03 September 2008

First major ARS action in the US - powers of SEBI

The US securities regulator today filed perhaps its first major complaint relating to auction rate securities (ARS) in the district court of New York against Credit Suisse brokers who made unauthorized purchases of these securities for corporate customers by making false and misleading statements and mischaracterisations. What is interesting is that most of the investors who were duped were foreign corporate investors rather than American investors and so is at least one of the brokers who has fled to his native Bulgaria. 
The SEC has sought the following:
  • Permanently restraining and enjoining the brokers from violating the anti-fraud provisions of the securities statutes. 
  • Disgorgement and prejudgment interest.
  • Civil monetary penalties

Separately, the Department of Justice announced its criminal action against the brokers. 

Unlike the US SEC, the Indian regulator has no power to approach a civil court seeking injunctions or other useful remedies. As it seems to have no locus to file a civil suit, it is hobbled in its enforcement to only administrative remedies rather than a combination of administrative and civil remedies. There is clearly a need to amend the SEBI Act 1992 and provide this additional remedy to the regulator.


Anonymous said...

could you please elaborate on this a little bit - the sebi act does give sebi the power issue various directions as also to levy penalties of rs.1 crore/Rs.25 crore, as maybe the case. what & why are the additional civil remedies required?

Sandeep said...

The clearest example is persons issuing bogus/fake shares. As a void/illegal contract has to be declared as void by a court of law - rather than SEBI, which cannot so declare - SEBI is stuck with its own lack of power and also an inability to go to court to get such a declaration. There are many other examples, like powers of injunctions, but I think this will give the idea of the possibilities. Civil orders (court orders) also introduce the concept of objectivity into the process of enforcement, though may be much slower.