1. This Order shall dispose of the proceedings initiated through Show Cause Notice ("SCN") bearing No. 1(14)ISMAILIQBAL/MSW/SMD/2013/02 dated April 23, 2013 under Section 15E(3) of the Securities & Exchange Ordinance, 1969 ("the Ordinance") issued by the Securities and Exchange Commission of Pakistan ("the Commission") to Mr. Irfan Ismail ("the Respondent").
2. At the outset, it is imperative to give an account of the facts relating to the case. The Respondent was employed at Elixir Securities Pakistan (Pvt) Limited ("Elixir"), Broker/Trading Right Entitlement Certificate Holder of the Karachi Stock Exchange Limited ("KSE"), in the capacity of KATS Operator.
As a part of his employment he was responsible for the execution of orders of the Foreign Clients of Elixir.
3. On perusal of trading data of Karachi Automated Trading System of KSE, it was observed that Mr. Aamir ("Aamir") traded extensively in the shares of various companies during the Period from May 01, 2012 till April 17, 2013 ("the Period"). It is pertinent to mention that trading in the account of the Aamir was conducted through Ismail Iqbal Securities (Pvt) Limited ("IIS"), Broker/ Trading Right Entitlement Certificate Holder of KSE.
4. The analysis of trading pattern of Aamir during the Period indicated that his trading was carried out significantly in correlation with the trading of the Foreign Clients of Elixir, later termed as "Foreign Clients".
5. The detailed analysis of trading by Aamir was performed which signified the following facts:
(i) He was a day trader and squared his position by day end or by next day.
(ii) A significant portion of his trading was in correlation with the Foreign Clients where his trading completely or partially matched with the Foreign Clients.
(iii) On average 98% of trading by Aamir matched with the trading of Foreign Clients out of his total trading activity on the specific dates when his trading was in correlation with the Foreign Clients.
(iv) Scrutiny of order level data showed that Aamir used to place orders to trade in the shares of companies around the same time when the Foreign Clients were placing orders to purchase/sale shares of the same companies through Elixir.
(v) A significant majority of trading in the account of Aamir was directly synchronized with the placement of orders and trading of Foreign Clients of Elixir which resulted in matching of transactions.
6. The scrip-wise trading by Aamir and the consequent profit earned is enumerated in the Table -1 below: {{TABLE}} Table - 1 Sr. Company Name BOT_QTY (shares) SOLD_QTY (Shares) Profit (Rs.)
1 Engro Corporation Limited 71,100 71,100 68,759 2 Fauji Fertilizer Bin Qasim Limited 50,000 50,000 23,810 3 MCB Bank Limited 261,400 261,400 325,312 4 National Bank of Pakistan 200,000 200,000 58,375 5 National Refinery Limited 20,000 20,000 82,839 6 Oil & Gas Development Company Limited 279,500 279,500 263,233 7 Pakistan Petroleum Limited 10,000 10,000 9,900 8 United Bank Limited 414,500 358,000 241,175 TOTAL 1,073,403
7. Considering the nature of trading executed by Aamir, the account details including account opening form, trading statement, financial ledger, copies of trading orders and details of receipts and payments of Aamir were obtained from IIS vide letter dated March 25, 2013. The information received from IIS further highlighted the following facts:
(i) Aamir had mentioned his relationship with the Respondent as brother.
Aamir had authorized the Respondent to operate his trading account maintained with IIS.
(iii) Aamir had nominated the Respondent to receive securities/ cash in his trading account maintained with IIS.
(iv) Aamir had mentioned Respondent's email address in his contact details as his contact person.
(v) The confirmation statement for trading activity in the trading account of Aamir was being sent to email address of the Respondent on daily basis.
In addition to the information received from IIS, the identity details of Aamir were also obtained from National Database and Registration Authority, which revealed that Aamir is the real brother of the Respondent.
