WhatsApp leak case: SAT sets aside SEBI order

PALAK SHAH Mumbai | Updated on March 25, 2021

Markets regulator has failed to establish insider trading connection, says tribunal

In a landmark order, the Securities and Appellate Tribunal (SAT) has set aside SEBI’s insider trading charges against employees of a few stock broking firms who had ‘forward(ed) as received’ messages on Whatsapp regarding unpublished quarterly results of leading companies.

The ‘Whatsapp leaks’ case had sent shivers down the spine of the analyst community in 2017 when SEBI started looking into private phone messages of several broking employees to determine if they had indulged in insider trading.

SEBI had penalised Shruti Vora from Antique Stock Broking for releasing Unpublished Price Sensitive Information (UPSI) related to financial results of Asian Paints through WhatsApp messages. Besides, analysts from other brokerages --Parthiv Dalal and Neeraj Kumar Agarwal --were also fined.

‘Shooting the messenger’

SAT reasoned that SEBI could not find the actual source of the messages and went behind only those who forwarded them . SAT further relied on the fact that generally available information would not be construed as UPSI and the person merely forwarding it would not be an “insider.” But the information can be branded as an UPSI only when the person getting the information had a knowledge that it was UPSI and SEBI had to prove ‘preponderance of probabilities’ in the circumstances.

In the present case, there are no attendant circumstances at all, except the possibilities, SAT reasoned. Proximity of time and similarity between the information were the only two factors that weighed with SEBI to brand the information as UPSI.

SAT relied on its earlier judgment involving fund manager Samir Arora. In that case, the tribunal had rejected SEBI’s arguments saying that it has to be established beyond doubt that the potential source of UPSI and the person allegedly in possession have linkage.

26 entities under lens

SEBI had initiated a crackdown during which search and seizure operations against 26 entities of a WhatsApp group were conducted and about 190 devices and records, among others, were seized.

According to SEBI, earnings data and other financial information of nearly 12 companies were leaked through WhatsApp messages. SEBI had said financial figures of Asian Paints in the Whatsapp messages closely matched with those disclosed subsequently by the company to the exchanges. SEBI had also fined persons involved in communicating financial results of Bajaj Auto, Ambuja Cement, Wipro and Mindtree through WhatsApp messages before their official announcements.

SAT found that the SEBI adjudicating officer – who happens to be the same in all the cases – imposed a penalty of ₹15 lakh on each entity. However, SEBI could not detect the source of such information from any of the company officials who are privy to the company results before they are made public. The SEBI official reasoned that the duty of the brokerage firm employees did not involve sending such messages to any of the clients and some were not even clients.

The accused argued that the concept of “Heard on Street” (HOS) is a common practice among traders, market analysts, institutional investors etc. Unsubstantiated information is widely shared and even big journals in the US and news agencies like CNBC, Reuters, Bloomberg and Twitter handles share HOS.

Published on March 25, 2021

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