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December 17, 2017

Tareen lucky as SC did not dig deep into ‘insider trading’


December 17, 2017

LAHORE: Although PTI’s frontline leader, Jahengir Tareen, was disqualified for life by the Supreme Court on Friday for the non-declaration of his property/assets in his nomination papers and for making untrue statements before the Apex Court, he must deem himself lucky as the judges did not go deep into charges of "Insider Trading" against him otherwise the matter could have gone worse.

These charges against Tareen date back to days when he was serving as federal minister for industries and production in the then premier Shaukat Aziz’s cabinet (2004-2007).

Tareen, according to SECP's statement before the Supreme Court bench in this case, had admitted in 2007 that he "might" have "unwittingly" contravened and violated laws.

The SECP had asserted before the bench that Tareen had volunteered to offer return of illegal gain of rupees 70.811 million, which was recoverable under the relevant laws and corporate regulations.

While the 64-year old Jahengir Khan Tareen claimed after his disqualification that the Supreme Court rejected accusations like misuse of authority/loan write-offs, Insider Trading and an incorrect declaration of farm income etc against him and disqualified him on a "mere interpretation of the trust deed" that names him as a settler and was used to buy property in the United Kingdom.

Tareen should thank his stars for not being convicted or sentenced a few years ago in this case, when he had made good his escape by paying an amount of Rs 73,067,000 (over Rs 73 million inclusive of fine imposed and his illegal gains) to the Securities and Exchange Commission of Pakistan (SECP) for violating state laws.

Even on Friday, the Supreme Court could have questioned the SECP for not proceeding against Jahengir Tareen more strictly after he had admitted a decade back of violating corporate and financial laws governing the national bourses---and had even paid back the money earned illegally.

Well, international capital market history, and that of Pakistan, is otherwise littered with precedents where rich, affluent and eminent stock market players/business tycoons were convicted and sentenced by courts with quite regularity for ripping off investors, besides being slapped hefty penalties, for their involvement a wide range of capital market manipulations and frauds.

Ruling against Tareen on Friday, Chief Justice Pakistan, Mian Saqib Nisar, observed that the SECP should have taken action against him (Tareen) for "Insider Trading," which refers to the trading of a public company's stocks or other securities/bonds etc by individuals with access to nonpublic information about the firm.

"Insider Trading," for knowledge of some readers unaware of capital market business and practices, is thus seen as unfair and immoral to other investors who do not have access to the information, as the investor with insider information can potentially make larger profits than a typical investor could make.

Soon after the verdict, Jahengir Tareen had tweeted: "Accusations Rejected by SC 1) Misuse of authority/loan write-off 2) Insider Trading 3) Misdeclared Agri income 4) London Property Full money trail accepted not hidden, declared in children's assets since 2011. And SC disqualifies me on mere interpretation of the trust deed???"

Another tweet from Tareen had stated: "I worked sincerely with all my strength for the betterment of PTI and Pakistan. I am proud that all allegations of financial wrongdoing were thrown out. I will continue to stand tall and keep working for a Naya Pakistan."

Revisiting Jahengir Tareen's Insider Trading case:

On November 23, 2016, the SECP had maintained before the Supreme Court of Pakistan that Jahangir Tareen had to deposit Rs 73,067,000 (over Rs 73 million) in the national kitty for violating laws.

The SECP had contended before the Apex Court that fine was imposed on offence of insider trading in transaction of share purchase of United Sugar Mills (USML) by JDW Sugar Mills Limited (JDW).

The stock market regulator had asserted that for the commission of offence, Tareen had violated Section 15A read with 15B (3) of Ordinance of 1969, Section 214 of Ordinance of 1984-Disclosure of interest by director, Sections 216 and 222 of the Ordinance of 1984 and Section 4 of the Takeover Ordinance-Disclosure of acquisition of more than 10 percent voting shares of a company.

The SECP, the successor of the erstwhile Corporate Law Authority, had further informed the Supreme Court arbiters that it probed the entire matter that culminated into return of entire illegal gain of Tareen and recovery of penalties for contravention of relevant provision of laws.

The SECP, which was respondent in Hanif Abbasi's petition against Tareen, wrote in its 4-page reply stated that Messrs JDW had acquired 75 percent capital of Messrs USML through a share purchase agreement dated October 21, 2005, whereas remaining 21.6 percent were acquired in a public offer held at Rs 333.33 per share between October 27-November 17, 2005.

