1. The case arises out of a Show Cause Notice No. SMD/SE/2(126)/2005 issued on 28.07.2005 by the Securities and Exchange Commission of Pakistan (the "Commission") to DJM Securities (Pvt.) Ltd.
(the "Respondent").
2. Brief facts of this case are that between 1/03/2005 and 21/03/2005, the Respondent carried out 12 trades involving 169,400 shares, in the aggregate, of Pakistan State Oil Limited ("PSO"), Oil & Gas Development Company ("OGDC"), Pakistan Oil Field Limited ("POL") Pakistan Telecommunications Company Limited ("PTCL") and Pakistan Petroleum Limited (PPL), through the Karachi Automated Trading System ("KATS") on behalf of three of his clients.
3. In the course of these trades, the Respondent purchased and sold 100,000 shares of PSO, 52,900 shares of OGDC, 11,000 shares of POL, 5000 shares of PTCL, and 500 shares of PPL. Consequently, the trades cancelled each other out and there was no change in the beneficial ownership of the shares.
4. The trading activity carried out by the Respondent 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 which worked to the detriment of the interests of the investors.
5. The Commission obtained the following KATS data from the Karachi Stock Exchange regarding the 12 transactions executed by the Respondent in the month of March alone, which revealed as follows: {{TABLE}} DATE CLIENT CODE SCRIP NO. OF SHARES PURCHASE AND SALE PRICE TIME OF TRADE 15/03/2005 6 PTC-REG 500 87.9 1347570009 1/03/2005 12 PTC-REG 1000 68.75 1412390068 2/03/2005 12 PPL-REG 500 257.5 1337010011 10/03/2005 12 POL-REG 10000 350 1414280034 11/03/2005 12 PTC-REG 1000 88 1434530019 14/03/2005 12 PTC-REG 2500 88.1 1403480027 15/03/2005 12 POL-REG 1000 346 1221140037 16/03/2005 12 OGDC-REG 13100 195.5 1028460033 21/03/2005 12 OGDC-REG 39800 161 945040015 1/03/2005 101 PSO-REG 5500 436 1119110050 1/03/2005 101 PSO-REG 44500 436 1119080004 1/03/2005 101 PSO-REG 50000 436 1119050048 {{TABLE}}
6. After examining the aforesaid data, the Commission issued a Show Cause Notice to the Respondent on 28/07/2005, detailing the aforesaid trade information and asking the Respondent to show cause as to why action should not be initiated against the Respondent under section 17 of the Securities and Exchange Ordinance 1969 (the "Ordinance") and the Brokers and Agents Registration Rules, 2001 (the "Rules"). The Commission also provided a copy of the summary of KATS data so that the Respondent would have adequate opportunity to explain the same. The Respondent was asked to submit a written reply to the Show Cause Notice and the hearing was fixed in Islamabad for 11/08/2005 which was subsequently postponed to 13/08/2005, at the telephonic request of the Respondent. The Respondent was unable to appear before the Commission at the fixed time; he was late by about two and a half hours and did not provide the Commission with any prior notice of delay.
7. The Respondent submitted a written reply to the Show Cause Notice dated 02.08.2005. The Commission requested the Respondent for additional information. He provided the same by his letter dated 08.03.2005. The Respondent also appeared before the Commission in person on 13.08.2005, before the Commission. The points raised by the Respondent in his written reply dated 02.08.2005 were:
(i) "500 shares PTCL regular (trade date 15-03-2005)
One of the brokers of DJM Securities (Pvt.) Ltd. by mistake placed the order of buy instead of sale and afterwards he cancelled out the trade by buying the equivalent number of shares at the same rate. Manipulation of stock is not base on 500 shares."
(ii) "Shares traded on account no. 12 by the name of Col. Rt.
Muhammad Ahmed Nadeem Mr. Col. Rt. Muhammad Ahmed Nadeem is a member of Islamabad Stock Exchange he trades on behalf of his clients through D.J.M. Securities (Pvt.) Ltd. and he requires that all the trades be executed through KATS even if it is a buy and sale order in the same scrip at the same time and same rate. So that he may be able to satisfy his clients that all the trades are done through KATS in case they ask for the KATS confirmation."
