Consent Orders to settle violations of Securities Laws — A review on completion of two years

1) April 2009 marks the second anniversary of the Guidelines
issued in April 2007 (referred to herein as ‘the Scheme’) issued by SEBI to help
quickly settle proceedings initiated against parties for violations of specified
provisions. The Scheme has been discussed several times earlier in this column
— firstly at the time of its introduction and, later, highlighting a few cases
settled.

2) It may be recollected that the Scheme is essentially
intended to help settle existing or potential proceedings for alleged violations
of specified securities laws. A person facing or anticipating to face
proceedings for alleged violations could simply come forward with an offer to
settle the case by way of a Consent Order to be passed by SEBI. A Chapter of
this Scheme covers compounding of offences, but here, the Consent Order Scheme
is discussed. It may be recollected that the inspiration for this Scheme was the
US Model where more than 90% of cases are settled in such a manner.

3) The author intends to review :

4) Such a review is important to :

5) A review will also help to know what type of cases are
typically being settled and in what manner. Obviously, precedents have value as
they would be normally followed in similar cases. Thus, parties may know what is
the likelihood of their cases being settled and at what costs. A good example is
of cases in the recent IPO scam where it was alleged that certain parties made
fictitious/benami applicants. The cases settled clearly specify the manner in
which cases are settled. Even more important, cases not settled but in respect
of which the party preferred to continue the proceedings before SEBI also show
the type of penalty and other action taken by SEBI.

6) Apart from this, from a policy perspective, it is worth
considering whether the qualitative objectives of the Scheme were also achieved
and whether, in particular, the cases settled are the type of cases that merited
settlement and also whether the settlement process is fair.

7) It may be worth quickly reviewing the Scheme and its very
broad procedure. Any person who faces or expects to face any proceedings by SEBI
for any violation of specified provisions of Securities Laws (such as the SEBI
Act, Regulations issued there-under, etc.) can make use of this Scheme. The
person would have to come forward to settle the matter and give its offer for
settlement. The offer is to be made to the High Powered Advisory Committee, a
Committee formed of 3 independent members and headed by a retired Judge. The
procedure for making an application under the Scheme and the actual proceedings
are fairly simple and non-legalistic. The role of the HPAC is to impartially
review the status of the matter and also give its recommendation to SEBI. In
practice, the HPAC goes a step further and attempts to facilitate the settlement
itself. One often gets a pleasant surprise in the proceedings when one gets
friendly support from the HPAC itself which points out the weaknesses of SEBI’s
case in an attempt to persuade SEBI to come forward to a reasonable settlement.
Of course, a party trying to get away cheaply may also be reprimanded, albeit
gently, and the risks of allowing the application for Consent Order being
rejected are also highlighted. When and if a settlement is reached, the party is
asked to deposit the settlement amount and a Consent Order is passed. Usually,
this means the end of the existing, potential and even related proceedings in
connection with the alleged violation.

8) An important thing to note is that it is not necessary
that the parties opting for settlement under the Consent Order should admit
any of the allegations — in fact, settlement does not mean admission of guilt.
Often, the issue is buying peace at a cost which otherwise may be incurred in
fighting and pursuing the matter. One could take the example of crossing a
traffic signal and the Traffic Police alleging that we have crossed when the
signal was red. It is possible that the sheer nuisance value of fighting the
matter in Court may not be worth it and a smaller fine accepted may be found to
be an expedient alternative.

9) How has this Scheme fared in the last 2 years ? By any
benchmark, it is a success. In the first three months of 2009, around 90
cases have been settled through consent orders, while in 2008 more than 250
cases were settled. A sum of more than Rs. 10 crores is reported to have been
collected through the process. Also, a substantial portion of this amount
relates to the ‘disgorgement’ of the profits made by persons in the alleged IPO
scam.

10) Cases have been settled irrespective of the level at
which they were pending — whether at the very initial stage of investigation or
adjudication or when they were pending before the Securities Appellate Tribunal
or even when they were pending before the Supreme Court.

11) The type of cases that have been settled reveal that
violations were varied, for example :

12) Settling allegations under the Scheme is not a stigmatic
or shameful act that would bring a sense of dishonour or even a need of
justification. There are at least two important reasons for this. Firstly, the
allegation being settled may not necessarily be one of a serious nature.
Secondly, as stated earlier, there is no requirement of admitting any violation.
Cases are settled not because the parties necessarily feel that they are guilty,
but often the objective is to avoid the tortuously long and expensive
proceedings. The result is that persons who have taken benefit of the Scheme and
settled cases include many very well-known companies. These include ING Vysya
Bank, UBS Emerging Markets Equity Relationship Fund, Thomas Cook (India)
Limited, J. P. Morgan Indian Investment Trust, HDFC Bank Limited, DSP Merrill
Lynch Limited, Apollo Tyres Limited, etc., as can be seen from the published
orders.

13) Another noteworthy experience is that the settlement process is quite fast and very often it is completed and closed within a period of a few months of making the application. Contrast this with the fact that proceedings for many matters that are more than 5 years old are being initiated now.

14) Then there is another area of observation. Settlement is normally made by offering a sum of money as settlement charges. However, in some cases, administrative charges have also been agreed to be paid as part of the settlement. Interestingly, the offer may also be in ‘kind’ in the sense that a party may agree not to access the capital markets for a specified period of time. Particularly in IPO cases, parties have offered the amount of profits made by way of disgorgement. This not only helped the amount of profits made being disgorged but the controversy as to whether SEBI could legitimately disgorge such profits is also avoided.

15) The Consent Order Scheme, without exaggerating, can thus be accepted to be a fairly good success. What are the criticisms levelled against the Scheme?

16) A major criticism is that serious cases relating to fraud and price manipulation are also settled. Allegations of false trading, etc. or other types of fraudulent activities or price manipulation, or the recent IPO scam, etc. are some examples of matters settled through Consent Orders.

17) The question is whether such cases should at all be settled and that too in some cases by paying the profits made with or without nominal extra legal charges. Would not such a practice create an absence of fear of law amongst would-be scamsters that the worse that can happen to them is that the profits would be lost and that too if they are caught in the act? Clearly, there is some basis for this concern.

18) The other side is that it may be very difficult in some of such cases to get a guilty verdict, considering also the prolonged legal proceedings involved, and considering that in some cases, evidence may not easily be forthcoming. Some of such cases may also be of a time when the prevailing law was not comprehensive to cover the transactions and or effective enough to provide deterrent punishment.

19) Another thought is whether such a continuing settlement Scheme is desirable. It literally:

1. creates a forum for avoidance of the regular proceedings to punish violations and it creates an almost assured way of facing reduced punishment.

2. diverts attention from the complexities of such laws and procedures and its reform.

However, we should not forget that such Schemes arise also because of complexities in the law relating to its enforcement.

20) Another concern is that the Consent Orders are not detailed enough. Typically, the order is of just one or two pages which merely refer very briefly to the allegations. There is no detailed background of the allegations, facts, etc. given. No reasoning is also given why the particular matter was settled and why it was settled at the amount at which it was settled.

21) All in all, though, the Scheme has received the success it deserves. It helps reduce the backlog of cases keeping SEBI free to focus on serious cases. It also helps parties bring the issue to a quick end particularly where it is technical.