1 The present matter arises out of a Show Cause Notice ("the Notice") bearing No. SMD/SCN/20/2005 dated September 8, 2005 issued by the Securities and Exchange Commission of Pakistan ("the Commission") to Abdul Aziz Tayub Patel ("the Respondent").
2. Brief facts of this case are that between March 1, 2005 and March 16, 2005, the Respondent, engaged in 10 trades in the shares of National Bank of Pakistan ("NBP"), Oil & Gas Development Company ("OGDC"), Pakistan Petroleum Limited ("PPL"), Pakistan State Oil Limited ("PSO"), and Pakistan Telecommunication Company Limited ("PTCL"), through the Karachi Automated Trading System ("KATS") of the Karachi Stock Exchange (Guarantee) Limited on behalf of three clients.
3. In the course of these trades, the Respondent purchased and sold, on behalf of the same clients, 500 shares of NBP, 17,000 shares of OGDC, 3700 shares of PPL, 5000 shares of 1 The Respondent has not appeared before the Commission on any of the three hearing dates fixed by the Commission.
PSO and 10,000 shares of PTCL. Each of these trades cancelled each other out with the effect that there was no change in the beneficial ownership of the shares.
4. The trades as aforesaid interfered with the fair and smooth functioning of the market by creating a false and misleading appearance of trading activity in the scrips mentioned hereinabove and were therefore to the detriment of the interests of the investors.
5. The Commission had obtained the following KATS data from the Karachi Stock Exchange (Guarantee) Limited for the relevant period, which revealed that during the month of March, 2005 the Respondent had executed the following trades which had cancelled each other and had not resulted in change in beneficial ownership.
6. {{TABLE}} 7.
Trade Date Client Code Name of Share Number of Shares Rate of Sale & Purchase Time of Trade Execution 3/03/2005 330 NBP-REG 500 140.4 1254530023 9/03/2005 447 OGDC-REG 10000 159.5 1404160006 11/03/2005 447 OGDC-REG 2000 164 946590044 15/03/2005 447 OGDC-REG 5000 180 1004320058 7/03/2005 447 PPL-REG 2000 265 1146200013 16/03/2005 447 PPL-REG 1000 315 1039140017 16/03/2005 330 PPL-REG 200 304 1253150034 16/03/2005 330 PPL-REG 500 305.5 1253410055 1/03/2005 329 PSO-REG 5000 421 956290084 9/03/2005 447 PTC-REG 10000 89.5 1413570063
8. In view of the above findings, the Commission issued the Notice to the Respondent on September 8, 2005, detailing the aforesaid facts and asking him to show cause as to why action should not be initiated against him in pursuance of Rules 8(a) and 8(b) of the Brokers and Agents Registration Rules, 2001 ("the Rules"). A copy of the aforesaid KATS data was annexed to the Notice in order to provide to the Respondent an opportunity for answering to the same.
7 The Respondent sent his written reply to the Notice dated September 14, 2005. Some of the points raised by the Respondent in his reply are as follows: a. "...regarding PPL 3000 Shares vide cliant code No 330 in which 500 Shares NBP and 700 Shares PPL the transaction result come in Nil, Cliant Code No 329 5000 Shares of PSO also result in Nil." b. "As you yourselves stated that the entries ultimately cancelled each other and did not result in any change of the cliant Position." c. "As a routine practice the entry Put in KAT which may in hand of BADLA system with stock routine, if it was effected the delivery would be made accordingly as per cliants own position It, does not mean that small quantity in the Shares any misleading appearance of trading activity in the market, nor it effects the trading volume and Shares Price."
8. The Respondent did not appear in person for hearing before the Commission on September 22, 2005 as required by the Notice. Furthermore, He did not request for an adjournment and failed to communicate to the Commission any grounds for not attending the hearing on September 22, 2005.
9. The Commission on its own motion granted the Respondent (via its letter dated September 22, 2005) another opportunity to appear on September 30, 2005.
