1) The recent SEBI order in the matter of Pyramid makes a fascinating read from many angles —the sheer brazenness of the fraud, the portrayal of the alleged main culprit almost as a hero by the press, the alleged direct involvement of senior journalists from leading newspapers, the way in which many investors, including funds, succumbed to the greed and fell for the scam, and so on. Above all, the most amazing aspect is the meticulous, high-tech investigation done by SEBI — said to be under an IPS officer specially appointed for this purpose — in which every step of the scam was meticulously investigated and documen-ted, for example, the actual physical location and movements of the alleged prime culprits were tracked through mobile tower records as to where they were, whom they met and whom they called or SMSed. There are many more such interesting details in this case, some of which are highlighted here. However, I would recommend to the readers to go through this 54 page order available on SEBI’s website.
2) One may wonder why such an order did not receive the wide publicity it deserved. The cynic in me believes that this was because journalists (including an ex-journalist) of a leading business and other newspapers were allegedly to be directly involved — in fact, one of them has been arrested.
3) The case has lessons for both companies and professionals. The high tech atmosphere we are living in ensures that the way in which we interact — through calls and SMS, through emails and even physical movements can be meticulously documented and unravelled. Bank accounts and their transactions, stock market transactions, share transfers through depositories are all through electronic mode and the details of which can be instantly unravelled in detail. What is worse, one may be put on the defensive even if calls, SMS or even stock markets transactions happened unknowingly with parties who are later found to be scamsters. The technology of recording, satellite tracking, mobile call records, etc. may raise embarrassing questions and instead of the regulator being required to prove guilt, the onus may shift on the accused simply on basis of these records.
4) The case will also have repercussions under securities and other laws. The issues are :
- how far such electronic data — in several new forms including physical locations of persons based on the location of their mobile phone —can be held to be admissible evidence.
- whether under the applicable laws, particularly the securities laws administered by SEBI, such data is sufficient to hold a person guilty.
It need to be noted that, even as I write this article, the person whom SEBI alleges to be the prime accused/mastermind is still not arrested and reportedly, SEBI is consulting senior criminal lawyers as to whether SEBI has the power to arrest him. Probably, the reason is that even this meticulous investigation has not been able to bring up evidence that would prove, to the level demanded by criminal law, his involvement.
5) Let us then go straight into the case. Let us start with what has been stated to have happened. I may add a caveat here that this article is intended to be an academic exercise to understand more of securities laws through the Order as a case study. Hence, the correctness or otherwise of the statements made in the Order are not known and are simply assumed to be correct to help focus on the interesting issues involved. Further, the Order itself is interim and without giving the parties a benefit of a reply or hearing. To make this article readable, I have avoided the use of the word ‘allegedly’ ad nauseam throughout this article but it should be read into every statement.
6) Pyramid Saimira Theatre Limited is a listed company. Its background is not relevant here except that there were 2 promoter groups represented by Mr. P. S. Saminathan and Mr. Nirmal Kotecha. Some shares were transferred between the two groups which would have triggered an open offer. However, before SEBI could examine the matter and give a direction, a forged SEBI order was served on the Company and its Promoters. As per this order, Mr. Saminathan was required to make an open offer within 14 days at a price of Rs. 250, when the ruling market price was around Rs. 70 — a fraction of such open offer price —and that too was allegedly manipulated.
7) One can expect the sheer temptation to buy shares at the ruling price of around Rs. 70 with a hope of getting the SEBI-ordered price of Rs. 250 or at least a modest and quick appreciation by selling at a higher price. As the proverbial fools rushed in to buy (including several funds), Mr. Nirmal Kotecha and his alleged associates started selling — and selling as if there was no tomorrow. He sold almost the whole of his stake as Promoter — he started selling when the price was Rs. 70-80 and went on selling when the price fell as the fact that the SEBI letter was a forgery came to be known.
8) The resultant investigation revealed a meticulously timed conspiracy. A letter on a letterhead identical to SEBI’s was couriered by an ex-journalist. The courier company was directed to serve the letter not in the normal course but on a specific day. Accounts were opened with several brokers and preparations made to dump the shares at the time when such letter was served and the news was made public. And then the shares were thus sold as if in a torrent. As per the Order, Nirmal Kotecha himself and through associated entities sold 70.99 lakhs shares.
9) Further investigation showed that the facts were even murkier. The price of about Rs. 75 was itself a jacked-up price by Nirmal Kotecha allegedly using several front persons to engage in circular/fictitious trades. The front persons used were, as SEBI found out, very poor persons staying in the distant suburbs of Mumbai. These persons, with nil or nominal income, traded in lakhs of shares of Pyramid. Interestingly, when SEBI visited one of such persons — an impoverished engineering student — he admitted that he had no knowledge of the trading and that blank signed documents of various types were obtained from him. Shockingly, while this interview was in progress, Nirmal Kotecha barged in and asked him to stop giving the statement and modify the earlier statement. Resultantly, he stopped giving the statement. SEBI has filed police complaint against Nirmal Kotecha for such obstruction.
