1. The matter arises out of a Show Cause Notice bearing No. SMD/SCN/1/2005 dated 15/07/2005 (hereinafter referred to as "the Notice") issued by the Securities and Exchange Commission of Pakistan (hereinafter referred to as "the Commission") to Worldwide Securities (Pvt.) Limited (hereinafter referred to as "the Respondent") Member-broker Karachi Stock Exchange (Guarantee)
Limited (hereinafter referred to as "the KSE").
2. Brief facts of this case are that between 1st March 2005 and 31st March, 2005, the Respondent carried out 104 trades of the shares involving total 3,446,700 shares of National Bank of Pakistan ("NBP"), Oil & Gas Development Company ("OGDC"), Pakistan Oil Field Limited ("POL"), Pakistan Petroleum Limited ("PPL"), Pakistan State Oil Limited ("PSO") and Pakistan Telecommunication Limited ("PTCL") through the Karachi Automated Trading System ("KATS") at KSE on behalf of two of its clients.
3. In the course of these trades, the Respondent purchased and sold, on behalf of two clients, 91,600 shares of NBP, 1,551,900 shares of OGDC, 3,300 shares of POL, 40,800 shares of PPL, 364,100 shares of PSO and 1,395,000 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. This practice on the part of the Respondent interfered with the fair and smooth functioning of the market. It creates a false and misleading appearance of trading activity in the scrips mentioned hereinabove and was, therefore, detrimental to the investors' interests.
5. The Commission obtained the KATS data from the KSE for the relevant period, which showed that during the month of March 2005 the Respondent had executed the following trades which cancelled each other out and did not result in change of beneficial ownership: {{TABLE}} DATE CLIENT CODE NAME OF SHARE NUMBER OF SHARES PURCHASE AND SALE RATE TIME OF EXECUTION 14/03/2005 5 NBP-REG 89,900 160.00 1227210045 30/03/2005 A NBP-REG 1,700 120.10 1035080053 1/03/2005 5 OGDC-REG 7,900 123.00 1400320039 2/03/2005 5 OGDC-REG 30,000 125.80 1044290037 3/03/2005 5 OGDC-REG 97,700 122.50 1115480084 7/03/2005 5 OGDC-REG 50,000 142.00 1012200056 7/03/2005 5 OGDC-REG 20,500 142.10 1248250039 7/03/2005 5 OGDC-REG 78,000 142.80 1255540034 7/03/2005 5 OGDC-REG 14,500 141.50 1327270023 7/03/2005 5 OGDC-REG 15,600 141.00 1334170014 7/03/2005 5 OGDC-REG 25,900 141.00 1336470059 7/03/2005 5 OGDC-REG 11,600 141.00 1336520005 7/03/2005 5 OGDC-REG 25,000 140.50 1346370032 8/03/2005 5 OGDC-REG 3,000 141.00 1047360079 8/03/2005 5 OGDC-REG 77,400 140.00 1052330020 8/03/2005 5 OGDC-REG 150,000 143.50 1152510074 8/03/2005 5 OGDC-REG 4,000 147.20 1308350006 8/03/2005 5 OGDC-REG 28,200 148.25 1341210015 9/03/2005 5 OGDC-REG 52,300 153.00 1012330072 9/03/2005 5 OGDC-REG 42,700 158.50 1235130002 9/03/2005 5 OGDC-REG 54,800 158.50 1235150034 14/03/2005 5 OGDC-REG 15,700 173.50 1210010023 14/03/2005 5 OGDC-REG 100,000 173.00 1325400002 15/03/2005 5 OGDC-REG 7,900 179.70 950350068 15/03/2005 5 OGDC-REG 50,000 184.45 1029490068 15/03/2005 5 OGDC-REG 84,700 185.95 1032370048 15/03/2005 5 OGDC-REG 22,000 185.70 1137250056 16/03/2005 5 OGDC-REG 19,400 193.50 1123510058 16/03/2005 5 OGDC-REG 4,500 191.00 1131400032 16/03/2005 5 OGDC-REG 15,300 192.30 