The financial regulatory agency's reply to the Apex Court had further read that Tareen, being the director of JDW, was authorized by the board of directors to negotiate the acquisition of USML.

The reply maintained: "Hence he was privy to all inside material information during acquisition of USML and consequently made a hefty gain of rupees 70.811 million in violation of Section 15A of the Securities and Exchange Ordinance, 1969. We hence observed unusual trading pattern and price movement in the shares of USML from November 2004 to November 2005 and initiated investigation under section 29 of SECP Act 1997. Investigation report revealed the contravention of Section 15A of the Ordinance 1969, Section 214, 216, 217 and 222 of the Companies Ordinance 1984 and Section 4 of Takeover Ordinance. Tareen acquired 341.780 shares through Messrs Haji Khan and Allah Yar and made a gain of rupees 70.811 million through sale of his shareholding in USML, in stock market and under public offer made by JDW in October 2005."

The court was apprised of the fact that the SECP had served Tareen a notice on December 3, 2007, whereby asking him to explain his position regarding allegation surfaced in respect of unlawful gains.

In response to the letter, Tareen (according to the SECP) had submitted a reply on December 8, 2007, wherein it was stated by him that "In view of the alleged violations pointed out by the SECP, I admit it does seem possible that some provisions of law may have unwittingly been contravened."

The SECP reply had stated: "Therefore, Tareen volunteered to offer return of illegal gain of rupees 70.811 million, recoverable under Section 15-B (3) of the Ordinance of 1969 along with fine of rupees 1.256 million under Sections 214, 216 and 222 of the Ordinance 1984 and Section 4 of the Takeover Ordinance."

The SECP said that it accepted the offer after legal consultation and recovered the amount from Tareen.

On October 18, 2017, the Supreme Court had adjourned the Jahangir Tareen disqualification case after his counsel had presented details of his client's 'insider trading.’

Archival research shows media had quoted Justice Umar Ata Bandial, a member of the three-judge bench hearing PML-N leader Hanif Abbasi’s plea seeking the disqualification of Tareen on the basis of his involvement in insider trading while serving as a federal minister in Pervez Musharraf’s government, as saying: "You admitted to being involved in insider trading. Were you acting fairly or not?"

During the October hearing, Justice Bandial had asked Tareen’s attorney Sikandar Bashir Mohmand whether it could be considered righteous if Tareen – then a minister – had secret information and used it for financial gain!

In response to the bench’s query, the counsel for Tareen had held that no admission or confession, "express or implied, "was ever made by his client in relation to the insider trading charges.

He said that the petitioner had falsely and incorrectly alleged Tareen violated the Insider Trading Ordinance, 1969 and the Companies Ordinance, 1984 in his acquisition of United Sugar Mills.

"The provisions relating to insider trading that were part of 1969 Ordinance during the relevant period were sections 15-A and 15-B, which was inserted unlawfully through section 7 (5) of the Finance Act 1995 with effect from July 2, 1995. These were replaced with effect from July 2, 2008, by section 6 (2) of the Finance Act 2008. Insertion of both contravention and violation of mandatory requirements of Article 70 (1) having not been passed by both houses of parliament and same clearly do not fall within the scope of a ‘Money Bill’ under Article 73 (2) of the constitution," said the counsel.

Bit of history and some handy examples from Pakistan, India and the United States where renowned stock market brokers and business tycoons were questioned, convicted, sentenced and fined by courts for capital market manipulations:

Although the phenomenon of "Insider Trading" has been a part of the American stock markets market since a US Assistant Secretary of the Treasury, William Duer, had misused his official position in the late 1700's to buy the "right" bonds that had yielded a lot of profit for him, it was during the 1920's that many Wall Street professionals, and even some of the general public, had raised hue and cry over the way American bourses were rigged by powerful investing pools.

However, as research conducted by the "Jang Group and Geo Television Network" shows, until the 21st Century and the European Union's market abuse laws, the United States was the leading country in prohibiting insider trading made on the basis of material non-public information.

In 1909, well before the Securities Exchange Act was passed, the United States Supreme Court had ruled that a corporate director, who bought that company's stock when he knew the stock's price was about to increase, had committed fraud by buying but not disclosing his inside information.

Here follow the examples:

In February 2007, the National Accountability Bureau, after a reference filed by the Securities and Exchange Commission of Pakistan, has arrested a broker Hassan Waheed, on charges of unauthorized trading, illegal deposits, non-payment of cash and non delivery of securities to investors.

