Insider trading: Recipient of ‘confidential information’/’Tippee’ can be held liable for fraud

Supreme Court: Dealing with the legality of ‘non-intermediary frontrunning’ in security market under the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (FUTP 2003), the bench of NV Ramana and Ranjan Gogoi, JJ held that non-intermediary front running may be brought under the prohibition prescribed under regulations 3 and 4 (1), for being fraudulent or unfair trade practice, provided that the ingredients under those heads are satisfied.

In the matter where both the judges gave separate but concurring opinions, Ramana, J said:

“The information of possible trades that the company is going to undertake is the confidential information of the company concerned, which it has absolute liberty to deal with. Therefore, a person conveying confidential information to another person (tippee) breaches his duty prescribed by law and if the recipient of such information knows of the breach and trades, and there is an inducement to bring about an inequitable result, then the recipient tippee may be said to have committed the fraud.”

He further added that in order to establish charges against tippee, under regulations 3 (a), (b), (c) and (d) and 4 (1) of FUTP 2003, one needs to prove that a person who had provided the tip was under a duty to keep the non-public information under confidence, further such breach of duty was known to the tippee and he still trades thereby defrauding the person, whose orders were front-runned, by inducing him to deal at the price he did.

Gogoi, J, in his opinion on the applicability of the said regulations on the tippees said:

“To attract the rigor of Regulations 3 and 4 of the 2003 Regulations, mens rea is not an indispensable requirement and the correct test is one of preponderance of probabilities. Merely because the operation of the aforesaid two provisions of the 2003 Regulations invite penal consequences on the defaulters, proof beyond reasonable doubt is not an indispensable requirement.”

The Court was hearing a batch of cases dealing with insider trading. The question before the Court was to decide whether the person, to who the information has been leaked, may be said to have committed fraud. Considering facts of the cases i.e. the volume of shares sold and purchased; the proximity of time between the transactions of sale and purchase and the repeated nature of transactions on different dates, the Court held that the conduct of the respondents was in breach of the code of business integrity in the securities market. [SEBI v. Kanaiyalal Baldevbhai Patel, 2017 SCC OnLine SC 1148, decided on 20.09.2017]

 

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