Written-Submission Appellant NLSIU

7/21/2019 Written-Submission Appellant NLSIU

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IN THE SUPREME COURT OF INDIA

ATNEW DELHI.

Civil Appeal No. ____/2012

(Under Sec. 15Z of the Securities and Exchange Board of India Act, 1992)

Securities and Exchange Board of India. ...Appellant

v.

LinkPark Investment Partners LLCRespondents

clubbed with

Civil Appeal No. ____/2012

(Under Sec. 15Z of the Securities and Exchange Board of India Act, 1992)

Securities and Exchange Board of India. ...Appellant

v.

Freddie Balsara, Mike Bennington,

Purple Floydeon Investments Private LimitedRespondents

Written submissions on behalf of,

Team Code _______

Counsel for the Appellant.


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TABLE OF CONTENTS

Index of Authorities ............................................................................................................. iv

Statement of Jurisdiction ...................................................................................................... vi

Statement of Facts ............................................................................................................... vii

Questions Presented ............................................................................................................. xi

Summary of Pleadings ........................................................................................................ xii

Pleadings............................................................................................................................... 1

I. LinkPark Has Acquired Control of Novio ................................................................... 1

[A].

Negative Rights Can Amount to Control.............................................................. 1

[B]. The Negative Rights Are Related to the Day to Day Management of Novios

Business Thus Amounting to Control ............................................................................ 3

[C]. In any Event, The Affirmative Rights relate to Major Decisions on Structural and

Strategic Changes .......................................................................................................... 4

II. The Call Option Agreement is Void ........................................................................ 4

[A].

The Securities Contracts (Regulation) Act, 1956 applies to unlisted companies ... 4

[B].

The Call Option Violates Section 16 of the Securities Contract Regulation Act,

1956 7

[C].

In any Event, The Call Option violates Section 18A of the Securities Contract

Regulation Act, 1956 ................................................................................................... 10

III.

The Information of the 10% Investment by LinkPark for Development of The

Messenger was Unpublished Price Sensitive Information [UPSI]................................. 11

[A].

Information was unpublished ............................................................................. 11

[B]. Information was Price Sensitive ......................................................................... 12

IV. The Respondents are Insiders ................................................................................ 12

[A].

Mike Bennington was an Insider ........................................................................ 12

[B]. Freddie is An Insider ......................................................................................... 14

[C].

Purple Floydeon Purchased Shares of Novio When in Possession of UPSI ........ 15


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V. Mere Trading In the Scrip of Novio While in The Possession of UPSI Raises a

Presumption of Guilt Against the Insiders ....................................................................... 16

[A]. The Burden of Proof lies on the Respondents to show that the Trade was not on

the Basis of UPSI. ....................................................................................................... 16

[B]. The Respondents believed the information to be UPSI and therefore traded on the

basis of it. .................................................................................................................... 17

VI.

Evidence Provided by SEBI is Sufficient to Prove that Respondents are Guilty of

Insider Trading ................................................................................................................ 17

[A].

Findings are to be Based on Circumstantial Evidence ........................................ 18

[B]. SEBI Should Have Access to Content of Text Messages Exchanged Between

Mike and Freddie ........................................................................................................ 19

Prayer ................................................................................................................................. 19


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INDEX OF AUTHORITIES

Indian Cases

AK Menon and BOI Finance Ltd. v. Fairgrowth Financial Services Ltd and The Custodian[1994] 81 CompCas 508 ................................................................................................ 5, 6

Anil Harish v. SEBI,[2012] 114 SCL 407 ................................................................ 10, 11, 12

Assistant Commissioner, Bangalore v. Velliappa Textiles Ltd., (2003) 11 SCC 405 ............ 15

Balwant Singh v. Rajaram, AIR 1975 Raj 73......................................................................... 8

BK Holdings Pvt. Ltd. v. Prem Chand Jute Mills, 84 CWN 876 ........................................ 5, 6

Brooke Bond India Ltd. v. UB Limited, 1999 (2) BomCR 429 .............................................. 6

Chandrakala v. SEBI, (2012) 2 CompLJ 391 ................................................................. 16, 17

Dahiben Umedbhai Patel v. Norman James Hamilton, (1983) 85 BomLR 275 .............. 5, 6, 7

District Mining Officer v. Tata Iron and Steel Company, 2002 (7) SCC 358.......................... 1

East Indian Produce Ltd. v. Naresh Acharya Bhaduri, 1988 64 CompCas 259 Cal. ..... 6

Gujarat NRE Minerals Ltd. v. SEBI, [2012] 106 CLA 37 .................................................... 12

Himachal Pradesh SIDC Ltd. v. PAMWI Tissues Limited and another, 2011 Indlaw HP 699 5