1138560062 16/03/2005 5 OGDC-REG 21,400 192.30 1138580022 16/03/2005 5 OGDC-REG 56,500 192.00 1142590065 16/03/2005 5 OGDC-REG 23,800 193.20 1229340040 17/03/2005 5 OGDC-REG 45,200 183.00 1001200028 17/03/2005 5 OGDC-REG 5,200 178.70 1009390031 17/03/2005 5 OGDC-REG 50,000 179.80 1022300043 17/03/2005 5 OGDC-REG 24,300 177.25 1028520002 30/03/2005 A OGDC-REG 105,000 126.15 1259030022 30/03/2005 A OGDC-REG 30,200 126.00 1300500010 30/03/2005 A OGDC-REG 8,500 126.00 1300580037 30/03/2005 A OGDC-REG 63,800 126.25 1301200020 30/03/2005 A OGDC-REG 7,500 128.00 1306130002 30/03/2005 A OGDC-REG 1,900 128.00 1335130010 29/03/2005 A POL-REG 3,200 240.90 1233020028 29/03/2005 A POL-REG 100 242.80 1249380022 11/03/2005 5 PPL-REG 300 297.00 1018170023 29/03/2005 A PPL-REG 17,000 216.50 1308090055 29/03/2005 A PPL-REG 4,500 221.00 1320200027 30/03/2005 A PPL-REG 19,000 231.00 1146290039 1/03/2005 5 PSO-REG 25,000 429.50 1113470057 1/03/2005 5 PSO-REG 15,000 433.00 1117310032 1/03/2005 5 PSO-REG 50,000 436.00 1119310047 7/03/2005 5 PSO-REG 4,700 445.00 1212060045 7/03/2005 5 PSO-REG 49,500 446.25 1213590042 8/03/2005 5 PSO-REG 17,000 452.05 1055180006 8/03/2005 5 PSO-REG 3,100 452.00 1055180009 8/03/2005 5 PSO-REG 19,500 453.00 1056050021 8/03/2005 5 PSO-REG 33,500 455.00 1059520115 8/03/2005 5 PSO-REG 12,700 455.25 1111480005 8/03/2005 5 PSO-REG 23,700 466.50 1123090021 9/03/2005 5 PSO-REG 6,800 496.00 946180123 9/03/2005 5 PSO-REG 600 501.00 1107110041 9/03/2005 5 PSO-REG 20,000 500.00 1111510035 9/03/2005 5 PSO-REG 8,100 501.80 1346560018 21/03/2005 5 PSO-REG 100 451.00 1031300011 21/03/2005 5 PSO-REG 3,500 455.90 1053130020 21/03/2005 5 PSO-REG 3,300 455.00 1054520044 21/03/2005 5 PSO-REG 9,500 455.50 1055240038 21/03/2005 5 PSO-REG 3,100 455.00 1055240040 21/03/2005 5 PSO-REG 10,000 438.00 1350230020 21/03/2005 5 PSO-REG 3,800 439.90 1351360022 21/03/2005 5 PSO-REG 5,000 439.70 1354180020 21/03/2005 5 PSO-REG 5,000 440.00 1354280017 21/03/2005 5 PSO-REG 5,000 440.00 1354300008 22/03/2005 5 PSO-REG 900 424.00 1055520010 22/03/2005 5 PSO-REG 7,900 429.00 1341380008 24/03/2005 A PSO-REG 500 407.55 1048000002 24/03/2005 A PSO-REG 2,900 409.25 1205050007 24/03/2005 A PSO-REG 1,700 408.60 1212100010 24/03/2005 A PSO-REG 2,500 408.10 1233370009 24/03/2005 A PSO-REG 200 408.25 1238460015 31/03/2005 A PSO-REG 10,000 441.10 958480082 2/03/2005 5 PTC-REG 98,500 70.95 1010430053 3/03/2005 5 PTC-REG 47,500 70.30 1345450049 3/03/2005 5 PTC-REG 51,500 70.30 1345550044 3/03/2005 5 PTC-REG 16,000 70.80 1350400043 3/03/2005 5 PTC-REG 70,500 71.15 1359480049 3/03/2005 5 PTC-REG 100,000 71.45 1408280014 7/03/2005 5 PTC-REG 5,000 80.55 1039080002 8/03/2005 5 PTC-REG 114,500 82.60 1211140018 8/03/2005 5 PTC-REG 281,000 83.20 1214580040 8/03/2005 5 PTC-REG 27,500 84.40 1258530047 11/03/2005 5 PTC-REG 51,500 89.30 1443110065 11/03/2005 5 PTC-REG 90,500 89.10 1451530045 11/03/2005 5 PTC-REG 6,000 89.10 1452010012 28/03/2005 A PTC-REG 196,000 67.00 1011330031 29/03/2005 A PTC-REG 3,000 66.30 1306130036 30/03/2005 A PTC-REG 22,500 72.40 1112210032 30/03/2005 A PTC-REG 28,000 72.65 1117160020 30/03/2005 A PTC-REG 50,000 72.70 1117160024 31/03/2005 A PTC-REG 7,500 75.50 1115400021 31/03/2005 A PTC-REG 8,500 75.50 1116290017 31/03/2005 A PTC-REG 24,500 75.00 1141100047 31/03/2005 A PTC-REG 95,000 74.20 1148360022 {{TABLE}}