(iii) "Shares traded on account no. 101 by the name of Mr. Akhtar Mr. Akhtar placed two orders of PSO 50,000 shares each on the 1st March, 2005 which he tried to cancel afterwards but due to heavy volumes traded in the market and some technical problems in our trading system we were unable to cancel the order as per clients instruction and decided to cancel the order by making a contra entry through KATS to keep unchanged the beneficial ownership of the securities involved."
(iv) "We would state thus that none of the transactions mentioned in your letter were executed with unfair or fraudulent intent on our or our clients behalf. Moreover keeping in view the volumes and volatility witnessed in the month of March, it is hard to see how the changes levied against DJM Securities (Pvt) Limited should be termed as justified."
8. In the hearing held on 13/08/2005, the Respondent stated that he is dealing in a large volume of securities and has some high net worth clients who place huge volumes of orders during the day and that their positions may match un-intentionally. Further the total numbers of shares in which transactions have been made, as stated in the Show Cause Notice, is just 169,400. This is only a small proportion of the total trades made in the said period of time, and therefore these trades cannot manipulate the market.
9. The Respondent requested that the Show Cause Notice be withdrawn for the reason that the Respondent had neither violated any provision of the Ordinance, including section 17, nor any of the Rules. The trades were not executed to mislead or manipulate the market price of the shares and even other wise constitute such a small part of the total trades executed on the dates in question that these trades could not have manipulated the market.
10. I have read and heard the arguments of the Respondent at length and after carefully examining the record, I find that the Commission must address the following questions:
(a) Did the acts or omissions as alleged against the Respondent breach the Rules and do such acts or omissions warrant action against the Respondent?
(b) If the Respondent is found in breach of the Rules, what should be the penalty imposed on the Respondent?
11. I have examined all the relevant issues pertaining to this case in depth as follows:
12. In the course of the Respondent's written as well as oral response to the Show Cause Notice, the Respondent has admitted that he carried out all 12 trades detailed in the Show Cause Notice. Even if the Respondent's claim with regard to the 500 shares of PTCL that his KATS operators made a mistake while processing the transaction is accepted; it does not mitigate the responsibility of the Respondent. The Respondent should have had adequate procedures in place to ensure KATS operators work properly. The current practice shows that KATS operators are insufficiently trained and are inexperienced for their job. I am not aware whether or not any action was taken against the KATS operators who had made the said mistake. The Respondent, by ignoring the negligent and erroneous practices of the KATS operator, who is an employee of the Respondent has infact encouraged his employee to conduct his business in a manner contrary to the Rules and has failed to exercise due skill, care and diligence in the conduct of business. {{TABLE}} DATE SCRIP BUYER'S NAME PURCHASED QUANTITY SELLER'S NAME SOLD QUANTITY MATCHED QUANTITY STRIKE PRICE (Rs.)
01/03/2005 PTCL Shahid 1000 Syed Ilyas 25,000 1,000 68.75 Pervaiz Rizvi 02/03/2005 PPL Mumtaz 1000 Muhammad 500 500 257.50 Ali Malik Qasim Janjua Ghulam 1000 Pervaiz 10/03/2005 POL Mumtaz 15,700 Saif Ur 500 10,000 350.00 Ali Malik Rehman Saif Ur 200 Saqib Malik 5,000 Rehman Rizwan 5,000 Ahmed 11/03/2005 PTCL Saqib 16,000 Malik Rashid 1,000 1,000 88.00 Malik Irfan Rizwan 25,000 Ahmed Malik 1000 Rashid 14/03/2005 PTCL Syed Ilyas 100,000 Mumtaz Ali 25,000 2,500 88.10 Rizvi Malik 15/03/2005 POL Syed 1,000 Sikander 6,000 1,000 346.00 Qaiser Hayat Bakth Zameer Shah 16/03/2005 OGDC Saqib 13,100 Mumtaz Ali 200,000 13,100 195.50 Malik Malik 21/03/2005 OGDC Abid 50,000 Irfan 1,000 39,800 161.00 Malik Khurram Qureshi Farasat Ali 1,500 Ch. Ashiq Ali 50,000 {{TABLE}}
15. The practice of brokers operating through other brokers whether of the same exchange or of other exchange(s) is an unhealthy practice detrimental to the interest of investors. I am not aware whether the investors investing through Col. Nadeem are aware of the fact that their securities are being traded through the Respondent. The investors who have invested through Col. Nadeem do not have any contract with the Respondent and in case any dispute arises, they stand at a weak legal position, as their transactions are being carried out and recorded in Col. Nadeem's name.
