SEBI Penalises and Bans 2 Employees of Sapphire Intrex for Front-running Trades

Moneylife Digital Team 31 July 2024

Investor Interest

Securities and Exchange Board of India (SEBI) has banned Gaurav Singhal (noticee 1) and Alka Jain (noticee 2) of Sapphire Intrex Ltd (big client) for two years and one year, respectively, for front-running trades at the non-banking finance company (NBFC). Additionally, Mr Singhal and Ms Jain are required to return Rs50.51 lakh plus 12% annual interest, which represents the unlawful gains they made from these trades, SEBI says in its order.

In the order, Dr Anitha Anoop, chief general manager (CGM) of SEBI, noted, "I find that the noticees have executed trades which were in the nature of front running on the basis of the non-public information of impending trading of the big client. The said acts of the noticees amounted to 'fraud' as defined under the PFUTP Regulations, 2003 and is an unfair trade practice in terms of Regulation 4(2)(q) of the PFUTP Regulations, 2003. Further, by indulging in such practices, the noticees have made unlawful gains or enrichment of Rs50.51 lakh."

SEBI conducted a detailed investigation into suspected front-running activities concerning trades of Sapphire Intrex by Ms Jain from 1 January 2021 to 31 December 2021. The investigation was initiated following an alert by the National Stock Exchange (NSE), which indicated possible violations of the SEBI Act, 1992, and the SEBI PFUTP Regulations.

SEBI's investigation revealed that Mr Singhal, employed by Sapphire and acting as the dealer responsible for executing trades and Ms Jain were involved in front-running the impending orders of a large client, Sapphire Intrex . The front-running scheme involved Mr Singhal using inside information to place orders through Ms Jain's trading account, resulting in a significant wrongful gain.

Sapphire Intrex, an NBFC registered with the Reserve Bank of India (RBI), primarily invests in and trades in securities and commodities.

During the investigation period, Mr Singhal was employed with Sapphire and executed trades through brokers via the internet-based trading (IBT) platform or by calling broker offices. He was found to have used a mobile number registered in his father-in-law's name to open an email ID in Ms Jain's name. This email ID and mobile number were then used to create and operate a bank account and a trading account in Ms Jain's name. The trading account was allegedly used to front-run Sapphire trades.

SEBI's findings indicated that Mr Singhal, based on advanced knowledge about Sapphire's impending orders, placed orders through Ms Jain's trading account in the same securities being traded by Sapphire. This activity resulted in a wrongful gain of Rs50.51 lakh. The investigation revealed several indicators of front running, including placing orders by the alleged front runner in advance of the large client's orders, taking advantage of non-public information to make profitable trades.

SEBI investigation also involved analysing IP address data provided by Google LLC and ICICI Bank which confirmed that the devices used to access Ms Jain's bank and trading accounts were the same as those used by Mr Singhal. Additionally, IP addresses linked to trading activities from Ms Jain's account were traced to Sapphire's office premises, where Mr Singhal was employed.

Despite Ms Jain's denial of any knowledge or involvement with Sapphire, SEBI's circumstantial evidence, combined with the statements and relationship between the noticees, conclusively established that Mr Singhal had used Ms Jain's account for front-running trades. The investigation noted 81 front-run instances in the equity segment, with a total profit of Rs35.34 lakh.

The market regulator imposed a fine of Rs10 lakh on Mr Singhal and Rs5 lakh on Ms Jain for front-running the trades of the NBFC.

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