20 September 2012

Securities fraud and investment advisors - SC ruling

In a high profile case of SEBI against investment advisor Mathew Easow, where SEBI had found him guilty of fraudulently recommending contrary to his actions in his own portfolio (the other order of SEBI to cease and desist is linked here). Where the appellate tribunal, SAT, had set aside SEBI's order, also imposing costs on SEBI, the legal story ended in the Supreme Court a few weeks back in a whimper. SAT's order was appealed by SEBI and while it was pending before the highest court, Mr. Easow passed away. The case therefore abated (as lawyers call it - the ending of a proceeding because of the death of a party where the issue was personal in nature). The Supreme Court's order  (Civil Appeal No. 1936/2008, Order dated 09.08.2012) stated "In our opinion, the imposition of cost was not warranted" and "all the questions of law which are raised in this appeal are kept open"

In my view, the case against him was extremely strong - though Prof. Jayanth Varma thinks not. In fact, I have previously argued, this was a case where SEBI's excellent analysis was overturned on a poor understanding by SAT of what was factually going on and as was well presented by SEBI in its orders. We must discover, the boundaries of this kind of fraud in another case I guess, but in the meanwhile, we are just a few weeks away from SEBI passing a new Investment Advisor's regulation which would bring a higher level of regulations for investment advisors.

The US Supreme Court has held the practice of 'scalping' to be in violation of the  anti-fraud rules of the US securities law in the old 1963 case of SEC v. Capital Gains. That issue is of a much lower scale of fraud as the investment advisor can at least argue that he bought stocks before recommending a buy because he genuinely believed in his recommendation. In the Mathew Easow case, it was alleged that he was doing the exact opposite of what he was recommending.

1 comment:

daventhomas said...

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Investment Adviser