How Joshi the Jadugar worked the mechanics in Axis front-running case

SEBI

The Securities and Exchange Board of India (Sebi) has barred Viresh Joshi and 20 more listed in the Axis mutual fund front-running case from buying, selling or dealing in the securities market or associating themselves with the securities markets.

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

The order also unearths the modus operandi of the whole operation in threadbare details. Joshi, 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 mutual fund, and used it to communicate his front-running trades to others.

How a mutual fund executes transactions?

Before we dive into how the 'Jadugar' executed his trades, we need to understand the trading dynamics of a mutual fund.

Every mutual fund has a designated fund manager of a scheme who is responsible for taking the day-to-day investment decisions and is also responsible for the scrip selection and portfolio creation.

The fund manager records the relevant information of the trade order i.e., scheme name, stock name, buy/sell, quantity, price limit etc. with a short reason and is required to place the orders as decided by him in the Bloomberg Order Management System (for Axis mutual fund).

On the other hand, the dealing team is responsible for the execution of trades. Upon receiving the order on Bloomberg Order Management System, the dealer routes the said order to a specific / selected stockbroker at his/her discretion out of the many empanelled stock brokers.

Depending on various factors including market situation, stock liquidity and order size, the dealer may either split the order across multiple stock brokers or may execute the said order through one stockbroker. These are day-to-day operational decisions taken by the dealer, driven by the need to execute the desired quantity at the best available price in the best interest of the mutual fund.

Further, the dealer monitors and reviews the ongoing trades and carries out appropriate modifications of the orders wherever required (e.g. with respect to price limit given to a stock broker(s), quantity based on the availability of liquidity, execution style, and any other relevant factors) within the parameters already provided by the fund manager.

On a given trading day, it is the Fund Manager who decides the crucial aspects of an order, that is, the specific stock to purchase, buy/sell, quantity and price limit of the stock, whereas it is the dealer who decides the timing and manner of execution of the order, depending upon the liquidity aspects of stock, flows available, volume etc. observed for the said selected stock in the securities market.

In the matters of front running, it is the timing of the placement of the impending orders on behalf of Axis mutual fund which assumes importance as the size of the order of a client like Axis mutual fund would be large enough to create an impact on the price movement of the specified scrip. Any trader possessing advanced knowledge of the impending order of the mutual fund has an advantage and can use it to make illegal gains.

The role of Joshi and others

Joshi, as per Sebi's order, was privy to the orders of the mutual fund and would pass on the information to the network of the entities.

The order goes on to segregate the accused entities into three different categories, namely, the information carrier (Joshi), the arrangers and the enablers.

The arrangers' group includes two individuals - Sumit Desai and Pranav Vora - who acted as conduits and arranged trading accounts and trading terminals to execute front-running trades communicated by Joshi. These 'on rent' or mule trading accounts were then used by enablers to execute the front-running trades communicated by Joshi.

Desai also introduced Joshi to enabler Prijesh Kurani, a Dubai-based finance professional, who used these 'on rent' trading accounts to trade the front-running orders from multiple accounts. Kurani also helped Joshi form a company named Vintage Capital Investment LLC in Dubai.

Kurani along with two others helped Joshi in partaking of the proceeds from their front-running trades. Interestingly, there were no bank transfers between Joshi's account and any of the other 20 entities. Proceeds earned from the front-running trades were deposited into Vintage's Dubai bank account.

The Sebi order records that Kurani is the Chief Investment Officer at Richr Business Services based out of Dubai. Kurani, when issued a summons by Sebi said he will not be able to appear before it.

Style of execution of front-running trades

The front-running trades were executed using the Buy-Buy-Sell trade pattern or Sell-Sell-Buy trade pattern, and the trades were timed around the orders of the Axis mutual fund.

"The tranches of the orders of the first leg of intra-day trades from the trading accounts(front running leg) have been placed/executed just prior to the impending large orders of the Axis mutual fund or before the last tranche of said large order was placed by Axis mutual fund while the second leg of the intra-day trade (squaring off of trades) begins by placing orders either prior to the last tranche of the order of the Big Client or immediately after it," the order says.

The Sebi order gives a detailed run-through of the WhatsApp conversation between the parties, Call Detail Records (CDRs) as well as hyperlinks of recorded videos between the individuals named in the case.

In the interim order, whole-time member SK Mohanty held that Joshi, who operated as a dealer of the mutual fund had to be dealt with a firm hand as he acted mischievously with the trades of a mutual fund "in collusion with his associates as part of a well-calculated scheme".

"The job profile of the top officials of any mutual fund demands high standards of diligence, honesty and ethics as they are dealing with public monies of innocent investors... I find that the way Viresh Joshi has conducted himself as a dealer of Axis MF in conceiving a fraudulent scheme and executing the said scheme so meticulously over a sustained period in collusion with other unscrupulous entities to front-run the trades of his very own mutual fund where around 66 lakh unit holders have put an aggregate sum of AUM of Rs 2.52lakh crore (as on March 31, 2022), it smacks of rampant dishonesty and unfairness on the part of Viresh Joshi and his accomplices... Indulgence in such heinous acts of market manipulation and fraudulent trade practices as have been blatantly displayed by a senior official of a mutual fund like Viresh Joshi has caused a serious breach of the trust reposed by the investors/unit holders of Axis MF and can potentially cause further erosion of the trust in mutual funds per seas a medium of investment in the securities market." the regulator said sternly in its interim order.