A recent order of the SEBI is disturbing as it appears thereby, as if the whole purpose of settlement by Consent Orders (also known as ‘plea bargaining’ in the West) is defeated. An implicit assumption – having some support in law too – is that when a matter is settled by mutually agreed consent order, it is settled fully. The regulator should not be able to start proceedings for the same matter under a different provision or for a different type of punishment. This is so, of course, if further action is not explicitly reserved or if the applicant knowingly applies for settlement for only some part of the actions possible against him.
This recent order is in the case of Arun Jain (No. WTM/RKA/ID7/48/2012 dated 9th October 2012) debarring him for two years for insider trading raises the question, to reiterate, the perceived sanctity and finality of consent orders and whether settlement by consent settles all actions possible for a particular act or omission. Or whether, even after the settlement and payment of settlement amount, SEBI may yet take action under another set of provisions. Applicants for consent orders may now rightly feel uncertain whether and how to apply for application for a consent order.
As readers are aware, the consent order process enables a person against whom proceedings are initiated for violation of securities laws, to apply for settlement in the form of a consent order. Often, this application is made as soon as a show cause notice is received and at times even before that or even at a very late stage. The objective is to expeditiously close proceedings in respect of a particular act or omission alleged to be in violation of law. The concern the recent SEBI Order raises is ‘whether a person can be punished again for the same act/omission under another provision of law’.
Let us consider, summarily, what were the broad facts in this case.
Adjudication proceedings were initiated against Arun Jain in 2005 for alleged insider trading asking why a monetary penalty should not be levied. In respect of these proceedings (with a short detour to the High Court against such proceedings) Arun Jain applied for ‘consent order’. A ‘consent order’ settling these proceedings was passed in 2008 (under the Guidelines of 2007, which have undergone a substantial change recently, as discussed later) for a settlement amount of Rs. 7,00,000.
In the normal course, that would have been the end of the matter. However, in December 2011, a show cause notice (SCN) was issued against him for the same matter – that is – violation of insider trading regulations. This time, however, the SCN asked why directions should not be issued under Sections 11, 11B and 11(4) read with Regulation 11 of the Insider Trading Regulations. The directions, the SCN stated, could be in the form of debarring him in various manners as specified. Rejecting the contentions of Arun Jain, including the contention that the matter was already settled by a consent order, the SEBI debarred him for a period of two years from buying/selling securities, etc.
The merits of the case are not discussed here and for this purpose, let us assume that Arun Jain was guilty of insider trading when shares were sold by a company promoted by him, while in possession of unpublished price sensitive information. Though a possibly valid point, the issue whether the violation was serious in nature and therefore deserved more punishment than the amount settled through the consent order, is also not discussed here.
The assumption that parties often seem to have, and which assumption now seems fallacious, is that consent orders are generally an end of the matter in terms of all actions that SEBI may take in respect of a particular act or omission. The order shows that SEBI would – if it deems fit – take action again under other provisions where available. It appears that it may even prosecute the party for the same violation.
It cannot be denied that the SEBI does have powers to initiate multiple and sequential proceedings for the same act/omissions. A particular act/omission may be punishable under different Regulations as a different type of violation and a particular act/omission may also attract multiple types of actions too.
SEBI can – as in the present case of insider trading – initiate adjudication proceedings for levy of monetary penalty, proceedings for debarment and even prosecution proceedings. Such proceedings need not necessarily be parallel or in the same SCN and can be sequential. It may be expected that each proceeding would take into account the punishment already meted out under other proceeding for the same matter but it cannot normally be denied that the SEBI does not have powers to initiate multiple proceedings and punish the party in multiple forms.
A question arises as to: ‘whether punishing a person twice or more for the same act amounts to “double jeopardy” which is not allowed under the Constitution of India. This issue was in fact, raised before the SEBI and, it is submitted, rightly rejected by the SEBI. The principle of double jeopardy as laid down under the Constitution of India, relate to criminal proceedings while in the present case, both the proceedings were civil ones. In fact, the SEBI even kept the possibility open that even in this case, after punishing the party twice under two civil proceedings, it could also initiate criminal proceedings.