Jethalal C. Thakkar v. R. N. Kapur of Bombay, AIR 1956 Bom 74 ................................... 8, 9

MCX Stock Exchange Limited v. Securities & Exchange Board of India & Ors., (2012) 2

Comp LJ 473 (Bom) .......................................................................................................... 8

Mysore Fruit Products Ltd. v. The Custodian, 2005 (107) BomLR 955 ......................... 5, 6, 7

Naresh K. Aggarwala and Co. v. Canbank Financial Services Ltd., (2010) 6 SCC 178 .......... 5

Niskalp Investments and Trading Company Limited v Hinduja Tmt Limited, 2008 143

CompCas 204 Bom ....................................................................................................... 8, 9

Rajshree Sugars and Chemicals Limited v. Axis Bank Limited, (2008) 8 MLJ 261 ............. 10

Re NRB Bearings, Order NO. : CO/33 /TO/05/2003 ............................................................. 1

Rhodia SA v. SEBI, 2001 Indlaw SAT 27 ......................................................................... 1, 4

Sahara India Real Estate Corporation Ltd v. SEBI, AIR 2012 SC 3829 ................................. 5

Samsung India Electronics Pvt. Ltd. v. State of Assam, 2012(4)GLT546 ...................... 15, 16

Sandeep Jain v. Securities and Exchange Board of India, 2012 Indlaw SAT 111 ................. 18

Securities and Exchange Board of India v. MCX Stock Exchange Ltd. and Ors.,

MANU/SC/0904/2012....................................................................................................... 8

Subhkam Ventures v. Securities and Exchange Board of India, 2010 Indlaw SAT 12 ........ 2, 3

Vodafone International Holdings B.V. v. Union of India & Anr., (2012) 6 SCC 613 ............. 3


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US Cases

Chiarella v. United States, 445 U.S. 222 (1980)................................................................... 13

Dirks v. SEC, 103SCt 3255(1983). ................................................................................... 13

SEC v McDermott,277 F.3d 240 (2d Cir. 2002)................................................................. 18

SEC v. Lund, 570 F. Supp. 1397 (1983) ........................................................................ 13, 17

SEC v. Rajat Gupta, 11-cr-00907, U.S. District Court, Southern District of New

York (Manhattan) ............................................................................................................ 19

SEC v. Shapiro, 494 F.2d 1301 (2d Cir. 1974)..................................................................... 17

English Cases

HL Bolton Co. Ltd. v. TJ Graham and Sons, 1956 All ER 624 ............................................ 15Lennard's Carrying Co. Ltd. v. Asiatic Petroleum Co. Ltd, [1915] A.C. 705 ........................ 15

Ranger v. Great Western Ry. Co., (1854) 5 HLC 72 ............................................................ 15

Tesco Supermarkets Ltd. v. Nattrass, (1971) 2 All ER 127 .................................................. 16

Statutes

Bombay Securities Contracts Control Act, 1925 .................................................................... 9

Companies Act, 1956 ............................................................................................................ 3

Securities Contracts (Regulation) Act, 1956 ................................................................. passim

Regulations

Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992

................................................................................................................................. passim

Securities And Exchange Board Of India (Substantial Acquisition Of Shares And Takeovers)

Regulations, 2011 ...................................................................................................... 1, 3, 4

Reports

Report of the Takeover Regulations Advisory Committee, (2010) ..................................... 1, 2


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STATEMENT OF JURISDICTION

APPEAL I

The Appellant has approached this HonbleCourt under Section 15Z of the Securities and

Exchange Board of India Act, 1992.

APPEAL II

The Appellant has approached this HonbleCourt under Section 15Z of the Securities and

Exchange Board of India Act, 1992.


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STATEMENT OF FACTS

THE COMPANY AND THE INVESTORNovio Software Systems Limited [Novio] is a technology company based in

Mumbai, whose shares are listed on the National Stock Exchange of India Limited (NSE) and

Bombay Stock Exchange, Mumbai (BSE). The CEO and founder of Novio is Freddie

Balsara, a technocrat, who is also one of its promoters and directors.

For developing its next generation blockbuster offering codenamed The Messenger,

Novio was in dire need of funds. Since the market conditions were not appropriate for a

public offering, private placement of shares was preferred by Freddie and his team. They

selected LinkPark Investment Partners LLC [LinkPark], a private equity fund based in New

York as the investor.

