IMRAN INAYAT BUTT, DIRECTOR/HOD (MSCID).--This order shall dispose of the proceedings initiated through Show Cause Notice bearing No,MISC/MSW/ SMD/1(5)2004/14.71 dated January 17, 2012 ("SCN") issued by the Securities and Exchange Commission of. Pakistan ("Commission") under section 22 of the Securities and Exchange Ordinance, 1969 ("the Ordinance") read with Rule 12 of the Brokers and Agents Registration Rules, 2001, ("the Brokers Rules") to United Capital Securities (Pvt.) Limited ("the Respondent").
2. The brief facts of the, case are that the Respondent was a member of Karachi Stock Exchange (Guarantee) Limited ("KSE") and registered with the Commission as broker under the Brokers Rules. On examination of the Karachi Automated Trading System ("KATS") data from August 1, 2011 to November 1, 2011 ("the Period"), it was observed that there were volatile price movements in the following scrips:--
(i) Armor Textile Mills Limited ("ANNT")
(ii) Climax Engineering Company Limited ("CLIM")
(iii) Colony Sarhad Textile Mills Limited ("COST")
(iv) Bala Enterprises Limited ("HAEL")
(v) Hamid Textile Mills Limited ("HATM")
(vi) Libass Textile Limited ("LIBT")
(vii) Mubarak Textile Mills Limited ("MUBT")
(viii) United Brands Limited ("UBDL")
3. The detailed analysis of the trading data for the aforementioned scrips ("the Scrips") indicated that two clients of the Respondent namely Ejaz Ahmed Khan ("EAK") and Shahmir Khan ("SK") actively traded in the Scrips in a manner whereby majority of their transactions hatched with each other and resulted in price appreciation of ' he Scrips.
4. The price summary of the Scrips during the Period indicated considerable price movement with very thin trading volume on the days when EAK and SK traded. Moreover, in majority of the instances the Scrips closed at the upper price limit of the day. consecutively for many days.
Following are the details of the Scrips along with price movement during the period:-- Sr No Scrip NameShares Prices (for the days when the clients traded During the period)
Open Price Close Price Increase/DecreaseHigh Price Date Rate (Rs.)Date Rate (Rs.)Date Rate (Rs.)
1 ANNT 4- OCT- 1111.00 10- OCT- 1114.75 34.09% 10- OCT- 1114.75 2 CLIM 10- OCT- 117.00 1- Nov- 116.99 0.14% 1- NOV- 118.99 3 COST 8- AUG- 110.30 4- OCT- 115.65 1783.33% 7- SEP- 115.65 4 HAEL 4- AUG- 118.00 6- SEP- 1111.00 37.50% 6- SEP- 1111.00 5 HATM 10- AUG- 111.05 12- AUG- 113.90 271.43% 12- AUG- 113.90 6 LIBT 4- OCT- 110.60 6- OCT- 113.55 491.67% 6- OCT- 113.55 7 MUBT 25- AUG- 111.00 12- OCT- 111.40 40.00% 30- SEP- 112.80 8 UBDL 19- AUG- 1127.0027- SEP- 1145.7069.26% 27- SEP- 1145.70
5. In order to further probe the matter, the date-wise trading details of the Scrips were examined which indicated that EAK and SK, while trading through the Respondent, were the main traders during the days when the share prices witnessed an increase. Further, the pattern of trading revealed circular trades between EAK and SK, which generated artificial volume in the Scrips. The date-wise trading summary of the clients' activity in the Scrips is indicated below:-- DATE VOLUMEEJAZ AHMAD KHANSHAHMIR KHAN SCRIP OPEN PRICE(RS.)CLOSE PRICEBUY QTYSOLD QTYBUY QTYSOLD QTY 4-Oct-11ANNT 11.00 11.99500 500 5-Oct-11ANNT 11.99 12.90500 500 7-Oct-11ANNT 12.90 13.85500 500500 8-Aug-11COST0.30 1.30 500 500500 9-Aug-11COST1.30 2.302.000 2,0002.000 10 Aug-11COST2.30 3.30500 500500 16-Aug- 1 1COST3.11 3.99500 500500 6-Sep-11COST3.66 4.651.000 1.0001.000 7-Sep-11COST4.65. 