It is imperative to note that in March 2017, the SECP had issued 24 show-cause notices to the brokers involved in insider trading in the Pakistan Stock Exchange.

SECP said abnormality was witnessed in the capital market during November last year when the index had surged 9,000 points in a single day and 3,000 points on the next day. The SECP started the study of the situation and investigation was initiated to identify the abnormality in the capital market to avoid any possibility of illegal trading.

The SECP chairman said investigation was carried out and 24 brokers were found involved in illegal investment. The brokers had admitted their mistakes and tendered their apologies

It was also in March 2017, according to Geo TV, that the SECP had filed a criminal complaint against an employee of a leading bank on charges of insider trading

According to an SECP press release, Misbahuddin Rizvi was responsible for placement of orders for equity investment.

Rizvi used to actively trade in shares and used insider information to earn millions in collusion with his relatives, SECP said.

It goes without saying that SECP is investigating the possibility of irregularities or manipulation by big brokerage houses in a bid to curb 'Insider Trading" and illegal leveraging in the stock market, but since many cases are under judicial consideration, it won't thus be appropriate to the name the brokerage houses and their owners.

A Mumbai stock broker, Ketan Parekh, was convicted in 2008, for involvement in the Indian stock market manipulation scam in late 1998-2001. In March 2014 he was convicted by a special court in Mumbai for cheating and sentenced to two years rigorous imprisonment.

He was debarred from trading in the Indian stock exchanges till 2017.

Another Indian capital market investor and broker, Harshad Mehta, was charged with numerous financial crimes that took place in 1992.

He was arrested and banished from the stock market with investors holding him responsible for causing a loss to various entities. Mehta and his brothers were arrested in November 1992 for allegedly misappropriating more than 2.8 million shares (2.8 million) of about 90 companies.

The total value of the shares was placed at US$39 million.

In September 1999, Bombay High Court convicted and sentenced him to five years rigorous imprisonment, besides slapping a fine.

Mehta again raised a furor in June 1993 when he made a public announcement that he had paid Rupees 10 million to the then Congress president and Indian Premier, Narasimha Rao.

Of the 27 criminal charges brought against him, he was only convicted of four, before his death at age 47 in 2001. It was alleged that Mehta engaged in a massive stock market manipulation schemes. He was tried for nine years.

Mehta was convicted by the Bombay High Court and the Supreme Court of India for his part in a Bombay Stock Exchange financial scandal valued at Indian Rupees 49.99 billion.

In May 2007, American prosecutors had charged a top Pakistani investment banker, Aijaz Rahim, with earning more than $7.5 million in illegal profits from an insider trading scheme that they said was run by a former Credit Suisse banker, also a Pakistani.

Rahim was accused of profiting from confidential information about nine deals, including the $45 billion buyout of TXU, the Texas energy giant. Credit Suisse was an adviser on all nine deals.

Altogether, prosecutors said Rahim earned more than $7.5 million from the nine transactions. More than $5.1 million of that stemmed from trading in TXU alone.

The "Reuters" news agency had added: "US federal prosecutors are seeking to recover about $9.8 million from two bank accounts allegedly linked to Mr Rahim."

In 2013, an India-born former Goldman Sachs Director Rajat Gupta was convicted in United States of insider trading.

According to "The Hindu," he was ordered to pay a hefty $13.9 million civil penalty and was permanently barred from acting as an officer or director of a public company for spilling boardroom secrets.

In July 2017, according to CNBC, a renowned Las Vegas gambler William "Billy" Walters was sentenced to five years in prison over his role in a $43 million insider-trading scheme.

In April, Walters was convicted on all 10 counts he faced, including securities fraud, conspiracy and wire fraud.

From 2008 to 2014, prosecutors argued that Walters made $32 million in profit and avoided another $11 million in losses.

In February 2017, according to "Reuters" news agency, a former Wall Street investment banker was sentenced to three years in prison on Friday after he was convicted of engaging in insider trading by repeatedly tipping his father off to unannounced healthcare mergers.

Sean Stewart, who worked at Perella Weinberg Partners and JPMorgan Chase & Co, was sentenced by US District Judge Laura Swain in Manhattan, who called his conduct "outrageous."

Judge Swain also sentenced Stewart to serve one year of home detention following his release from prison, and she ordered him to pay a $7,500 fine.

Jurors had found Stewart guilty last August of securities fraud and other charges, making him one of 85 people to be convicted in a wave of insider trading cases by US Attorney Preet Bharara’s office since 2009.

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