8. The information related to the trading and order placement of the Foreign Clients was sought from Elixir vide letter dated March 25, 2013. The requisite information comprised of name of official who received the orders for the Foreign Clients, name of official who executed the trades for the Foreign Clients, any other official / KATS operator who was aware/ involved in the order placement / execution of the Foreign Clients on the given dates and the mode of placing orders by the Foreign Clients along with the dates and timing of the same. The information obtained from Elixir revealed that the Respondent was KATS Operator in Elixir and was responsible for the execution of the orders placed by the Foreign Clients during the Period.
9. Based on the aforesaid trading pattern of Aamir and its significant synchronization with trading of Foreign Clients of Elixir along with the relationship of the Respondent with Aamir, prima facie, established that the Respondent, being an insider, by virtue of his position as KATS Operator at Elixir, had passed on/disclosed the inside information relating to trading orders received from Foreign Clients to Aamir, based on which Aamir indulged in insider trading. Consequently, SCN was issued to the Respondent to explain as to why action should not be taken against him under Section 15E
(3) of the Ordinance. The Respondent was required to appear in person or through an authorized representative before the undersigned at the Commission's Head Office on May 08, 2013 for hearing. Moreover, a letter dated May 02, 2013 was issued to Chief Executive Officer of Elixir with a request to appear at the Commission's Head Office on May 08, 2013 in reference to the show cause notice issued to the Respondent.
10. On the date of hearing the Respondent appeared at the Commission's Office but left without attending the hearing. However, the Chief Executive Officer ("CEO") and Chief Operating Officer of Elixir appeared before the undersigned. The submissions made by them are presented as under:
(a) The CEO apprised that the Respondent is employed at Elixir in capacity of KATS Operator since November 02, 2009. However, he had not been attending the Office since April 29, 2013.
(b) The CEO stated that the facts provided by the Commission regarding the probable involvement of the Respondent in Front Running of the Foreign Clients of Elixir was surprising and shocking for them as the management was totally unaware of this act of the Respondent. Further, he also added that management of Elixir is also in process of seeking legal advice for appropriate action against the Respondent.
(c) They apprised about the efforts being made by the Elixir for attracting Foreign Investment in Pakistani Securities Market.
11. Further, Elixir vide its letter dated May 24, 2013 reiterated the submissions as stated above, the relevant contents of the written response of Elixir are stated as under:
(a) It provided following details regarding the internal controls in place at Elixir to safeguard the interest of its clients: The trading desks are segmented into Foreign Institutions, Local Institutions and Retails and there is separate team for each desk and there is a separate trading room for each segment. All the chat software/ social media access are strictly prohibited in the trading area. Further, all the incoming and outgoing telephonic conversations are recorded. Only the Desk Head of each segment has Master KATS while all the traders have Junior KATS. The compliance team takes post trading reviews on daily basis to check any instances of Front Running.
(b) It highlighted a number of events abroad and in Pakistan being organized by Elixir to promote Foreign Investment in Pakistani Capital Markets.
(c) Eventually, it assured full commitment and cooperation on the behalf of Elixir to the Commission for providing assistance in the particular instance of Front Running.
12. Consequently, the Respondent was given another opportunity of hearing vide letter dated May 09, 2013, vide which he was required to appear on May 17, 2013 at the Commission's Office at 5th Floor, State Life Building # 2, Wallace Road, Karachi to put forward his defense. On behalf of the Respondent, Aamir, brother of the Respondent came to attend the hearing on May 17, 2013.
However, the same could not be held due to some procedural issues.
13. Subsequently, the Respondent was given third opportunity to attend the hearing and to appear at the Commission's Karachi Office on May 23, 2013.
14. On the date of the hearing, Aamir, brother of the Respondent ("the Representative") appeared before the undersigned and made the following verbal submissions:
(a) The Representative admitted that the Respondent was following the orders of the Foreign Clients of Elixir which were provided to him for execution and used this information to execute trading in his account.
(b) The Representative asserted that the Respondent was not aware that trading in such a manner is violation of Rules and Regulations. He submitted that he had no idea regarding illegality of nature of the offense and consequences of such type of transactions.
(c) The Representative apprised that his family was going through very difficult circumstances. He submitted that he belongs to a very poor family and resided in area of Karachi where law and order situation was worsened