10. The high tech investigation of SEBI to unravel some aspects of the conspiracy is something to admire and appreciate. The forged letter was allegedly issued by an ex-journalist who, alongwith certain other journalist colleagues, arranged for wide publicity of the letter. SEBI tracked the exact movements of Nirmal Kotecha and these persons by using the mobile tower data of their mobiles. It traced them to exact locations during the critical period when the fraud was happening – near a temple in Dadar and in a reputed restaurant in Dadar. It was found that these persons had been in this hotel for a specified period together. It was then found that two of such persons proceeded to go towards Dalal Street.
11. Calls made by such persons during such periods were traced with the length of the calls noted. The sequence of calls was also used to construct the underlying conspiracy at it happened. Interestingly, the mobile number of the Company Secretary of Pyramid was given to some journalists who wanted to confirm the correctness of the information. The Company Secretary said that he had no knowledge of the SEBI letter. Yet another number of another Company Secretary of Pyramid group was given. It turned out that the number actually was in the name of another person and did not belong to the other Company Secretary. Such person took the calls and confirmed the information. The Company Secretary to whom such journalists assumed they were talking denied receiving any such call. The person who took the calls is not traceable.
12. Email exchanges of concerned parties were also meticulously traced to know particularly how publicity was organised for the forged letter.
13. It will be interesting to see as to what extent the data of this sophisticated investigation in the form of call logs, actual physical locations of mobiles, etc. are admissible as evidence in law and useful to pinpoint the guilt, particularly for prosecution.
14. SEBI has also uncovered other information relating to the case. It appears that huge withdrawals and deposits of cash were made in accounts allegedly connected to Nirmal Kotecha. The fronts through whom Nirmal Kotecha dealt with also received huge loans from certain persons who also are allegedly connected with Nirmal Kotecha. These loans were alleged to have been arranged by a Chartered Accountant.
15. The investigation led to earlier years and it was found that the seeds of the conspiracy were sown much earlier around when shares in Pyramid were allotted to Nirmal Kotecha. The merchant banker who carried out several assignments for Pyramid also gave a buy recommendation for the shares of Pyramid giving a very high target price – far higher than recommendations by other analysts.
16. Even the purchase of shares between the two Promoters which would have triggered the open offer was alleged to be fictitious.
17. SEBI has vide its interim Order banned almost 250 entities in various manner till further directions. Generally, these entities have been banned from buying/selling in the capital markets. Curiously, the fronts – the pathetically poor persons – have also been barred from buying/selling. The merchant banker who gave a buy recommendation for Pyramid has beenbanned from giving further recommendations. One of the brokers who opened the accounts of Nirmal Kotecha and his fronts has been barred from accepting new clients.
18. The investigation also shatters some illusions of an independent press. Several existing and past journalists are alleged to have been directly involved in the scam. The Order said that one of them agreed to carry out his part for, what he admitted, a sum of Rs. 10,000. They also used their contacts with other newspapers and parties to publicise this letter and even coordinated with Nirmal Kotecha to arrange for confirmations from officials of the Company. Sadly, but perhaps expectedly, the Order received disproportionately less coverage. A leading business newspaper whose Assistant Editor was accused of being directly part of the scam published a brief article reporting the Order and adding a cryptic sentence that the journalist was under investigation. What is even more curious is the creation by the press of a hero-like halo around Nirmal Kotecha, tracing his ambitions and role-models and how a person coming from a very modest background managed to reach a net worth of Rs. 500 crores at the age of 36 years. His alleged modus operandi of making huge monies buying into shares of otherwise dud companies at low prices and then rigging up the price for offloading such shares has almost been glorified.
19. One cannot also help wondering at the motivations and the expectations of the perpetrators of the scam. How did they believe that they could get away with such a brazen scam of issuing a forged SEBI letter that SEBI was bound to immediately deny issuing? One can accept that they did not expect that their physical movements and calls would be traced with such sophistication and precision. But, how did they believe that their earlier trading and subsequent sales would not be tracked?
In short, is there a faith of such individuals in the defective legal system and its enforcement and perhaps even the corruption that they can expect to get away with such transactions? To repeat, as of writing this article, the person whom SEBI alleges to be the mastermind and main beneficiary has yet to be arrested. It is also to be seen whether such persons would be allowed to use the Consent Order mechanism and escape severe punishment.
20. This case also, particularly as it develops, would become a case study for a student in securities laws since there would be numerous provisions that would be found to have been violated. These would include provisions relating to price manipulation, false trading, Insider Trading, code of conduct of stock brokers and merchant bankers, and so on. This is apart from, of course, other laws such as the Indian Penal Code.