5.65500 500500 21-Sep-11COST1.60 0.60500 500 500 30-Sep- 11COST0.60 1.60500 500 500 4-Oct-11COST1.60 2.55500 4-Aug-11HAEL7.40 8.00650 500 5-Aug-11HAEL8.00 9.00500 500500 8-Aug-11HAEL9.00 9.981,000 500 500500 500 19-Aug-11IIAEL9.00 10.00500 500 500 6-Sep-11IIAEL10.00 11.00650 650 650 10 -Aug- 11HATM1.05 2.00 '500 500500 11-Aug-11HATM2.00 3.00500 500500 12-Aug-11HATM3.00 3.901,500 1.5001.500 4-Oct-11LIBT 0.60 1.60 500 500 5-Oct-11LIBT 1.60 2.60500 500 6-Oct-11LIBT 2.60 3.55500 500 7-Oct-11LIBT 3.55 2.551500 500 1000 19-Aug-11UBDL27.00 28.35500 500500 22-Aug- 11UBDL28.35 29.50500 500500 5-Sep-11UBDL29.50 30.74500 250 250250 250 6-Sep-11UBDL30.74 31.68625 250375250 250 7 -Sep-11UBDL31.6832.31600 350 250 250 350 8-Sep 11 UBDL32.3133,40620 275 335 275 275 9-Sep-11UBDL33.4034.941.000 500 500 500 500 12-Sep-11UBDL.34.9436.34500 250 250 250 250 15-Scp-11UBDL36.3437.83500 250 250 250 250 16-Sep-11UBDL37.8339.611.477 250 250 250 250 19-Sep-11UBDL39.6141.05500 250 250 250 250 20-Sep-11UBDL41.0540.9520,700250 350 250 250 21-Sep-11UBDL 40.9542.75500 250 250 250 250 22-Sep-11UBDL42.7544.68500 250 250 250 250 23-Sep-1lUBDL44.6842.450 250 26-Sep-11UBBL42.4543.79600 250 350 250 250 27-Sep-11UBDL43.7945.7 4.000 20-Oet -11CLIM 5.006.00 500 500 21-0e1 11 CLIM 6.007.00 500 500 25-0e1-11CLIM 7.00 7.99 500 500 1-Nov-11 CLIM 7.99 6.99 500 500 500 25-Aug-11MUBT1.00 1.25 500 28-Sep-1 IMUST1.00 1.88- 500 30-Sep-11MUBT1.88 2.80 500 500 500 12-Oct-11MUST0.621.40 10.505305 105
6. While reviewing the order level data and trading data of EAK and SK during the Period, it was noted that at various instances EAK and SK placed their bids and offers regularly at the upper limit in such a way that bids and offers matched with each other and the Scrips closed at the upper price limit of the day.
7. In view of the above, the Commission sought information regarding the trading accounts of EAK and SK from the Respondent vide letter dated September 29, 2011. The information provided by the Respondent revealed that EAK and SK are related .to each other as SK is the son of EAK. Prima facie it appeared that EAK and SK were trading in collusion with each other in the Scrips.
8. In light of the aforementioned, the SCN dated 'January 17, 2012 under section 22 of the Ordinance read with Rule 12 of the Brokers Rules was issued to the Respondent. The Respondent was asked to submit a written reply within seven days of the date of SCN and hearing was fixed on January 31, 2012 at Commission's Head Office, Islamabad.
9. The Respondent vide its letter dated January 31, 2012 replied that both the clients acted on their own. Further, it requested to hold the hearing at Karachi. The Commission in the interest of justice vide its letter dated January 31. 2012 acceded to the request of the Respondent and directed it to submit the written response to the SCN by February 9, 2012.
10. The Respondent vide its letters dated February 1, 2012, February 24,, 2012 and March 14, 2012 reiterated its willingness to appear in person on hearing, however, failed to submit its written response to .the SCN despite of various reminders.
11. It is pertinent to mention that during the course of the present proceedings, the Respondent was suspended by the KSE on February 1, 2012 on account of non-resolution of various investors' complaints. Subsequently, the Respondent was expelled from the KSE on March 5, 2012 due to its inability to resolve the outstanding investors' complaints.
12. The hearing in the matter was held on March 22, 2012. The hearing was attended by Mr. Wasi Mirza, CEO and Mr. Haroon Younus, Director <b>("Representatives of the Respondent")</b> on behalf of the Respondent.
13.The Representatives of the Respondent at the time of hearing made following verbal submissions:--
(i) The' issue was revealed to the Respondent only after the, receipt of the Commission's SEN. The trading practice of EAK and SK didn't raise any suspicions at the Respondent's end as
(a) EAK and SK were operating in very illiquid scrips and quantum of their transactions was minima/.
(b) Both the clients were not executing Blank Sales, as they possessed position for the particular transactions they executed.
(c) No significant profit/loss was booked by the clients, due to circular trading pattern.
