India’s stock market regulator Sebi’s effort to penalize stock experts who give misleading advice through media has received a jolt with its appellate tribunal setting aside the Rs20 lakh fine imposed on Mathew Easow, chairman of Mathew Easow Research Securities Ltd, a Kolkata-based broking house. Sebi had penalized Easow for allegedly selling stocks on which he had publicy issued buy recommendations.
The tribunal, which hears appeals against orders issued by Securities and Exchange Board of India (Sebi) also directed the regulator to pay Rs100,000 to Easow for the damage caused to his reputation. A Sebi official said it would examine the order and decide on the next course of action after taking legal opinion. The regulator can appeal against SAT orders in the Supreme Court.
In its order, passed on Thursday, the Securities Appellate Tribunal (SAT) questioned Sebi’s adjudicating officer’s impartiality and ability to understand the stock recommendations made by Easow on CNBC, a business news channel.
In January 2006, Sebi claimed to have found Easow’s firm taking opposite trading position on stocks that he was recommending to investors on CNBC. Sebi alleged that the Easow sold stocks on which he gave buy recommendations to investors. It warned Easow against giving such recommendations. The order was passed by G. Anantharaman, a member of Sebi’s board.
Simultaneously, Sebi also initiated adjudication proceedings against Easow. In such proceedings, a Sebi officer conducts an independent enquiry and imposes a penalty, if required, in accordance with the seriousness of the offence. In September 2006, the adjudicating officer of Sebi imposed a Rs20 lakh penalty on Easow on grounds that his firm made a profit of Rs6.7 lakh by selling stocks of four companies which he had recommended to investors.
Easow’ legal counsel, Somasekhar Sundaresan, argued that the firm didn’t sell its entire holdings in the stocks he had recommended. He claimed that the recommendations also carried an in-built sell recommendation as they mentioned the support and resistance levels for each stock—an indicator to buy and sell. While passing its order on the penalty, Sebi had based its judgment on the fact that the support and resistance levels mentioned by Easow were meant for day traders only and not for investors.
SAT found little merit in this argument. “It is true that the resistance and support levels mentioned... were meant for intra-day traders but that does not mean that the short-term and long-term traders and investors could not take advantage of those levels… We are amazed that the adjudicating officer could not understand this basic concept…,” said the order. SAT also observed that the adjudicating officer made similar allegations as had been made by his superior (Anantharaman) and that even the language used was similar. The tribunal said it is yet to come across a single instance where a junior officer of Sebi has taken a view which is contrary to the one taken by his or her superior.
This issue has often been a subject of debate in the legal community.
The Sebi Act governing the functioning of the regulator allows it to initiate parallel proceedings against the same person or entity with the two proceedings being independent of each other.
“It’s a clear case of conflict of powers between two authorities constituted under the same legislature,” said Siddharth Shah, head of corporate securities at Nishith Desai Associates.
The Easow case was one of the first attempts by Sebi to target experts who, according to the regulator, give misleading recommendations to investors. Since then it has warned BLB Ltd, and Lalit Dua and Associates, and stock market adviser Anirudh Sethi from issuing recommendations on stocks in the papers.
The regulator also been working on regulations for investment advisors, a draft of which was put on its website for public comments in October 2007.