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A larger appellate bench of the Securities and Exchange Commission of Pakistan (SECP) was divided over framing a major case of insider trading in the shares of a banking company, as two SECP Commissioners established case of insider trading whereas third Commissioner declared that it was not the very case.

According to the final order issued by the SECP larger appellate bench, the appeal has been disposed of with the majority view of two to one against three appellants (sponsor/major shareholder, his brother and friend). The appeal before the SECP larger bench was made by Chairman/CEO of the company, his real brother and his friend.

The interesting aspect of the detailed order of the larger appellate bench of the SECP is that two members of the bench established case of insider trading, but the third member of the bench gave an entirely different viewpoint in the said case.

The appeal before the SECP larger appellate bench was made by three appellants including Appellant No. I (sponsor, major shareholder, Chairman/CEO of the company); Appellant No. 2 (real brother of sponsor/major shareholder) and Appellant No. 3 (friend of the real brother of major shareholder).

As per majority view of two commissioners (members of the bench), it declared, "We have no doubt that the Respondent (Commissioner SMD SECP) had successfully established that the Appellant No. 2 (real brother of sponsor/major shareholder) indulged in insider trading, therefore, penalty of Rs 1,000,000 imposed under Section I5E (I) of the Ordinance was justified, hence we maintain it."

The two commissioners of the SECP large appellate bench further declared that the Commissioner SMD SECP had failed to establish a case against the Appellant No. 3 (friend of the real brother of major shareholder), therefore, the impugned order is set aside to the extent of Appellant No. 3. However, the case has been successfully established against Appellant No. I (sponsor, major shareholder, chairman/CEO of the company) whereby, he disclosed the inside information of the Scheme to Appellant No. 2 (real brother of the major shareholder), therefore the impugned order is maintained to the extent of Appellant No. I.

On the other hand, the third member (commissioner) of the SECP large appellate bench observed that after careful examination of record and submissions of the parties, the commissioner was of the considered view that Appellant No. I was not in possession of inside information about the Scheme, therefore, he cannot be termed as an insider of the company. There is also nothing on record to prove that Appellant No. I had disseminated the information about the Scheme to Appellant No. 2.

In this case, the SECP has failed to establish two basic ingredients of insider trading, ie, possession of 'inside information' and dissemination of 'inside information' to others. The SECP had penalized Appellant No. l on the basis of alleged admission; however, the record does not corroborate it. "The record is in favor of Appellant No. I therefore, I am not inclined to accept the presumption of admission against Appellant No. l. The SECP has also failed to establish "possession of inside information" by Appellant No. 2, and its "disclosure prior to announcement" to Appellant No. 3."

The third member (commissioner) of the SECP large appellate bench believed that the impugned order was not passed keeping in view the principle of legal reasoning, necessary to establish the alleged guilt and violations on the part of Appellant No. I, 2 and 3. "Appellants No. I, 2 and 3 have successfully made out their case in appeal, therefore, I hereby set aside the impugned order and accept this appeal," third member of bench added.

In this case, the commissioner SMD SECP has failed to establish two basic ingredients of insider trading i.e. possession of 'inside information' and dissemination of 'inside information' to others, said the third member of the bench.

This order shall dispose of Appeal No. 21 of 2017 filed under Section 33 of the Securities and Exchange Commission of Pakistan Act, 1997 (the appeal) against the Order dated January 12, 2017 (the impugned order) passed by the Commissioner, SMD, (the respondent) against three appellants under Section 15 E of the Securities and Exchange Ordinance, 1969 (the Ordinance).

The SECP commissioner SMD investigated that Appellant No. I (insider), allegedly, in violation of section 1 SE (3) of the Ordinance, disclosed the Scheme to his real brother Appellant No. 2, who avoided a loss of Rs 22 million on net sale of 8 million shares of the company on April 28, 2015, thus, violating Section I SA of the Ordinance. The investigation further revealed that Appellant No. 2, in violation of Section l 5E(3) of the Ordinance, disclosed the scheme to his friend, appellant No. 3, who in violation of Section I SA of the Ordinance avoided a loss of Rs. 28 million on sale of 11,600,000 shares of the company on April 28, 2015.

The appeal was initially heard by a two-member appellate bench on April 27, 2017. The Bench consisted of Zafar Abdullah, Commissioner, and Fida Hussain Samoo, Commissioner. The decision of the appeal was reserved however, due to retirement of Fida Hussain Samoo, the Bench was dissolved without pronouncement of decision. Thereafter, on March 14, 2019 the Appeal was heard by a new bench, consisting of Shaukat Hussain, Commissioner and Aamir Ali Khan, Commissioner. Both commissioners were divided in their opinion with regard to the decision of this appeal, therefore, on September 23, 2019, the Registrar Appellate Bench referred the matter under Rule 16, sub-rule 6 to the Chairman Securities and Exchange Commission of Pakistan (The Chairman) for constitution of a larger bench in order to decide the instant appeal. The chairman constituted a larger bench consisting of the two Commissioners who had already heard the matter and Farrukh H Sabzwari, Commissioner. The appeal was fixed for hearing on October 11, 2019; however, it was adjourned on the appellants' request. Thereafter, the appeal was re-fixed and heard by the larger appellate bench on November 5, 2019.

Copyright Business Recorder, 2019