Formula for front-running operations : Private mobile, isolated work space, mule accounts, reveal Sebi orders

Two cases reveal a common pattern in front running cases

A new front-running case that mirrors the modus operandi of the Axis Mutual Fund case has put the spotlight on the vulnerabilities of Asset Management and Portfolio Management Companies.

A study of the two cases reveals a common thread of events, circumstances and participants that helped the front-running misadventures come to fruition while simultaneously highlighting how the chinks in the armour of these fund management companies can be conveniently exploited by fund managers well-positioned to unlawfully profit from their access to confidential information.

Before we delve further, it is necessary to go into the details of the second front-running case involving Anvil Wealth Management, a portfolio management service provider. In its order dated March 28, the Securities and Exchange Board of India (SEBI) barred six entities from the securities market, including Anvil’s fund manager Kaushal Chandarana while also directing the impounding of wrongful gains of Rs 2.23 crore.

Kaushal, in his position as the fund manager/ portfolio manager, was privy to the orders/trade information of a big client – Anvil Wealth. He was also aware of the confidential information on orders that were up for execution, the timing as well as the size of the order in a particular scrip.

As per the SEBI order, two firms, namely, Ninja Securities Pvt Ltd and Banhem Securities Pvt Ltd, which had a common director—Manish Mehta — were found placing orders ahead of Anvil in the cash segment.

The market regulator observed that "a scheme was hatched by Kaushal and Manish wherein the former would pass on the information of the impending trade orders of the big client to the latter, who would then place orders from the trading accounts of his connected entities, Ninja and Banhem, thereby front-running the trades of the big client."

What happened in the Axis front-running case?

The market regulator, in an order passed on March 1, had barred the fund manager Viresh Joshi and 20 more entities from buying, selling or dealing in the securities market or associating themselves with the securities markets.

Further, Rs 30.55 crore were impounded from these entities according to the wrongful gains they made through their front-running activities.

The order also unearthed the modus operandi in threadbare details. Viresh, referred to as 'Jadugar' in WhatsApp conversations by others involved in the illegal scheme, used his position in Axis Mutual Fund as a dealer and availed of the hybrid working model during the peak Covid years to work around any physical supervision on his actions.

He also secured another mobile, which he did not disclose to Axis MF, and used it to communicate his front-running trades to others.

What are the commonalities between the two cases?

Private work environment

Both Kaushal and Viresh had access to a private work environment, which would not have been otherwise possible or have been difficult had it not been for the Covid pandemic.

In the case of Axis MF, the dealers of the fund were also given separate dealing rooms to ensure social distancing. The available records indicate that during the period under investigation by SEBI, Viresh was working from home as well as from the office, where he had his own separate dealing room.

"It can be prima facie observed that Viresh Joshi had no immediate physical supervision both at home and in the dealing room in the office," the SEBI order said.

In the case of Kaushal, from March to August 2020 and post-August 2020 onwards till September 2021, he was working from home as well as from the office depending upon the exigencies of work.

"He was given a separate cubicle to discharge his official functions during office hours in the office premises apparently to enable him to maintain distance from his other colleagues so as to ensure privacy. From the above, it can be prima facie observed that Kaushal had no immediate physical supervision, either at home or in the office, thereby giving him an opportunity to take advantage of his physical and social distance from his supervisors and work around his official duties," the SEBI order stated.

Private phones

In the Axis MF case, Viresh had multiple mobile phones, the existence and usage of which were not declared to the company. This is critical considering that it opened up another avenue for Viresh to pass on confidential information to others down the line. A sizable part of SEBI's investigation pivots around the call detail records of Viresh and other participants.

In the case of Anvil Wealth Management, the firm had no laid down policy which barred access to personal phones during work hours.

"Kaushal used to place the trade orders of Anvil through phone calls and messages. Therefore, not only did Kaushal prima facie had abundant opportunity to pass on the non-public information about the impending trade orders of the big client because of his private working environment both at his office and at home but also had the necessary means i.e. access to a phone to communicate the same to the outside world," the SEBI order said.

The enablers

For a front-running operation to be successful, it is necessary to have access to trading accounts, trading terminals and other tools. Without an enabler in the picture, the front-running gambit is dead in the water.

In the Axis case, a number of parties including individuals as well as companies, either actively or passively, permitted their trading accounts to be used for executing front-running trades. For instance, one Prijesh Kurani used his trading account but also executed trades from the accounts of his wife, mother and mother-in-law as well as from his brother's account. Apart from this, the trading terminal of a firm named Marfatia Stock Broking Pvt Ltd and the trading account of its director was also used by the front-runners.

In Kaushal's case, it was Manish Mehta who, as per SEBI's order, was executing front-running trades from the trading accounts of Ninja and Banhem Securities.

 Co-directors get no relief

A key takeaway from both cases is that none of the other directors of the firms which were being employed for the cause of front-running trades was let off the hook. The market regulator in both cases fixed responsibility on directors — who were not involved in the front-running operations— largely arguing that as directors it was their duty to keep an eye on the goings-on in the company and not turn a blind eye to the operations.