THE AGREEMENTS

The terms of agreement between Novio and LinkPark were that LinkPark would invest

in 10% shares of Novio at a price of Rs 1500 per share. Under a Share-Subscription-cum-

Shareholders Agreement signed between the parties on March 15, 2012, it was agreed that

LinkPark would nominate two directors on the Board of Directors of Novio. Furthermore,

certain affirmative rights were given to LinkPark by virtue of which no resolution concerning

changes in Articles of Association of the company, adoption of annual accounts, declaration

of dividend, remuneration of the managing director and other such matters could be passed

without the prior consent of LinkPark or its nominee directors.

On the same day, Freddie issued a side letter to LinkPark as per which he assured

LinkPark that if there was any fall in its shareholding within 3 months from the date of

completion of its investment, he would make up for this shortfall so as to maintain its originalshareholding at 10%.

LinkPark, in addition to the 10% stake, also wanted a call option over an additional

16% shares in Novio and therefore entered into a Call Option Agreement with Freddie and

his wife Hannah in relation to their shareholding in Led Skinnard Investment Limited [Led

Skinnard], acompany registered in Mumbai. Both Freddie and his wife, along with some

nominees, held 100% stake in Led Skinnard. Under the said agreement, LinkPark could

exercise its right to buy all the shares held by Freddie, Hannah and their nominees in Led

Skinnard within 18 months from the date of signing of the agreement i.e. March 15, 2012.


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The only asset held by Led Skinnard was its 16% stake in Novio and therefore the strike price

of the call option was fixed such that the value of Led Skinnards shares represented its 16%

shares in Novio at the price of Rs 1500 per share.

THE ALLOTMENT OF SHARES AND THE SUBSEQUENT EVENTS

LinkParks proposed investment was approved in a meeting of the Board of Directors

of Novio held on March 15, 2012. The stock exchanges were informed of this meeting on

March 13, 2012. The approval of the shareholders was obtained on April 14, 2012 and the

shares were duly allotted to LinkPark on the next day. Though LinkPark had made disclosure

of its investment in Novio on the date of allotment, no disclosures were made regarding the

side letter or the Call Option Agreement.

Upon announcement of LinkParks investment in Novio, the market price of Novios

shares arose due to the bullishness of the stock markets. The proceeds of the issue of shares

were deployed for the development of The Messenger which turned out to be a great success.

During early May, 2012, LinkParks shareholding dropped below 10%, which was

however made up by Freddie as per the terms of the side letter. Such subsequent purchase

and sale of shares to make up for LinkParks shortfall was effected at prices ranging from Rs

1525 to Rs 1575.

SEBIS ORDER AGAINST LINKPARK

On analyzing all the transactions that were entered into between Novio, Freddie and

LinkPark, SEBI issued a show cause notice to LinkPark as to why it should not be subject to

penalties for failing to make an open offer to the shareholders of Novio and also for other

technical violations of the SEBI regulations. After hearing LinkParks submissions, the whole

time director of SEBI issued an order making it mandatory for LinkPark to make an open

offer at a price of Rs. 1575 and also imposed a penalty of Rs. 1 crore on it. The order also

declared the Call Option Agreement entered into between LinkPark and Freddie as void and

unenforceable on the ground of it violating several securities and corporate laws in India.

Aggrieved by this order of SEBI, LinkPark preferred an appeal to the Securities Appellate

Tribunal [SAT] which reversed SEBIs order on all counts.

FURTHER CONTRAVENTIONSNOTICED BY SEBI

During July, 2012 SEBI issued another notice to Freddie seeking information in

relation to possible contravention of applicable regulations issued by SEBI. The notice alsostated that some unusual transactions were detected by SEBI, one of which was the purchase


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of 50,000 shares of Novio by Purple Floydeon Investments Private Limited [Purple

Floydeon] on March 7, 2012 at an average price of Rs 1400 per share , a week prior to

Novios announcement about LinkParks proposed investment. Purple Floydeon, Indias

largest hedge fund, was managed by Mr. Mike Bennington, a smart technopreneur.

MIKES RELATIONSHIP WITH FREDDIE AND NOVIO

Mike and Freddie had a close relationship as they, along with their wives, had studied

in the same college. In addition to speaking to each other at least once a week, they used to

go on at least two vacations a year. Moreover, they often discussed tech and gaming matters.

To make up for LinkParksshortfall in May, 2012 Freddie had also contacted Mike, though

this became unnecessary at a later stage due to funding from other sources. Such close was

the relationship between Freddie and Mike that Freddie wanted Mike to join the Board of

Directors of Novio though he didnt take such a step due to the possible negative perception

about Novio that would have arisen in the markets as a result of this step.

In a professional capacity, Mike also provided strategic advisory services to Novio,

relating to financial and business aspects of the company under a formal agreement. For the

same, he was paid an annual consulting fee of Rs. 10 lacs as consideration.