This practice of broker appointing a sub-broker not only hampers the functioning of stock exchange and the Commission while undertaking monitoring and surveillance of trading activity but also compromises on transparency of the market. The aforesaid practice is also contrary to international best practices undertaken by brokerage houses. The Respondent has thus acted against the interest of the investors and has failed to act with due skill, care and diligence in conduct of his business by allowing his client, Col. Muhammad Ahmad Nadeem, to act on behalf of other clients under one account.
16. The relevant KATS data independently obtained by the Commission from the Karachi Stock Exchange, (which was made available to the Respondent and has not been disputed by it) establishes that the aforesaid trades had the effect of canceling each other out and did not result in any change in the beneficial ownership of these shares. Such trading activity interferes with the fair and smooth functioning of the market and undermines market integrity by creating an impression of shares being traded in the market when in fact the trades have been cancelled out by the same person. The interests of the investor are compromised due to the fact that they receive a false impression of trading in the market which is more than likely to influence the decision of any reasonable investor to invest or trade in the market.
17. For the three transactions dealing in shares of PSO, made through account No. 101, the Respondent placed a new order, at the same price as the previous order that resulted in reversing the previous order. The practice of entering a reversal order in KATS instead of canceling the wrong order is an undesirable practice that creates the appearance of false trading and is therefore illegal. By failing to take any corrective measures the Respondent has allowed such activities to continue unabated.
18. The Respondent could not justify or explain the technical problems cited in his reply as the reason for entering a contra entry. In failing to ensure that the order was cancelled in a timely manner and instead revising the previous order entered in KATS by the KATS operators, the Respondent has acted improperly and negligently in breach of his duty to act with due skill, care and diligence in the conduct of his business. Consequently, the Respondent has failed in his duty to maintain high standards of integrity, promptitude and fairness in the conduct of his business.
19. It is clear from the facts detailed above that the Respondent has failed to follow the requirements of the Code of Conduct prescribed for brokers. By executing and permitting the execution of trades which cancelled each other out and did not result in the transfer of beneficial ownership the Respondent has indulged in acts which have interfered with the fair and smooth functioning of the market to the detriment of the interests of investors. The Respondent has failed to maintain high standards of integrity, due skill and care in the conduct of his business. He has indulged in manipulative, fraudulent and deceptive practices, has engaged in malpractices and has not complied with statutory requirements, and has therefore acted in violation of Rule 8(iv) of the Rules.
(b) What should the order be?
20. The violation of the Rules is a serious matter. In exercise of the powers under Rule 8(b) of the Rules, conferred by S.R.O.847(I)/2005 dated 19/08/2005, I hereby impose on the Respondent, a penalty of Rs. 25,000/- (Rupees Twenty Five Thousand only), which should be deposited with the Commission no later than thirty (30) days from the date of this Order.
21. In addition to the aforesaid, I hereby direct the Respondent to abstain from buying and selling of shares in a manner that does not result in a change in the beneficial ownership of the shares, failing which action will be taken against him in accordance with law.
22. This Order is issued without prejudice to any other action that the Commission may initiate against the Respondent in accordance with the law on matters subsequently investigated or otherwise brought to the knowledge of the Commission.