SEBI to move apex court against SAT on Price Waterhouse order

SEBI is all set to file an appeal with the Supreme Court challenging the Securities Appellate Tribunal’s decision in the matter involving Price Waterhouse. One of the key questions which SEBI will put before the top court is whether it has faulted in taking action against the audit firm drawing inference from convincing probable evidence (preponderance of probabilities).

SEBI will challenge SAT in the apex court for passing an ‘erroneous order’ that has potential to set precedent for the regulator to establish ‘mens rea’ (criminal intent and direct evidence) in civil matters, according to sources in the know.

While SEBI had taken action against the audit firm to protect investor interest based on the principle of ‘preponderance of probabilities’, the SAT rejected SEBI’s strictures against a network of accounting firms and individuals working under PW in the absence of any direct evidence to link them with Satyam Computer scam.

“Thus, pinning down the engagement partners and the audit firms on a preponderance of probabilities that they had committed a big fraud in a reckless and careless manner cannot in our view lead to a conclusion that there was any intention or mens rea on their part,” the SAT order had said.

Deepika Sawhney, Partner, Corporate Professionals, said: “In my view , SEBI’s appeal will seek to address one of the questions of law to be settled-- whether a different principle of evidences shall apply for a person directly dealing in securities market; and whether proving inducement mens rea is necessary.”

The Supreme Court in its previous judgment involving SEBI v/s Kishore Ajmera on the particular question had held: “...mens rea is not an indispensable requirement and the correct test is one of preponderance of probabilities. Proof beyond reasonable doubt as is not an indispensable requirement. The inferential conclusion from the proved and admitted facts, so long as the same are reasonable and can be legitimately arrived at on a consideration of the totality of the materials, would be permissible and legally justified.”

Disgorgement

SEBI will further question the inconsistency in the SAT order, which upholds the ‘disgorgement’ amount imposed on the auditor but gives it a free pass on other strictures. “Usually, disgorgement is of ill-gotten gains and if SAT was comfortable in upholding that in the same case, it reflects their inconsistency,” sources close to the developments said.

The SAT order was mainly based on inference drawn from a Bombay High Court judgment which held that it would be necessary for SEBI to establish connivance in the matter where the ‘auditor’ was not dealing in the securities market. SEBI had cited its wide powers to act against entities when it came to protecting the the interest of shareholders and investors. In case of Satyam scam, while the auditor is not regulated by SEBI directly, its report directly affected share market investors who mainly depended on audited financial statements for a holistic picture. SAT rejected this argument. SEBI by its Act is a quasi-judicial authority and decides matters under civil proceedings. Yet, the High Court had allowed SEBI to continue with its probe.

“The HC order was for limited purpose to determine if SEBI has jurisdiction to conduct enquiry and investigation against chartered accountants. The writ petition was dismissed allowing SEBI to proceed with the matter considering the aspect as to whether any directions can be issued by SEBI on the basis of evidence available on record as per the provisions of Section 11 and 12 of the SEBI Act i.e. investor protection and regulating securities market,” Sawhney said.

COMMENT NOW