6. In view of the aforesaid data, the Commission issued a Notice dated 15/07/2005 to the Respondent. In this Notice, the details of the aforesaid facts were provided and the Respondent was asked to show cause as to why action should not be initiated against it under Section 17 of the Securities and Exchange Ordinance 1969 ("the Ordinance") and the Brokers and Agents Registration Rules, 2001("the Rules"). A copy of the summary of the KATS data was also sent so that it would have the opportunity of answering the same. The Respondent was asked to submit a written reply to the Show Cause Notice within five days from the date of the Notice and the first hearing was fixed in Islamabad for 25/07/2005.
7. At the written request of the Respondent, the date of hearing was extended to 02/08/2005 and subsequently to 05/08/2005. The Respondent submitted a written reply to the Show Cause Notice on 28/07/2005. On the date of hearing, Mr. Mohammad Anwar Memon, Chief Executive and Mr. Mohammad Asif, Director appeared on behalf the Respondent in person before me. The main points raised by the Respondent in its written reply and in the course of hearing were as follows:
(a) The Respondent admitted to having executed all 104 transactions detailed in the Notice dated 15/07/2005 and stated that out of the total transactions, 77 transactions had been executed on behalf of a client bearing Code No. 5 ("Client 5") while the remaining 27 transactions were executed on behalf of a client bearing Code No. A ("Client A").
(b) In respect of total 77 trades executed on behalf of Client 5, it stated that 4 transactions had been erroneously recorded due to inadvertent and unintentional mistake of the KATS operator. The shares were purchased by Client A and sold by Client 5. However the KATS operator erroneously entered the code for client 5 while recording the bid for client code A. The error was detected by the back office of the Respondent at the end of the day and was duly rectified.
(c) In respect of the trades executed on behalf of Client 5 and A, the Respondent stated that Client 5 and A were active "day traders" in both the ready and future market. The activity of day trading requires very fast reflexes on the part of investors and KATS operators are bound to be some human errors. The trades in question may have been a result of error on the part of the KATS operator while punching the bids and offers or the trades may have occurred due to overlapping of limit orders given by the Clients 5 and A.
8. On the basis of the aforesaid the Respondent requested that the Notice dated 15/07/2005 be withdrawn. It stated that it had not violated any of the provisions of the Ordinance, including Section 17 or of the Ordinance. The trades were not executed to mislead or manipulate the market price of the shares because these constituted a very small part of the total trades executed on those dates. However, the Respondent admitted that the cumulative impact of all such trades carried out on the exchange may influence the investors.
