the basis of an argument that the trial court’s instruction to the jury concerning the “personal benefit” element of an insider trading violation was “erroneous” and there was insufficient evidence of such benefit.

Rakoff had also denied Gupta’s bid to seek a “certificate of appealability” that would have given the IIT and Harvard alumnus another legal recourse to challenge his conviction.

Rakoff, who had presided over Gupta’s trial and sentenced him to the two years’ imprisonment, had said that even though Gupta is a “man of many laudable qualities,” the “hard fact remains” that he committed a serious crime.

Source:
http://www.business-standard.com/article/international/gupta-s-latest-bid-to-reverse-insider-trading-conviction-fails-115123000290_1.html

Deepwater Horizon Rig

According to the Securities and Exchange Commission, after the explosion on the Deepwater Horizon oil rig on April 20, 2010, Seilhan was designated to BP’s Incident Command Center in Houma, Louisiana, where he was responsible for overseeing the initial oil collection and clean-up operations.  In his position as Incident Commander, Seilhan learned of nonpublic information relating to the seriousness of the disaster, including initial oil flow estimates from the sunken rig that were significantly greater than the public estimate of  5,000 barrels per day.  Indeed, those private estimates were between 52,700 and 62,200 barrels per day – a 10x increase than that provided to the public.

After he learned of this information, Seilhan sold his and his family’s entire $1 million portfolio of BP securities, including common shares and options.  By doing so, Seilhan and his family were able to avoid over $100,000 in losses as BP’s share price eventually declined 48%.  Later, after BP announced it had successfully capped the well, Seilhan  repurchased shares of the BP Stock Fund (composed nearly entirely of BP shares) at a lower basis.

While the Commission acknowledged the assistance of the Department of Justice’s Deepwater Horizon Task Force, there is no indication that criminal charges will be filed.

Keith A. Seilhan, a senior responder for BP during the Deepwater Horizon oil spill, agreed to settle claims that he violated federal securities laws by selling his family’s entire $1 million portfolio of BP securities after he learned that the public estimations of the spill’s magnitude were grossly understated.  Without admitting or denying the allegations, Seilhan agreed to pay (i) $105,409 of ill-gotten gains; (ii) $13,300 in prejudgment interest; and (iii) a civil penalty of $105,409.

A copy of the SEC’s Complaint is here and embedded below:

Source:

http://www.forbes.com/sites/jordanmaglich/2014/04/17/sec-accuses-former-bp-employee-of-insider-trading-during-deepwater-horizon-spill/

Rakesh Agarwal vs. SEBI.

Rakesh Agarwal, was the Managing Director of ABS Industries Ltd. (ABS), was involved in negotiations with Bayer A.G regarding their intentions to takeover ABS. It was alleged by SEBI that prior to the announcement of the acquisition, Rakesh Agarwal, through his brother in law, Mr. I.P. Kedia had purchased shares of ABS from the market and tendered the said shares in the open offer made by Bayer thereby making a substantial profit. The investigations of SEBI affirmed these allegations. He was an insider as far as ABS is concerned. By dealing in the shares of ABS through his brother-in-law while the information regarding the acquisition of 51% stake by Bayer was not public, the appellant had acted in violation of Regulation 3 and 4 of the Insider Trading Regulations.

Rakesh Agarwal contended that he did this in the interests of the company. He desperately wanted this deal to click and pursuant to Bayer’s condition to acquire at least 51% shares of ABS, he tried his best at his personal level to supply them with the requisite number of shares, thus, resulting in him asking his brother-in-law to buy the aforesaid shares and later sell them to Bayer.

The SEBI directed Rakesh Agarwal to “deposit Rs. 34, 00,000 with Investor Education & Protection Funds of Stock Exchange, Mumbai and NSE (in equal proportion i.e. Rs. 17, 00,000 in each exchange) to compensate any investor which may make any claim subsequently.” On an appeal to the Securities Appellate Tribunal (SAT), Mumbai, the Tribunal, however, held that the part of the order of the SEBI directing Rakesh Agarwal to pay Rs. 34,00,000 couldn’t be sustained, on the grounds that Rakesh Agarwal did that in the interests of the company (ABS) to help Bayer A. G acquire his company.

Securities and Exchange Board have set out in its order banning Arora — the former star Asia-Pacific fund manager of Alliance Capital Management — from trading in August are far from convincing.

There are three main charges. One, that Arora played a pivotal role in thwarting Alliance Capital’s efforts to sell its India operations by resorting to unethical means.