THE ODDITY IN COMMUNICATIONPATTERN

During its investigations, SEBI also received Freddies itemized mobile bill, along with

other things. On checking the same, SEBI noticed an odd communication pattern. Between

March 1 and March 7, 2012 an aggregate of 216 text messages was exchanged between Mike

and Freddie. However, for the rest of the month, only a total of only 41 messages were

exchanged. Moreover, no calls were made between them during this period. Noticing this odd

communication pattern, SEBI asked for the content of these messages from both Freddie and

Creedtel, Freddies mobile telephone operator. Having being denied access, SEBI initiated an

action in the Bombay High Court compelling Creedtel to disclose the content of these text

messages. Such proceedings are stillpending before the Honble High Court.

SEBIS ORDER AGAINST FREDDIE,MIKE AND PURPLE FLOYDEON

On the basis of the available information, SEBI issued a show cause notice to Mike,

Freddie and Purple Floydeon in relation to possible contravention of various securities laws.

Though it is not disputed that the information relating to Novios search for a large investor

was in the public domain since February, 2012, the official announcement regarding the same

was made by Novio only on March 15, 2012. Moreover, the precise terms of the investment


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as well as the identity of the investor were unknown to the markets till the announcement was

made. Also, Purple Floydeon was a short term trader and in this period regularly invested and

divested in securities of various companies. However, the purchase of 50,000 shares was its

first only investment in Novio, with no divestment.

After hearing all the noticees, the whole time member of SEBI found all three guilty

under the applicable regulations issued by SEBI. The order debarred them from accessing the

capital markets and penalty ranging from Rs 10 lacs to Rs 50 lacs was imposed upon them.

Moreover, Purple Floydeon was asked to compensate all investors who had sold their shares

to it on March 7, 2012 with the amount being the difference between Rs 1575 and the price at

which the shares were sold to it. On an appeal by the concerned parties to the SAT, SEBIs

order was reversed. The SAT also pronounced a verdict on the matter relating to SEBI

seeking content of the text messages and held that it did not have the power to do so.

Aggrieved by both the orders of the SAT, SEBI has preferred an appeal before this Honble

Court.


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QUESTIONS PRESENTED

I.

WHETHER LINKPARK HAS ACQUIRED CONTROL OFNOVIO?

II. WHETHER THE CALL OPTION AGREEMENT IS VALID?

III.WHETHER THE INFORMATION ABOUT LINKPARKS INVESTMENT IN NOVIO, FOR THE

DEVELOPMENT OF THE MESSENGER IS UNPUBLISHED PRICE SENSITIVE INFORMATION?

IV.WHETHER THE RESPONDENTS ARE INSIDERS?

V. WHETHER MERE TRADING IN THE SCRIP OF NOVIO WHILE IN THE POSSESSION OF UPSI

RAISES A PRESUMPTION OF GUILT AGAINST THE INSIDERS?

VI.WHETHER EVIDENCE PROVIDED BY SEBI IS SUFFICIENT TO PROVE THAT RESPONDENTS

ARE GUILTY OF INSIDER TRADING?


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SUMMARY OF PLEADINGS

I.LINKPARK HAS ACQUIRED CONTROL OFNOVIO

In spite of arguments to the contrary, affirmative rights as provided for LinkPark underthe Share-Subscription-cum-Shareholders-Agreement can amount to control. The condition

that needs to be satisfied before such rights can amount to control is that the rights should

relate to day to day management of a companys business. In this case, the rights do relate to

the day to day management of Novio. In any event, the rights relate to major decisions on

structural and strategic changes and hence, amount to control. Thus, LinkPark is obligated to

make an open offer to the shareholders of Novio as it has acquired control over it.

II.THE CALL OPTION AGREEMENT IS VOID

The call option Agreement as contemplated in the present case is illegal under the

Securities Contracts (Regulation) Act, 1956 and is therefore void. Though it may be

contended that the said Act does not apply to unlisted companies such as Led Skinnard, this

is not the case as the Act does not make a distinction between listed and unlisted companies.

The definition of securities as given in the Act and also its legislative intent further support

this proposition. It may also be argued that options being contingent contracts are not

violating Section 16 of the act. This is however not the case and also the mere fact of an

option being a contingent contract does not render it legal under the Act. Further, in any

event, options are violating Section 18A of the Act.