(ii) The Representatives of the Respondent explained that EAK belongs to an area of interior Sindh and used to place orders through telephone. They further stated that after the receipt of the Commission's. SCN, the clients were inquired regarding the rationale behind the execution of the trades in question, for which the clients didn't provide any proper justification. Further due to routine activity of the clients in particularly thinly traded scrips the KATS operator of the Respondent was also unable to comprehend the trading pattern of the clients.
(iii) The trading accounts of the both the clients were closed by the Respondent after the receipt of the inquiry letters from the Commission.
(iv)The Respondent admitted that this was shocking news for its management that such malpractice was being conducted through their brokerage house and it was not aware of the details of the matter.
(v) The Respondent contended that due to lack of business during the period tinder review it was practically impossible for the Respondent to scrutinize the clients who were bringing in business and apparently not involved in any market abusive activity.
(vi)The Respondent further argued that it had no intention . or involvement in any such act which is in contrast with the rules and regulations. Further. no director/ employee was part of the scheme of trading practice executed by EAK and SK.
(vii) The Respondent pleaded that keeping in view the noninvolvement of the Respondent in the matter and the fact that Respondent is an expelled member of the KSE and is engaged in the settlement of the claims of its clients in a make shift office in the premises of the KSE, the Commission may take a lenient view in the matter.</i>
14. I have examined the facts, evidences and documents on record, in addition to written and verbal submissions made on behalf of the Respondent and my findings on the issues are as follows:--
(i) Accounts of EAK and SK were not operating independently rather they were trading in correlation with each other. The Account Opening Forms of both clients indicate clear linkages and they are related as father and son. Moreover, the transactions were being operated through same terminal and by same KATS operator. Further, numerous transactions were reversed on the same day; therefore, beneficial ownership for the transactions did not change. The trades in question resulted in price inflation and generation of artificial volume which in turn created false market.
Therefore, the element of collusion is established.
(ii) The contention of the Respondent that it was not aware of the execution of the transactions being executed by EAK and SK indicates irresponsible and negligent conduct on part of the Respondent and weak internal controls. The clients of the Respondent were operating in illiquid scrips and were contributing to majority of its volume. Further, at various occasions the clients were involved in circular trading thus buying and selling among themselves. It was the duty of the Respondent to ensure that its employees (traders) are vigilant and well trained to detect and prevent execution of such transactions.
(iii)The contention of the Respondent that no significant profit/loss was booked by the EAK and SK by trading through its brokerage house is irrelevant. The trading executed between both the clients resulted in considerable price appreciation of the Scrips. Further, in majority of the instances the Scrips closed at the upper price limit of the day. Consecutively for many days.
(iv) The Respondent has contended that there was no involvement by the management/employee for any manipulative activity. It is pertinent to mention that the Respondent was providing brokerage services to its clients for transactions which resulted in artificial volume and price increase in the Scrips mentioned above. The Respondent was responsible for the execution of each and every transaction executed through its terminals. It is mandatory for any entity being in the business of brokerage to ensure the validity and genuineness of its clients and the trades being executed through its terminals.
15. After a detailed and thorough perusal of facts and the contentions and averments made by the Representatives of Respondent during the course of hearing, it is evident that the Respondent showed negligence in conduct of its business and was unable to detect/scrutinize the abnormal trading executed through its terminals. Moreover, the transactions in question executed through the Respondent resulted in price inflation and generation of artificial volumes in the Scrips, thus created false market. Being in the business of brokerage, it was mandatory on the Respondent to execute its business with due care and skill and to put in-place proper systems and controls to ensure that its business is conducted according to the law.
16.Keeping in view the aforementioned, it is established that the Respondent being a broker during the period under review, failed to abide by Rule 12 of the Brokers Rules and has violated Clauses Al, A2, A4 and A5 of the Schedule III of the Brokers Rules punishable under section 22 of the Ordinance.
17.The violation committed by the Respondent is a matter of grave concern, however, in view of the poor financial condition of the Respondent and in order to enable it to satisfy all outstanding investor's complaints a lenient view in the matter is being taken. Therefore, in exercise of the powers under section 22 of the Ordinance, I hereby impose on the Respondent a penalty of Rs,10,000 (Rupees Ten Thousand only).
18. The matter is disposed of in the above manner and the Respondent is directed to deposit the fine in the account of the Commission being maintained in the designated branches of MCB Bank Limited not later than thirty (30) days from the date of this Order and furnish the copy of the deposit challan to the undersigned.
19. This Order is issued without prejudice to any other action that the Commission may initiate against the Respondent and its clients in accordance with law on matters subsequently investigated or otherwise brought to the knowledge of the. Commission.