Two, he did not make disclosures or sometimes made wrongful disclosures when some of Alliance’s holdings in certain stocks breached limits that required informing the respective companies.

Third, he sold his entire holding in Digital GlobalSoft based on unpublished, price-sensitive information.

In this case, SEBI conducted investigations into the management, conduct and other affairs of the Alliance Capital Asset Management (I) Pvt. Ltd. (ACAML). Samir Arora was the fund manager of the company. Knowing that the company was inviting bids for takeover of the same, he made special arrangement with Henderson Global Investors. For helping this company takeover his present company, he purchased shares and when the price rose sold off the shares to get a considerable profit. The Authority found him guilty and directed him not to buy, sell or deal in securities, in any manner, directly or indirectly, for a period of five years.

The conduct of Samir Arora is not in consonance with the high standards of integrity, fairness and professionalism expected from a fund manager. His conduct erodes the investors’ confidence and is detrimental to their interests as well as the safety and integrity of the securities market. His association in the securities market in any capacity is prejudicial to the interests of the investors and the safety and integrity of the securities market.

Hindustan Lever Limited (HLL) – Brooke Bond Lipton India Limited  (BBLIL)

The controversy involved HLLs purchase of 8 lakh shares of BBLIL two weeks prior to the public announcement of the merger of the two companies (HLL and BBLIL). SEBI, suspecting insider trading, conducted enquiries, and after about 15 months, in August 1997, SEBI issued a show cause notice to the Chairman, all Executive Directors, the Company Secretary and the then Chairman of HLL. Later in March 1998 SEBI passed an order charging HLL with insider trading.

SEBI directed HLL to pay UTI compensation, and also initiated criminal proceedings against the five common directors of HLL and BBLIL. Later HLL filed an appeal with the appellate authority, which ruled in its favour.

Background of the case:

The SEBIs charges were triggered off by HLLs purchase of 8 lakh shares of Brooke Bond Lipton India Ltd (BBLIL) from the Unit Trust of India (UTI, 1996-97 income: Rs 7,481 crore) at Rs 350.35 per share. This transaction took place on March 25, 1996, before the HLL-BBLIL merger was announced on April 19, 1996. A day after the announcement of the merger, the BBLIL scrip quoted at Rs 405, thereby leading to a notional gain of Rs 4.37 crore for HLL, which then cancelled the shares bought.

HLL is an insider, according to Section 2 (e) of the SEBI (Insider Trading) Regulations. It states: An insider means any person who is, or was, connected with the company, and who is reasonably expected to have access, by virtue of such connection, to unpublished price-sensitive information.

The SEBI has argued that both these conditions were met when HLL bought the BBLIL shares from the UTI. HLL and BBLIL had a common parentage–as subsidiaries of the London-based $33.52-billion Unilever–and were then under a common management. Thus, HLL and its directors had prior knowledge of the merger. Agrees Both HLL and BBLIL are deemed to be under the same management even under Section 370 (1)(b) of the Companies Act, 1956.

No company can be an insider to itself. The transnational knowledge of the merger was because it was a primary party to the process, and not because BBLIL was an associate company. To buttress this point, HLL maintains that if it had purchased shares of Tata Oil Mills Co. (TOMCO) before the two merged in April, 1994, SEBI would not consider it a case of insider trading. Why? Because HLL was not associated with the Tata-owned TOMCO.

HLL contends that it purchased the BBLIL shares so that its parent company, Unilever, could maintain a 51 per cent stake in the merged entity. Before the merger, Unilever had a 51 per cent stake in HLL, but only 50.27 per cent in BBLIL. Thus, the HLL management feels that the SEBI should consider if it had any additional information which it should not, legitimately, have had as a transferee company in the merger.

According to the SEBI guidelines, HLL can be deemed to be an insider. But the SEBIs definition of an insider has to be fleshed out by it to provide a clearer picture.

HLL dealt in, or purchased, the BBLIL shares on the basis of unpublished price-sensitive information which is prohibited under Section 3 of the Regulations. Section 2 (k)(v) states that unpublished, price-sensitive information relates to the following matters (amalgamations, mergers, and takeovers), or is of concern to a company and is not generally known or published.

According to the SEBI, there can be no dispute that the information of the overall fact of the merger falls under this definition.

Only the information about the swap ratio is deemed to be price-sensitive. And this ratio was not known to HLL–or its directors–when the BBLIL shares were purchased in March, 1996. Moreover, HLL argues that the news of the merger was not price-sensitive as it had been announced by the media before the companies announcement, April 7, 1996). HLL also points out that it was a case of a merger between two companies in the group, which had a common pool of management and similar distribution systems. Therefore, the merger information in itself had little relevance; the only thing that was price-sensitive was the swap ratio.