III.THE INFORMATION OF THE 10%INVESTMENT BY LINKPARK FOR THE DEVELOPMENT OF

THE MESSENGER IS UNPUBLISHED PRICE SENSITIVE INFORMATION [UPSI]

It is submitted that firstly information about LinkParks proposed investment had not

been published by the company and news about Novios quest for a large investor was in the

public domain, only due to speculative media reports. Therefore, information about

LinkParks investment in Novio was unpublished. Secondly, when the announcement about

LinkParks investment in Novio was made, the stock prices of Novio rose immediately. This

shows that this news was indeed price sensitive in nature, as it affected the prices of

securities. Thirdly, LinkParks investment also granted it control in Novioas per provisions

in the Share-Subscription-cum-Shareholders Agreement. According to SEBI Regulations,

information about mergers, acquisitions and takeovers is price sensitive in nature.


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IV.THE RESPONDENTS ARE INSIDERS

Firstly, Freddie being the founder and only director acting in an executive capacity is

an insider, according to the SEBI [Prohibition of Insider Trading] Regulations, 1992.

Secondly, he shared an extremely close personal relationship with Mike, his college friend, by

virtue of which, it is submitted that Mike too was deemed to be a connected person.

Moreover, since they regularly discussed all upcoming recent developments, it can be

reasonably concluded that Mike would have access to unpublished price sensitive

information. Therefore, Mike is an insider. Thirdly, Mike also shared a professional

relationship with Novio, according to which he provided strategic advisory services relating

to financial and business aspects of the company. Since information relating to these aspects

is price sensitive, it is submitted that Mike too was an insider of Novio. Lastly, Purple

Floydeon was a privately owned hedge fund company in which Mike was managing its

affairs. According to the principle of directing mind and will of the company, a company is

liable for the actions of its officials who are the directing mind of it. Therefore, since Mike

was an important part of Purple Floydeon, and an insider of Novio, hence, Purple Floydeon,

i.e. the investment vehicle used by him will be liable for his actions.

V.MERE TRADING IN THE SCRIP OFNOVIO WHILE IN THE POSSESSION OF UPSIRAISES A

PRESUMPTION OF GUILT AGAINST THE INSIDERS

Firstly, when an insider, who is in possession of unpublished price sensitive

information, trades in the securities market, a presumption of guilt of is raised against him.

The burden of proof lies on the Respondents to prove that they did not trade on the basis of

this information, and their trades were motivated by some other legitimate purpose. Secondly,

the Respondents themselves considered the information to be price sensitive in nature, and

hence they only invested in Novio and did not divest, despite being short term traders. Thus,

it is submitted that Respondents traded not only when in possession of unpublished price

sensitive information, but also on the basis of it.

VI.EVIDENCE PROVIDED BY SEBIIS SUFFICIENT TO PROVE THAT RESPONDENTS ARE GUILTY

OF INSIDER TRADING

It is a well settled principle that in cases of insider trading, it is extremely difficult to

provide direct evidence. Therefore, the cases are entirely based on circumstantial evidence.

Firstly, in the given case, evidence provided by SEBI is sufficient to prove the offence of


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insider trading, as it is clearly established that the Respondents were insiders with access to

unpublished information which was price sensitive in nature, and they traded on the basis of

it, while in possession of the same. Secondly, it is submitted that under SEBI Regulations,

SEBI does have the power to access content of text messages exchanged between Mike and

Freddie, and an appeal requesting the same is still pending before the Honble Bombay High

Court. Therefore, it is submitted that evidence provided is sufficient to prove the Respondents

guilty of insider trading.


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PLEADINGS

Securiti es and Exchange Board of I ndia v.LinkPark I nvestments Partners LLC

I. LINKPARK HAS ACQUIRED CONTROL OF NOVIO

1.

It is a well settled rule that in interpreting pieces of legislation, one has to look into

the intent of the framers of the legislation.1In construing SEBI Regulations, judicial officers

have often resorted to the reports of various committees, based on the recommendations of

which such regulations were drafted.2 It has been emphasized by the Takeover Regulations

Advisory Committee (TRAC), which recommended the enactment of the Securities And

Exchange Board Of India (Substantial Acquisition Of Shares And Takeovers) Regulations,

2011 [Takeover Code, 2011]that not only acquisition of de jurecontrol but also de facto

control would trigger the open offer obligations.3 In this case, it is submitted that LinkPark

acquired de facto control of Novio, by virtue of the following reasons:

2. Firstly, not merely positive but also negative rights in the form of vetoing resolutions

passed by majority of the board of directors or shareholders can amount to control [A].

Secondly, in order to prove control, the negative rights should relate to the day to daymanagement of the company [B]. Thirdly, in the event these rights do not relate to the day to

day management of a companys business, it can still amount to control if these rights relate

to major decisions on structural and strategic changes [C]. It is submitted that in this case,

all these ingredients are present.

[A]. NEGATIVE RIGHTS CAN AMOUNT TO CONTROL

3.