10. The Respondent sent a reply dated September 29, 2005 (via fax and later through courier) to the Commission. The main points raised by the Respondent in his letter are as follows: a. "Reference your letter No SMD/SCN/20/2005 dated September 22, 2005 regarding show cause notice No SMD/SCN/20/2005 dated September 8 2005 and fixation of hearing on September 22, 2005 I regret that could not appear before the Commission on September 22, 2005." b. "Now a day we are busy in filing of Income Tax Returns, the last date of which is September 30, 2005 and from October 04/05 the month of Ramzan will start." c. "Under the circumtance the date fixed for hearing before you on September 30, 2005 be adjarned and New Date be fixed after the month of Holy Ramzan, for which I shall be highly greatful to you."
11. The Commission replied to this letter on the same date i.e. on September 29, 2005, in which, took a very serious notice of the Respondent's failure to appear twice before the Commission and his irresponsible attitude towards the regulator. In the interest of justice however the Commission provided the Respondent a final opportunity to appear before the Commission on October 3, 2005.
12. The Respondent replied vide its letter dated October 1, 2005 as follows: a. "We acknowledge the receipt of your letter No. SMD/SCN/20/2005 dated September 29, 2005 in respect of show cause Notice No. SMD/SCN/20/2005 dated September 08, 2005 and which have been re-fixed again on October 03, 2005 allowing very short time for preparation of details, etc." b. "Prima- facie we have not violated any law and apparently the examination of our records revealed that the transactions appearing in your Annexure "A" were not transacted at all." c. "However, to comply your letter, we have referred the case to our corporate consultant M/s. Rahim Iqbal Rafiq & Company, Chartered Accountants, who after initial study of the case pointed out that the show cause notice issued by Securities and Exchange Commission of Pakistan - is incomplete and Page No. '2' is missing. Further they have also asked us to provide the details and evidence required for rebuttal purpose." d. "Meanwhile, we are also approaching Karachi Stock Exchange (Guarantee) Limited to furnish us the copies of the transactions transacted by our client on those particular dates as mentioned in your annexure."
13. I have provided the Respondent with three opportunities to explain his contentions in person and after carefully examining the record, I have addressed the issues arising out of this matter hereunder: i. The Respondent in his written reply dated September 14, 2005 provided explanation of the transactions annexed to the Notice. In respect of these trades, the Respondent has taken the plea that "As you yourself stated that the entries ultimately cancelled each other and did not result in any change in the client Position." The Respondent also explained in the same letter regarding the transactions highlighted in Annexure A of the Notice and attached copy of a CDC Account Balance Report, which does not give details about the transactions under review. ii. The Respondent's mere attempt to explain the 10 trades as described in the annexure to the Notice is admission that these trades were actually carried out by the Respondent. However, from the above mentioned plea of the Respondent it is evident that he is ignorant of the fact that any trading activity, which does not result in change in beneficial ownership, is against the law.
Furthermore, the Respondent's explanation that these trades resulted in 'Nil' is evident that the Respondent believes such trades to be lawful. This plea does not hold merit and is contrary to the law. In failing to take cognizance of the provisions of the law, the Respondent has acted negligently.
He has also failed to exercise due skill and care towards his clients by failing to ensure lawful activity at his brokerage firm. iii. Additionally, vide his letter dated October 1, 2005 the Respondent claimed that "apparently the examination of our records revealed that the transactions appearing in your Annexure 'A' were not transacted at all." It is clear from the written replies received from the Respondent that he has given contradictory statements before the Commission and has tried to mislead the Commission by furnishing wrong or false information. Such statements and conduct puts the integrity of the Respondent under serious question. iv. To enable the Respondent to clarify his position and as per the law, the Commission provided him with ample opportunities of hearings on September 22, 2005 then September 30, 2005 and finally October 3, 2005. However, the Respondent has failed to appear without stating any cogent reasons for his inability to appear which shows his irresponsible attitude towards the regulator. On one occasion he did not even inform the Commission that he will not be able to appear however, in the interest of justice the Commission afforded him a second opportunity of being heard. Despite his repeated failures to appear the Commission fixed a date of hearing of October 3, 2005.