Why did HLL not follow the route of issuing preferential shares to allow Unilevers stake to rise to 51 per cent in HLL? As per the SEBI chargesheet Such a step would have involved various compliances/ clearances, and required Unilever to bring in substantial funds in foreign exchange. The implication: HLL depleted its reserves to ensure that Unilever did not have to bring in additional funds

Issuing of preferential shares would have, indeed, been a cheaper option to ensure that Unilever had a 51 per cent stake in HLL. Had HLL followed this route, it would have had to pay Rs 282..35, instead of Rs 350.35, per share. In other words, it would have made a profit of Rs 5.41 crore by doing so. However, Unilever always enjoyed the option. Says a senior manager with HLL: The forex angle falls flat on that ground itself. HLL also states that while the preferential route would have been beneficial for itself, it would have been dilutory for other shareholders since it would have resulted in an expanded capital base, leading to a lower earnings per share in the future.

HLL was probably worried that the clearances for a preferential allotment from the SEBI and the Reserve Bank of India (RBI) would take their time in coming–or not be given at all. It had already faced a time-consuming and expensive run-in with the RBI during the HLL-TOMCO merger in 1994.

Levers cancelled the entire holding of HLL in BBLIL

HLL was upfront that its entire holding in BBLIL–1.60 per cent–including the lots purchased from the UTI would be cancelled after the merger in March, 1997. HLL maintains that this is perfectly legal. In addition, shareholders of both HLL and BBLIL approved of the cancellation of shares as part of the merger scheme. Says Iyer: By this process of cancellation, which normally happens in every amalgamation, the voting rights of Unilever have gone up. However, so have the voting rights of other shareholders. So, no exclusive benefit–profits or avoidance of loss–has accrued to HLL or Unilever.

By extinguishing the shares, HLL wanted to maintain Unilevers shareholding at 51 per cent and not realise any financial gains. However, Section 3 defines insider trading irrespective of whether profits are made or not.

By virtue of being in uncharted territory, the parallel hearing before the Union Ministry of Finance will be disposed of within four or five months from the date of filing. And if the verdict goes against Levers, the group will then go to court. If so, expect a long-drawn legal battle. For now, the SEBI verdict is a black spot on a company that excels in cleaning them up.

Prosecution Not Justifiable:

Round two of the battle between SEBI and HLL took place under the aegis of the Appellate Authority of the Finance Ministry.

In response to the SEBI’s charge, HLL appealed to the Appellate Authority pleading that it be absolved of the charges of insider trading. UTI later filed an appeal with the Appellate authority, claiming a higher compensation of Rs. 75.2 million (7.52 crore).

It pleaded that it had to incur a notional loss as it was not aware that a merger of the two Unilever group companies was on the cards

HLL Not Guilty-Proposal ‘Generally Known’:

In support of its ruling, the Appellate Authority cited press reports that indicated “prior market knowledge of the merger.” However, by its own admission, there were only a few reports “prior to the actual purchase (of shares from UTI).” The Authority had cited 21 news reports to support the contention that the prospect of a merger between HLL and BBLIL was widely known.

In its judgement, the Appellate Authority said that under Regulation 11B, SEBI was not capable of initiating investigations and then taking recourse to powers under the Act for awarding compensation without passing an order under the above mentioned regulation.

Although not high-ranking in terms of dollars, the case of Wall Street Journal columnist R. Foster Winans is a landmark case for its curious outcome.

Winans wrote the  “Heard on the Street” column profiling a certain stock. The stocks featured in the column often went up or down according to Winans’ opinion.

Winans leaked the contents of his column to a group of stockbrokers, who used the tip to take up positions in the stock before the column was published. The brokers made easy profits and allegedly gave some of their illicit gains to Winans.

Winans was caught by the SEC and put at the center of a very tricky court case. Because the column was the personal opinion of Winans rather than material insider information, the SEC was forced into a unique and dangerous strategy. The SEC charged that the info in the column belonged to the Wall Street Journal, not Winans. This meant that while Winans was convicted of a crime, the WSJ could theoretically engage in the same practice of trading on its content without any legal worries.

Read more: http://www.investopedia.com/articles/stocks/09/insider-trading.asp#ixzz1lE4vsw1y

One of the most famous cases of insider trading made household names of Michael Milken, Dennis Levine, Martin Siegel and Ivan Boesky. Milken received the most attention because he was the biggest target for the Securities and Exchange Commission (SEC), but it was actually Boesky who was the spider in the center of the web.

