The Securities and Exchange Commission of Pakistan (SECP) has imposed a penalty of Rs 2,500,000 on a member of Karachi Stock Exchange (KSE) who violated the rules and regulations of the SECP and KSE in shares transactions.
Sources told Business Recorder on Saturday that the SECP has issued an order against the member of the KSE for violating the Securities and Exchange Ordinance, 1969 and KSE regulations. The Commission has imposed penalty on the KSE member, who placed the sale orders in its proprietary accounts without having pre-existing interest, failing in maintaining high standards of integrity, promptitude and fairness in conduct of business.
The SECP thoroughly evaluated the available evidence/information. It has been established that the KSE member has placed the sale orders in its Proprietary Accounts without having pre-existing interest. The assertion of the member that different clients'' transactions were executed in Proprietary Accounts due to human error and the same were being notified to the KSE does not hold true as the correction report submitted to KSE only mentions correction of trade involving only 62,300 shares.
The KSE member opined that it has large number of clients and trading volume does not justify execution of such large number of erroneous transactions. The member by executing sales in Proprietary Accounts without having pre-existing interest, by submitting a false information to the Commission and by aggregating its clients'' orders in Proprietary Accounts has violated the provisions of the Securities and Exchange Ordinance and the KSE regulations which in turn is violation of Code of Conduct set forth under the third schedule of Brokers'' Rules.
The SECP further said that execution of deals shows that the member has failed to maintain high standards of integrity, promptitude and fairness in conduct of its business. The KSE member has adopted a practice which has potential risk for itself, its clients, and the whole market. The member has in fact indulged in improper and undesirable conduct while doing business at the stock exchange. The member did not comply with the statutory requirements of the Code of Conduct as enshrined in the Brokers'' Rules. Therefore, the member acted in violation of Rule 8 (iv), read with Rule 12 of the Brokers'' Rules.
It is pertinent to mention here that the Commission had earlier passed an order against the member under section 22 of the Ordinance. The Commission had directed the member to ensure that full compliance be made of all rules, regulations and directives of the Commission and the stock exchanges in future for avoiding any punitive action under the law. The member was again strictly warned to conduct its business with due diligence, care and skill, failing which appropriate action can be taken against it.
It is regrettable to note that despite earlier warnings and cautions of the Commission, the member continuously indulged in trading activities that are not permitted in the law. The aforementioned clearly shows relaxed and casual attitude of the member towards compliance and its conformity with the applicable rules and regulations. The Commission has taken a very serious note of such conduct of the KSE member.
The order said that unfair trade practices are detrimental for the growth and development of the market and undermine market integrity. It is the responsibility of each and every market participant to play its due role to ensure that market is fair, efficient and transparent for the protection of investors and to reduce the systematic risk of the market. If any market participant does not act accordingly then it should be held accountable. The above-mentioned trading activities of the member interfered with the fair and smooth functioning of the market and also damaged the interest of other investors who were trading in the stock market.
The violation of the Rules and Regulations is a serious matter which entitles the Commission to even suspend the member''s membership, but the SECP has elected not to exercise this power at present. However, in exercise of the powers under section 22 of the Ordinance, a penalty of Rs 2,500,000 has been imposed on the KSE member.
The SECP has strongly advised the KSE member to take immediate measures and put in place proper checks and procedures to eliminate the occurrence of such instances in future. The Commission has also directed the member to ensure that full compliance be made of all rules, regulations and directives of the SECP in the future for avoiding any serious punitive action under the law.
The matter is disposed of in this manner and the KSE member is directed to deposit the fine in the account of the Commission being maintained in the designated branches of MCB Bank Limited not later than 30 days from the date of this Order and furnish the copy of the deposit challan to the SECP, the order said.
The order is issued without prejudice to any other action that the Commission may initiate against the member in accordance with law on matters subsequently investigated or otherwise brought to the knowledge of the Commission, the SECP added.
The SECP order has disposed of the proceedings initiated through show-cause notice issued to MRA Securities (Pvt) Limited, Member of the Karachi Stock Exchange.