By way of explanation of his careless attitude, the Respondent in his letter dated October 1, 2005. took the plea that he does not have sufficient time to prepare for the hearing and requested an adjournment. This plea does not hold merit because the Notice was served on the Respondent, he repeatedly failed to appear and had over three weeks to prepare and explain his position before the Commission until the final date of hearing of October 3rd, 2005.
The Respondent took another plea in his letter dated October 1, 2005 by stating, "Meanwhile, we are also approaching Karachi Stock Exchange (Guarantee) Limited to furnish us the copies of the transactions transacted by our client on those particular dates as mentioned in your annexure."
This reveals that the Respondent is not properly keeping and maintaining the books of accounts, records and documents as required by law. In my view the plea of the Respondent does not hold merit and a serious note is being taken of such statement that the Respondent is not maintaining proper records of transactions of his clients with due skill and care. The Respondent was also made aware of the fact in the Notice that the details of the transactions in annexure A of the Notice were obtained by us from KSE.
The relevant KATS data independently obtained by us from the Karachi Stock Exchange (Guarantee) Limited reveals that all the aforesaid trades canceled each other out and the beneficial ownership of these shares did not change. Such practice on the part of the Respondent interfered with the fair and smooth functioning of the market because it falsely depicted trading activity. The interests of the investor also suffered because they received a false impression of trading in the market which impacted upon their decision to trade in particular scrips in the market. viii. It is the broker's responsibility to maintain high standards of integrity, promptitude and fairness and exercise due care and skill in the conduct of his business. The Respondent should have been diligent to avoid carrying out any trading activity that would have interfered in fair and smooth functioning of the market and cause detrimental result to the investors' interest. The Respondent should have known that such trading is a serious offence and he should have taken adequate measures to eliminate the possibility of executing any trades which would result in no change in beneficial ownership. ix. By engaging in and allowing trades in the market that lead to creating a false impression of trading activity in particular scrips, is not only against high standards of integrity but is also improper, dishonorable and disgraceful and against the law. x. It is also evident from the facts detailed above that the Respondent has failed to follow the requirements of the code of conduct. He has executed and permitted to execute trades which have cancelled each other out and have not resulted in the transfer of beneficial ownership. xi. In failing to ensure that a proper system and policy is in place to eliminate any chance of such trading activity, the Respondent has failed to act with due skill, care and diligence in the conduct of his business. Consequently, the Respondent has failed in its duty to maintain high standards of integrity, promptitude and fairness in the conduct of all its business and has in fact indulged in dishonorable, disgraceful and improper conduct on the stock exchange, and has therefore acted in violation of Rule 8(iv), read with Rule 12 of the Rules.
14. The Commission takes a serious note of the violation of the Rules and failure of the Respondent to promptly respond to the Commission on matters of important nature. The Commission is entitled to suspend the license of the Respondent. In the present circumstances however, the Commission has decided to not exercise this power. Therefore in exercise of the powers under Rule 8(b) of the Rules, I hereby impose on the Respondent, the penalty of Rs. 50,000.00 (fifty thousand) which should be deposited with the Commission, no later than 30 (thirty) days from the date of this Order and furnish the receipt challan to the Commission.
15. Additionally, I hereby direct the Respondent to abstain from buying and selling of shares in a manner that the trades do not result in a change in beneficial ownership of the shares failing which the Commission will proceed against them according to law. Furthermore, the Respondent must comply with its responsibility to keep and maintain the books of accounts, records and documents as specified in the Securities and Exchange Rules, 1971 and the Stock Exchange Members (Inspection of Books and Record) Rules, 2001.
16 This Order is issued without prejudice to any other action that the Commission may initiate against the Respondent in accordance with law on matters subsequently investigated or otherwise brought to the knowledge of the Commission.