Boesky was an arbitrageur in the mid-1980s with an uncanny ability to pick out potential takeover targets and invest before an offer was made. When the fated offer came, the target firm’s stock would shoot up and Boesky would sell his shares for a profit. Sometimes, Boesky would buy mere days before an unsolicited bid was made public – a feat of precognition rivaling the mental powers of spoon bender Uri Geller.

Like Geller, Boesky’s precognition turned out to be a fraud. Rather than keeping a running tabulation of all the publicly traded firms trading at enough of a discount to their true values to attract offers and investing in the most likely of the group, Boesky went straight to the source – the mergers and acquisitions arms of the major investment banks. Boesky paid Levine and Siegel for pre-takeover information that guided his prescient buys. When Boesky hit home runs on nearly every major deal in the 1980s – Getty Oil, Nabisco, Gulf Oil, Chevron (NYSE:CVX), Texaco – the people at the SEC became suspicious.

The tips were well worth the money, because Boesky made millions by buying up pre-takeover shares and unloading them after the market learned about the deals. The takeover of Carnation by Nestle (OTC:NSRGY) alone netted Boesky $28 million and, for that reason, alerted the Securities and Exchange Commission (SEC) to his activities. Siegel’s firm also came under scrutiny, and Boesky and Siegel parted ways, with Siegel receiving a final pay-off from Boesky of $400,000 dropped at a phone booth. The net was already cast, however, and the SEC reeled in Siegel and Boesky along with other big criminal names, such as Michael Milken.

Read more: http://www.investopedia.com/articles/stocks/08/fraud-wall-street-crypt.asp#ixzz1lE20KJb3

The SEC’s break came when Merrill Lynch was tipped off that someone in the firm was leaking info and, as a result, Levine’s Swiss bank account was uncovered. The SEC rolled Levine and he gave up Boesky’s name. By watching Boesky – particularly during the Getty Oil fiasco – the SEC caught Siegel. With three in the bag, they went after Michael Milken. Surveillance of Boesky and Milken helped the SEC draw up a list of 98 charges worth 520 years in prison against the junk bond king. The SEC charges didn’t all stick, but Boesky and Milken took the brunt with record fines and prison sentences.

Siegel became a witness for the government and was let off easy with a two-month sentence and a fine, while Boesky was given three years and fined $100 million for his involvement in the scheme.

Read more: http://www.investopedia.com/articles/stocks/08/fraud-wall-street-crypt.asp#ixzz1lE1mU3fP

Read more: http://www.investopedia.com/articles/stocks/09/insider-trading.asp#ixzz1lDzGkTRA

In this famous case, Rakesh Agarwal, the Managing Director of ABS Industries Ltd. (ABS), was involved in negotiations with Bayer A.G (a company registered in Germany), regarding their intentions to takeover ABS. Therefore, he had access to this unpublished price sensitive information.

It was alleged by SEBI that prior to the announcement of the acquisition, Rakesh Agarwal, through his brother in law, Mr. I.P. Kedia had purchased shares of ABS from the market and tendered the said shares in the open offer made by Bayer thereby making a substantial profit. The investigations of SEBI affirmed these allegations. Bayer AG subsequently acquired ABS.

Further he was also an insider as far as ABS is concerned. By dealing in the shares of ABS through his brother-in-law while the information regarding the acquisition of 51% stake by Bayer was not public, the appellant had acted in violation of Regulation 3 and 4 of the Insider Trading Regulations.

Rakesh Agarwal contended that he did this in the interests of the company. He desperately wanted this deal to click and pursuant to Bayer’s condition to acquire at least 51% shares of ABS, he tried his best at his personal level to supply them with the requisite number of shares, thus, resulting in him asking his brother-in-law to buy the aforesaid shares and later sell them to Bayer.

The SEBI directed Rakesh Agarwal to “deposit Rs. 34,00,000 with Investor Education & Protection Funds of Stock Exchange, Mumbai and NSE (in equal proportion i.e. Rs. 17,00,000 in each exchange) to compensate any investor which may make any claim subsequently.” along with a direction to “(i) initiate prosecution under section 24 of the SEBI Act and (ii) adjudication proceedings under section 15I read with section 15 G of the SEBI Act against the Appellant.”

On an appeal to the Securities Appellate Tribunal (SAT), Mumbai, the Tribunal held that the part of the order of the SEBI directing Rakesh Agarwal to pay Rs. 34,00,000 couldn’t be sustained, on the grounds that Rakesh Agarwal did that in the interests of the company (ABS), as is mentioned in the facts above.

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