This is not a joke

Comment on the SAT order clearing Mathew Easow - By D. Sampathkumar in www.businessline.in

"The Securities Appellate Tribunal (SAT) order exonerating Mathew Easow, a financial analyst, of charges of indulging in fraudulent/unfair trading practice has once again brought into focus the legal position on research recommendations by analysts and their own private investment decisions on the very scrips that were the subject matter of their recommendations earlier.

SEBI’s initial order seemed to suggest that there is an element of impropriety involved in an analyst taking a trading position for himself that is contrary to his own recommendations. But the Tribunal ruling in the latest case, while seeming to concur with this, has nevertheless created a caveat that undermines the very principle.

A recap

But first a quick recap of the facts of the case. A television channel engaged the services of Mathew Easow as an exclusive panelist for its stock market coverage.

In terms of the agreement, Mathew had sent a number of investment recommendations which later became the subject matter of a SEBI inquiry.

The inquiry revealed that the investment company, in which Mathew had an interest, purchased shares of those companies that Mathew recommended to the television channel’s viewers just immediately prior to such a recommendation being aired to the public.

SEBI investigation also revealed that the investment company started offloading over the next few days parcels of the shares originally purchased. SEBI contended such an act amounted to a fraudulent/unfair trading practice.

It held that the act of the investment company selling shares following Mathew’s recommendation meant that the he did not believe in his own ‘buy’ recommendation. This, it argued, fell within the scope of the SEBI regulation on prohibition of fraudulent and unfair trading practices. The relevant clause in the regulation reads as follows:

“… publishing or causing to publish or reporting or causing to report by a person dealing in securities, any information which is not true or which he does not believe to be true prior to or in the course of dealing in securities.”

SEBI first issued a ‘cease and desist’ order and followed it up with a penalty of Rs 20 lakh.

It later revoked its ‘cease and desist’ order as it felt that the imposition of a monetary penalty would be sufficient deterrence against his indulging in such practices in the future. The order imposing the monetary penalty thus became the subject matter of an appeal before the Tribunal.

The Tribunal ruled in favour of Mathew. It based its ruling on the fact that, in his recommendation for a ‘buy’, he had not only given a short term price target at a considerable premium over the then prevailing market price, he had also, as part of the same recommendation, indicated certain upper and lower price levels which should trigger fresh buying or selling as the case may be, for investors.

Buy or sell

Thus, for instance, in the case of Albert David, a pharmaceutical company stock, SEBI charged Mathew that he had recommended that investors buy the stock as in his view the stock price would climb to Rs 200 in the short term.

But on the day his recommendation was published he had a sold a parcel of his own holding in that stock at the going market price. He followed it up with selling additional lots over the next few days.

This, in its view, constituted a fraudulent trading practice as he himself did not believe in his own recommendation.

True, SEBI conceded, he had indicated certain price points, namely Rs 145 or 146 or 149, which, if breached in the course of a day’s trading, should trigger fresh buying by investors.

Similarly he had also, SEBI mentioned, indicated that if prices fell below Rs 135 or 133 or 130 investors should liquidate their positions in order to cut their losses.

The Tribunal accepted the analyst’s plea that his ‘buy’ recommendations also thus contained, within it, recommendations for a ‘sell’. Further, these price points for selling though given in the context of investments by ‘day traders’ are equally applicable to those who buy into the scrip with a view to holding on for a longer duration.

Mathew’s counsel argued, which the Tribunal accepted as valid, that a ‘sell’ instruction was built into the original ‘buy’ recommendation. The counsel submitted that his act of selling the scrip on the day the investment recommendation was published should therefore be treated as in consonance with his recommendation and not contrary to it. In the event, the counsel argued, there was no ‘fraudulent’ trading in the sense of Mathew’s subsequent trading actions being at variance with his original recommendation.

The central legal issue therefore boiled down to a consideration of whether SEBI was wrong in ignoring those ‘sell triggers’ contained in the recommendation on the ground that these were not applicable to short-term investors who were being told that the scrip is expected to touch Rs 200.

The Tribunal felt that it should not have been ignored and so ruled that if Mathew’s investment firm sold Albert David stock there was no impropriety involved as ‘selling’ was very much part of Mathew’s original recommendation.

The Tribunal’s reasoning, it is submitted with respect, is flawed. Mathew’s ‘sell’ instructions may be integral to the ‘buy’ recommendations. But those instructions (sell) have to be read with the specific price points that he had mentioned.

The price points, it may be mentioned, are precisely those levels at which selling should be triggered. In the case of Albert David stock, for instance, the trigger points for sale on September 1, 2005, were Rs 137, 135, 133, 130. But Mathew could not have sold at those prices, as the lowest price that the stock hit on September 1 was Rs 142.25! Yet he did sell 2,700 shares of Albert David — nearly 20 per cent of his holdings.

If Mathew saw himself as a day-trader he had sold at prices that were way above prices only on reaching which he had recommended that investors sell their holdings. If, on the other hand, he saw himself as an investor for the short-term, then he had sold at prices considerably below the target price of Rs 200 that he had set for other investors.

Looked at either way it is difficult to see how he could be seen as not guilty of breaching the SEBI regulations".

I think poor SEBI needs more than a good lawyer to represent it's case.

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