However, often, the party assumes that settlement through a consent order would be the end of the matter. He would offer and agree to a settlement amount, assuming that this is a one-time settlement for all actions that are possible. Also, even though, strictly speaking, settlement of prosecution proceedings would be by way of compounding, the implicit assumption often in minds of the party is that a consent order would mean the end of the matter. And thus, not only other proceedings for the same action, but even prosecution would not be initiated.
This assumption does have some basis in law, even if not strong. For example, the applicant is required to give the following statement as part of the prescribed undertaking form as part of the application for consent order:-
“The Order passed pursuant to this application shall conclude any/all disciplinary action that SEBI could bring against us, for the conduct (cause of action) set forth in this application.’
Thus, arguably, the whole basis of making of the application for the consent order and the consent order itself is on the understanding that “any/all disciplinary action” that the SEBI could bring for the conduct/cause of action shall be “concluded”.
Consider also another statement that the undertaking form contains:-
“Any plea of limitation for reopening the case, if I violate/do not comply with the consent order subsequently, and SEBI shall be free to take any enforcement action including initiation of adjudication/prosecution proceedings against me for such violation/non-compliance of the consent order.”
Thus, again, the applicant has some basis in assuming that only if he violates the terms of the consent order, that the settled proceedings could be reopened and further proceedings of all types possible could be initiated.
Thus, the applicant party does seem to have a reasonable basis even in law, to expect that the consent order shall conclude actions that the SEBI may take for a particular cause of action.
Of course, as often debated, the basis of consent orders, unfortunately, itself is not wholly satisfactory in law. For example, except by way of generally providing for settlement by consent and that too in not very clear and exhaustive terms, the parent enactments such as SEBI Act, Securities Contracts (Regulation) Act and the Depositories Act, do not lay down comprehensively the consequences of a settlement through a consent order. Thus, in theory, it becomes a case by case settlement.
It can be expected that a party, who is already facing multiple proceedings for the same matter, would either apply for consent for all proceedings or none at all. However, he does not expect that proceeding of one nature would be initiated at the first stage and he settles the same through consent order and then it is followed by yet another proceeding and perhaps thereafter even by prosecution.
While the above was under the Guidelines for consent order of 2007, the SEBI has issued amended Guidelines in May 2012, which have also been discussed earlier in this column. The revised Guidelines are a little more explicit and specific on the matter of multiple proceedings and their settlement. It seems that the concern that the order in Arun Jain’s case raises may still arise in the minds of applicant parties. Consider the following extracts from the 2012 Guidelines (emphasis supplied):-
“One application may be considered for a single proceeding or multiple proceedings arising from the same cause of action but in no case, shall one application be considered for multiple proceedings arising from different causes of action.”
“In case, more than one proceeding arising from the same cause of action has been initiated against the applicant, the IA shall be increased by 15%.”
The undertaking under the revised Guidelines also contains a similar clause:-
“6. The Order passed pursuant to this application shall conclude any/all disciplinary action the SEBI could bring against me/us for the conduct (cause of action) set forth in this application (SCN).”
Thus, the concern would still remain. For example, if a SCN for adjudication is issued for an alleged violation and settled, can yet another SCN and/or prosecution be issued and punishment meted out?
The present Order and stance of the SEBI is worrisome for parties seeking to apply for consent orders in the future and even for pending applications. Of course, it may make the parties more alert and they may insist on comprehensive settlement, where all possible consequential actions that the SEBI could take are covered by such settlement or none at all. Alternatively, and which seems to be the better course, is that we learn further from the Western experience of decades of plea bargaining and provide for comprehensive final settlement terms where the parties know, at one place, what allegations/ violations are settled and what he has agreed in return.
