The market regulator Securities and Exchange Board of India (SEBI) on June 3 passed its final order in the IIFL group front-running case, where it found the group’s equity dealer – Santosh Singh – guilty of wrongfully using his knowledge of impending orders of IIFL group entities.
SEBI also passed its final order in the Fidelity case, where Vaibhav Dhadda (alias Avi Dhadda), a former employee of Fidelity International and the trader for 21 funds of the Fidelity Group along with his relatives Alka, Arushi and several other related parties were found guilty of front running.
Altogether, there were 11 individuals that were required to disgorge Rs 2.1 crore. Given the large size of the Fidelity case and to piece together the intricate details, SEBI even used matrimony website www.jainshubhbandhan.com and Facebook to to make establish certain relations.
Both IIFL and Fidelity were old cases that SEBI had been investigating.
IIFL case
In the IIFL case, Singh acted as dealer of IIFL Mutual Fund, IIFL Select Series II, IIFL Multi-Strategy Fund, IIFL Long Term Growth Fund I, IIFL Focused Equity Strategies Fund - Capmetrics Investment Adviser and IIFL Special Opportunities Fund Series 5.
SEBI also found his friend Adil Suthar guilty of the charges and said that the latter’s contention that he didn’t know what information shared by Singh was confidential and what was not didn’t hold water.
The regulator said Suthar’s continuance of profiting and transacting in stock markets based on the information passed onto him by Singh, showed that he had an inkling that this information was of the impending orders that Singh was privy to.
Also read: What is the difference between insider trading and front-running?
SEBI has also penalised the accountholders, whose accounts were used as mule accounts, for placing of these dubious trades by Singh and Suthar.
“There is no room left for doubt that Noticees … had lent their trading and bank accounts … which practically resulted in handing over the ownership and custody of securities and funds … to a third party. This devious practice facilitated the Noticee in executing the front-running trades whilst concealing his identity behind the name-lending account holders and the name lenders received gratification, directly or indirectly, in some form or the other by being part of the illicit activities by renting their accounts,” SEBI’s order read.
Singh contended that he never shared the source of his information with Suthar. SEBI stated that disclosing the source of the information didn't matter, as Suthar was well-aware that the information was passed by Singh on the basis of his knowledge of impending orders by IIFL group entities.
Modus operandi
In IIFL case, SEBI found out that the orders in all the mule accounts were not only in sync with each other but also in tandem with orders of the IIFL group entities.
Both IIFL and Fideliy's cases showed front-running patterns that followed buy-buy-sell mode as well as sell-sell-buy mode.
Simply put, the front-runners would buy the stock in their mule accounts before their fund's buy order and then sell the stock after the fund's order is placed.
On the other hand, in the sell-sell-buy pattern, the front-runners would sell the stock in their mule accounts ahead of placing the the fund's sell order and then buy the stock after the entity's order to square-off the trade in their mule accounts.
Penalties
In the IIFL case, SEBI said that the mule account-holders will be barred from accessing the securities market for 2 years.
Singh and Suthar will be barred for 5 years. SEBI had in its last interim order in the matter had already asked the duo to deposit Rs 30.18 lakh and Rs 27.8 lakh, respectively.
SEBI further penalised Singh with Rs 10 lakh and Suthar with Rs 8 lakh. The duo needs to pay these penalties within 45 days.
In the Fidelity case, apart from disgorgement of Rs 2.1 crore, SEBI barred Vaibhav Dhadda for three years from securities markets. All the other related individuals were also barred for two years from the securities markets.
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