Regulation 2(1)(e) of the Takeover Code, 2011 defines control to include:a.

a right to appoint a majority of the directors

or

b. a right to control the management or policy decisions of the company.

1District Mining Officer v. Tata Iron and Steel Company, 2002 (7) SCC 358.

2Rhodia SA v. SEBI, 2001 Indlaw SAT 27 [Rhodia SA]; Re NRB Bearings, Order NO. : CO/33 /TO/05/2003

3Report of the Takeover Regulations Advisory Committee, 29, (2010).


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4. It is submitted that in this case, the second requirement has been satisfied wherein

LinkPark is exercising control over the management or the policy decisions of Novio by

virtue of the affirmative rights it has been given in the Share-Subscription-cum-Shareholders

Agreement [Agreement].4

5.

Though it may be contended that control may occur only through positive rights and

not negative ones as contemplated in the Agreement, it is submitted that the distinction

between the two is minute. For example, if the minority shareholder imposes some conditions

upon an action that the company deems necessary to undertake, it may not be able to do so

until it accepts the minority shareholders conditions.In such a case, a negative right compels

a company to follow a certain course of action which it would otherwise not have followed

had it not been for the minority shareholder.

6.

The existence of negative rights in shareholders agreements has also been

acknowledged by the TRAC.5Though it held that a blanket provision stipulating such rights

as amounting or not amounting to control would be liable to misuse, it subsequently held that

the question of whether such rights amount to control would therefore have to be discerned

from the facts and circumstances surrounding each case.6 It thus did not rule out the

possibility of such negative rights amounting to control under certain circumstances.

7. Though Subhkam Ventures,7 ruled out such rights as amounting to control, the

Supreme Court subsequently held that the judgment by the Securities Appellate Tribunal

(SAT) was not to be taken as a precedent. Even if the reasoning used in Subhkam Venturesis

used to contend that the driving seat test, as per which the requirement of being able to steer

the companys decisions is to be satisfied before a certain action can amount to control, fails

in this case, such reasoning is false on the ground that it doesnt look into the fact that even

one possessing negative rights may be in the driving seat and thus in control of the company.

The example given above8amply illustrates this.

4Factsheet, Annexure.

5Report of the Takeover Regulations Advisory Committee, 29, (2010).

6Id. at 29.

7Subhkam Ventures v. Securities and Exchange Board of India, 2010 Indlaw SAT 12 [Subhkam Ventures].

8 5, Memorandum for Appellant.


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8. Moreover, the trigger point for open offer obligation under the Takeover Code, 2011

is 25%.9 It is submitted that this is not an arbitrary percentage. Under the Companies Act,

195610

a special resolution can only be passed if it has the support of seventy five percent of

the shareholders. In other words, a shareholder having more than twenty five percent stake in

a company can block such a resolution. Therefore, it is submitted that the concept of negative

rights is well built in the Takeover Code, 2011 itself.

[B]. THENEGATIVE RIGHTS ARE RELATED TO THE DAY TO DAY MANAGEMENT OF

NOVIOS BUSINESS THUS AMOUNTING TO CONTROL

9. Though negative rights may not amount to control of a company in itself, but if these

rights are shown to be related to the day to day management of a company, these rights do

amount to control.11

10.Accounting systems such as the US GAAP12 make a distinction between

participative and protective rights. While participative rights relate to the day to day

management of the company, protective rights do not. Furthermore, it has been held by the

Honble Supreme Court of India that participative rights restrict the powers of the majority

shareholder to exercise control over the operations of the company.13

11.It is submitted that in the given case, a number of affirmative rights as given in the

Agreement amount to participative rights. For example, rights with respect to declaration of

dividends, approval of annual business plan and remuneration of senior personnel of the

company are rights related to the day to day management of a companys business and thus

amount to controlling its management or policy decisions. Thus, LinkPark has acquired

control of Novio and is obligated to make an open offer under Regulation 4 of the Takeover

Code, 2011.

9Regulation 3(1), Takeover Code, 2011.

10Section 189, Companies Act, 1956.

11Subhkam Ventures, 2010 Indlaw SAT 12.

12 Generally Accepted Accounting Principles [GAAP] are rules and principles for accounting used in the

United States of America.

13Vodafone International Holdings B.V. v. Union of India & Anr., (2012) 6 SCC 613 at 76.


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[C]. IN ANY EVENT, THE AFFIRMATIVE RIGHTS RELATE TO MAJOR DECISIONS ON

STRUCTURAL AND STRATEGIC CHANGES

12.In the event it is held that the affirmative rights as given in the Agreement do not

relate to the day to day management of Novios business, the rights still relate to major

decisions on structural and strategic changes and thus amount to control.