The brief facts of the case are that the on September 28, 2009 the said KSE member in its Proprietary Accounts first sold 1,695,000 shares of Jahangir Siddiqui & Company Limited (JSCL) between 09:30:10 am to 09:30:35 am and subsequently squared its position to the extent of 1,415,000 shares by purchasing these shares between 09:30:38 am to 14:06:38 pm. The shares were sold from twelve different Proprietary codes of the member and orders were placed through eleven trading terminals of the Karachi Automated Trading System (KATS).
The Commission sought clarification from the member regarding the above-mentioned sale in its Proprietary Accounts. The member in its reply stated that the trades in question were executed on behalf of its clients in its Proprietary Accounts and it has already submitted correction list on September 28, 2009 to KSE which showed more then 300 rectification entries consisting 2.1 million shares of JSCL. The reply of the member was examined and was not considered satisfactory as the same did not contain any evidence to prove pre-existing interest in the shares before sale nor did it provide any reasonable justification for execution of clients'' orders by the member in its Proprietary Accounts.
Therefore, the SECP issued notices to the member under section 22 of the Ordinance and the Brokers Rules stating that the unit has prima facie contravened Clause A (2) and A (5) of the Code of Conduct set forth under the third schedule of the Brokers Rules. The KSE member had submitted a written reply, which stated that being a member of the KSE it submits correction list on daily basis and correction list of September 28, 2009 has already been submitted to the KSE. The member further stated that transactions of different clients were executed in its Proprietary Accounts erroneously because of human error which occurred during the peak time of market operations when most of the investors were placing their purchase and sale orders simultaneously. The member also stated that the trades in question were merely result of errors committed by its KATS Operators without having any fraudulent intention.
From the written replies and subsequent documents submitted by the KSE member and contentions and averments made by authorized representative of the member during the hearing, it is clearly established that incongruent statements were made by the member regarding trading of JSCL shares in its Proprietary Accounts. It is evident from the fact that the member had provided a correction list of September 28, 2009 submitted to KSE containing over 300 rectifying entries of 2.1 million shares of JSCL. On the contrary, the Trade Log Modification Report (TLMR) of September 28, 2009 obtained from KSE showed that the member only submitted six rectifying trading entries of JSCL having volume of 62,300 shares only which clearly shows that the Respondent furnished wrong and misleading information to the Commission. In this regard, attention is invited towards Section 18 the Ordinance under the heading of "Prohibition of false statements etc"- which is reproduced hereunder for reference :-
"No person shall, in any document, paper, accounts, information or explanation which he is, by under this Ordinance, required to furnish, or in any application made under this Ordinance, make any statement or give any information which he knows or has reasonable cause to believe to be false or incorrect in any material particular".
In addition to the above the Rule 8 (viii) of the Brokers Rules states that:-
"Where the Commission is of the Opinion that a broker has furnished wrong or false information." the Commission may, if it considers necessary in the public interest so to do, by order in writing:-
(a) suspend the registration of a broker for such period as may be specified in the order; or (b) impose on a broker a fine not exceeding one hundred thousand rupees:"
From the above it is very evident that the member had furnished false information to the Commission, therefore, violated the Section 18 of the Ordinance and Rule 8 (viii) of the Brokers Rules.
It may further be noted that KSE vide its letter no. KSE/N-4848 dated August 07, 2006 requires that "if inadvertent mistake taking place in the input of any transactions, the members may amend their records in such circumstances provided they report such error in writing to the KSE on the same day for its proper documentation'' and proof". From the information provided by the KSE, it has been noticed that the member is used to report a large number of mistakes on daily basis to KSE which clearly shows that the member is not executing its business with due care and skill neither its has proper systems and controls in place which could prevent execution of such erroneous trades or practice of the Respondent to use the Proprietary Accounts for the execution of clients'' orders.
Therefore, the Commission has imposed a penalty of Rs 2,500,000 against the KSE member for committing violations of the relevant Rules and Regulations.
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