The market regulator has uncovered a front-running scam that ran on a simple hack--of physical proximity to information.
That is, people who were passing on information to the front-runners sat close to the dealing desks of several brokers who were placing the orders of a big client.
On April 23, the Securities and Exchange Board of India (SEBI) passed an interim-cum-showcause notice to Madhav Stock Vision Pvt Ltd, two of its directors and other associates asking them to disgorge over Rs 2.72 crore, which was earned by illegally front-running trades of a big client.
In the order, SEBI said that they were prima facie found to be in violation of various provisions of the SEBI Act and the Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations.
The entities have also been banned from the market with immediate effect.
The regulator found evidence that the dealing desks of four stock brokers were placed in close proximity to each other, which enabled the passing of non-public information (NPI) of big clients' trades. This helped MSVPL to front-run these trades, according to the regulator's initial findings.
In the order, SEBI's Whole-time Member Kamlesh Varshney wrote, "The proximity of the trading terminals/dealing desks of four stock brokers enabled Noticee nos.2 (Jyotiswaroop Nandkishore Purohit) and 3 (Pankit Bhagwati Jhaveri) to be privy to the NPI which Broker no.2 and Broker no.3 had with the dealers of the Big Client. Taking advantage of this proximity Noticee nos. 2 and 3 passed on the NPI pertaining to impending order of the Big Client to the dealer/director of the Front Runner. MSVPL while front running the orders of Big Client placed orders in various scrips following SSB and BBS strategy." Purohit and Jhaveri were thus information carriers, while noticees 4 (Rajesh Bhagwati Jhaveri), 5 (Ajay Sampatraj Jain) and 6 (Rajkumar Prabhu Damani ) were facilitators of this operation.
He added, "Noticees are found to be part of the act where related entities of the Noticees are shown as employees of MSVPL and the unlawful gains is routed through these related entities in the form of salary payments. These acts on the part of Noticees elaborated in the present order indicates towards the scheme that was crafted for personal gains and to defraud the investors, as the NPI pertaining to the impending transactions in various scrips was encashed to make unlawful gains in the accounts of the Front Runner."
(This copy will be updated.)
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