13.In Rhodia SA,14

the acquirer was found to have been in joint control of a body

corporate located outside India on the basis that it had certain affirmative rights over major

decisions on structural and strategic changes. These rights related to declaration of

dividends, acquisition or disposal of assets amounting to more than 20% of the total

consolidated assets of the company, issuance of equity securities, stock splits,

commencement of a new line of business, etc. The requirement of the rights being related to

the day to day management of a company was done away with.15

14.Since the rights the acquirer had inRhodia SA, are similar to the ones provided in the

Agreement, it is submitted that LinkParks rights under the Agreement allowed it to influence

major decisions on structural and strategic changes of Novio, implying that it has acquired

control over Novio and is thus obligated to make an open offer under the Takeover Code,

2011.

II. THE CALL OPTION AGREEMENT IS VOID

15.It is submitted that the call option agreement entered into between LinkPark on one

side and Freddie and Hannah on the other on March 15, 2012 in relation to their shareholding

in Led Skinnard is void under the relevant securities and corporate laws. This is so as firstly,

the provisions of Securities Contracts (Regulation) Act, 1956 [Securities Act] do applyto

an unlisted company [A]. Secondly, the call option agreement violates both Section 16 [B]

and Section 18A [C]of the Securities Act.

[A].

THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 APPLIES TO UNLISTED

COMPANIES

16.It may be contended that unlisted companies, such as Led Skinnard, unlike listed

companies are outside the purview of the Securities Act. However, it is submitted that under

14Rhodia SA, 2001 Indlaw SAT 27.

15Rhodia SA, 2001 Indlaw SAT 27, 20.


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Sec. 2(h) of the Securities Act no such distinction should be made between the shares of

listed and unlisted companies and provisions of the Securities Act accordingly apply to both.

The same has also been held in the cases of Naresh K.Aggarwala16

andHimachal Pradesh

SIDC Ltd.17

17.

Even if such a distinction is made regarding the applicability of the Securities Act to

listed and unlisted companies, it is submitted that shares of unlisted companies do come

under the ambit of the Securities Act because such shares may be defined as securities

under the Act [i]. Further, the legislative intent clearly shows an intention to include and

regulate unlisted companies [ii].

i. Shares of unlisted companies are securities as per the Securities Act

18.The provisions of the Securities Act apply only to securities as defined under

Section 2(h) of the Act. The said section also mentions the words or other marketable

securities of a like nature.18

This implies that marketability is a necessary common criterion

that applies to all stated categories of securities such as shares, scrips, stocks, bonds, etc. as

defined under the Securities Act.19

19.In Dahiben,20

marketable securities were defined as those securities that enjoy a

higher degree of liquidity such that they can be readily sold in the market. In other instances

as well, it has been held that securities that are freely transferable may be regarded as

marketable.21

20.While, the Court in Dahiben22 concluded that private limited companies, which are

unlisted, did not come under the ambit of the Securities Act, inBKHoldings23

andEast India

16Naresh K. Aggarwala and Co. v. Canbank Financial Services Ltd., (2010) 6 SCC 178.

17Himachal Pradesh SIDC Ltd. v. PAMWI Tissues Limited and another, 2011 Indlaw HP 699.

18Sec. 2(h)(i), Securities Act.

19Dahiben Umedbhai Patel v. Norman James Hamilton, (1983) 85 BomLR 275 [Dahiben].

20Dahiben, (1983) 85 BomLR 275.

21Sahara India Real Estate Corporation Ltd v. SEBI, AIR 2012 SC 3829; AK Menon and BOI Finance Ltd. v.

Fairgrowth Financial Services Ltd and The Custodian [1994] 81 CompCas 508 [AK Menon]; Mysore FruitProducts Ltd. v. The Custodian, 2005 (107) BomLR 955 [Mysore Fruit Products].

22Dahiben, (1983) 85 BomLR 275.

23BK Holdings Pvt. Ltd. v. Prem Chand Jute Mills, 84 CWN 876 [BK Holdings].


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6

Produce24, the case was differentiated on account of the fact that the Court in Dahiben,

considered marketability with respect to a private limited company and not a public unlisted

company which is materially different from a private limited company. Despite the fact that

theBrookeBond case25later extended the principle inDahibento all unlisted companies, it is

submitted that the reasoning employed was flawed and the judgement has also been

subsequently overruled. InBrookeBond, it was held that the shares of unlisted companies are

not securities under the Securities Act as they are not freely transferable i.e. marketable

given that they do not have a proper market for trade. However, it is submitted that such a

definition of marketable securities would accord a very narrow meaning to them. 26 InBK

Holdings, it was concluded that marketable could be equated with saleable thereby

implying that anything capable of being sold would be deemed marketable. Hence, it is

submitted that definition of marketable under Brooke Bond is unduly restrictive and

therefore the appropriate definition of marketable should simply be shares capable of being

sold.