9. I have heard the views and contentions of the Respondent at length after carefully examining the record, I find that the following issues arise out of this matter:
(a) Whether the acts of commission and omission as alleged against the Respondent constitute a breach of the Rules? If so, up to what extent?
(b) What should the order be?
Each of these issues has been examined seriatim:
(a) Whether the acts of commission and omission as alleged against the Respondent constitute a breach of the Rules? If so, up to what extent?
10. In the course of their written as well as oral contentions, the Respondent has admitted that the Respondent carried out all 104 trades detailed in the Notice dated 15/07/2005. In respect of four of these trades, the Respondent has taken the plea of error on the part of the KATS operator which was subsequently corrected by the back office staff and in respect of the remaining 100 trades they have pleaded human error on the parts of the KATS operator due to the exigencies of day trading.
11. It is evident from the relevant KATS data obtained from the KSE, (which has not been disputed by the Respondent) that all except four of the aforesaid trades had the effect of canceling each other out and did not result in the change in beneficial ownership of these shares. Such trading activity interferes with the fair and smooth functioning of the market due to the fact that it gives the impression of shares being traded in the market when in fact throughout the trades remain in the possession of the same person. The interests of the investor suffer in turn due the fact that they receive a false impression of trading in the market which influences their decision to invest or trade in the market.
12. The Respondent has taken the plea of "human error" on the part of the KATS operator to explain the canceling out effect of the aforesaid 104 transactions.
During the course of the hearing the Respondent informed us that the relevant KATS operator is the employee of the Respondent. They further informed us that all KATS operators are highly skilled and experienced personnel.
13. The plea of "human error" does not hold weight in view of the fact that the KATS operators are highly skilled personnel whose job it is to record such transactions within a very short time period.
Even otherwise the same error cannot be repeated 104 times and that too with the same persons.
14. The fact that the same error has been repeated by the KATS operator in respect of 100 transactions goes to show that the Respondent, who as the employer of the KATS operator, is responsible for its errors and omissions, has failed to exercise due skill care and diligence in the conduct of their business. Further, there is no evidence that the Respondent has taken any action against the KATS operator for his obvious omissions which in itself is a failure on the part of the Respondent to exercise due care and skill.
15. I do not however find the Respondent liable under the Rules, for the four transactions executed by them on behalf of Client A, in view of the documentary evidence provided by the Respondent which confirms that the transactions did in fact resulted in a change in beneficial ownership.
16. In engaging in and allowing trading activity in the market merely for the purpose of creating a false impression of trading activity in particular scrips, is not only contrary to high standards of integrity but is also improper, dishonorable and disgraceful and contrary to law.
17. It is evident 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 to be executed 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.
18. In failing to ensure that a proper system was in place to avoid repeated "error" on the part of KATS operators, and in failing to take action against the KATS operator in respect of his omissions, the Respondent has failed to act with due skill, care and diligence in the conduct of its 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 gross and blatant violation of Rule 8(iv) read with Rules 12 of the Rules.
(b) What should the order be?
19. The Respondent has acted contrary to at least four provisions of the code of conduct prescribed for brokers in the Rules, in violation of Rules 8(iv) read with Rules 12 of the Rules. The violation of the Rules is a serious matter which entitles the Commission to suspend the Respondent's license, however the Commission has elected not to exercise this power at present. Therefore in exercise of the powers under Rule 8(b) of the Rules, I hereby impose on the Respondent, the penalty of Rs.100,000 (Rupees one hundred thousand only). This sum of Rs.100,000 (Rupees one hundred thousand only) should be deposited in the designated bank account maintained in the name of the Securities and Exchange Commission of Pakistan with Habib Bank Limited within 30 days from the date of this order and furnish the receipted challan to the Commission.
20. In addition to the aforesaid, I herby direct the Respondent to abstain from buying and selling of shares in a manner that these do not result in a change in the beneficial ownership of the shares failing which action will be taken against them in accordance with law.
21. 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.