21.

Further, it is submitted that the condition to be marketable laid down in Dahiben

does not necessitate the existence of a market place and such securities may be traded in

without the physical existence of one. There is a very large volume of securities of public

companies that are not listed on the stock exchange. Often these securities are heavily traded

and have such a large market that they have quotations appearing in newspapers. The Court

in AKMenon27, citing the example of units of the Unit Trust of India, came to a similar

conclusion. Thus, it is submitted, on the basis of the above mentioned argument, that despite

the shares of Led Skinnard not being listed, there may be a large market for them where they

are capable of being sold.

22.Moreover, the Bench in AKMenon concluded that shares of a public unlisted

company that are otherwise capable of being listed in the stock exchange would come

under the purview of the Securities Act. MysoreFruit Products,28 reaffirming this view,

further noted that the decision in BrookeBondwas merely a prima facie view, as repeatedly

24East Indian Produce Ltd. v. Naresh Acharya Bhaduri, 1988 64 CompCas 259 Cal.

25Brooke Bond India Ltd. v. UB Limited, 1999 (2) BomCR 429.

26BK Holdings, 84 CWN 876.

27AK Menon, [1994] 81 CompCas 508.

28Mysore Fruit Products, 2005 (107) BomLR 955.


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7

clarified by the Single Judge. Hence, it is submitted that shares of public unlisted companies

qualify as securities under the Securities Act.

ii. The legislative intent of the Securities Act extends beyond the stock exchanges

23.Though judgements such as DahibenandBrooke Bondconcluded that the Securities

Act was never intended to regulate securities that were not listed on stock exchanges, this was

based on the flawed assumption that the stock exchange was the only market for trading in

securities.

24.It is submitted that the legislators did in fact intend for the mandate of the Securities

Act to extend beyond the stock exchanges. MysoreFruitProducts reinterpretedDahibenby

drawing attention to the fact that the Securities Act also regulates trading of securities outside

the limits of the stock exchanges through a mechanism of licensing of security dealers. The

Bench concluded that Sec. 1329 read with Sec. 1730 demonstrates that shares not listed on

stock exchanges were also securities.D. K. Deshmukh, J. noted, so far as the Court is

aware, there are only 21 recognised stock exchanges. Thus, in areas where there are no stock

exchanges and where there can be no listed securities, the Government can regulate by

means of licensed dealers.

25.Hence, it is submitted that the Securities Act was also intended to deal with

transactions outside the stock exchanges, i.e. trading in securities of unlisted companies.

[B]. THE CALL OPTION VIOLATES SECTION 16 OF THE SECURITIES CONTRACT

REGULATION ACT,1956

26.

It is submitted that the call option agreement entered into on March 15, 2012 is illegal

on the grounds of it violating Section 16 of the Securities Act, which applies in this case, as

has been proved in [A]. This is due to the following reasons:

27.Firstly, it may be contended that an option contract being a contingent contract

qualifies to be a spot delivery contract and is thus valid under the SCRA, however this

reasoning is faulty for the reason that an option contract is indeed not a contingent contract

[i]. Secondly, in the event it is a contingent contract, it is still illegal under the Securities Act

[ii].

29Section 13, Securities Act.

30Section 17, Securities Act.


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8

i. A Call Option is not a contingent contract

28.Options, on prior occasions, have been held to invalid by SEBI as they violate Section

16 of the Securities Act.31

Under that section and the subsequent notification issued under

it,32a contract for the purchase or sale of securities other than suchspot delivery contract or

contract for cash or hand delivery or special delivery or contract in derivatives as is

permissible under the said act is illegal. The term spot delivery contract has been defined

in Section 2(i) of the Act. Since an option contract is not a spot delivery contract, it is thus

illegal under Section 16 of the Securities Act.

29.Firstly, inMCX Stock Exchange,33it was held that since an option contract constitutes

a contingent contract, it qualifies to be a spot delivery contract and thus, is not per seillegal.

The judgement relied heavily uponJethalal C. Thakkar, 34wherein it was held that in case of

contingent contracts, a contract is formed only upon the occurrence of a contingency, which

inMCX Stock Exchange, was the exercise of the option. However, the court in MCX Stock

Exchange did not take note of the fact that Jethalal C. Thakkar had been subsequently

overridden by Niskalp Investments,35which held that in a contract where one party has an

option to buy back shares of another,36

such contract will not be a contingent contract.

Therefore it is submitted that, since options are not contingent contracts as per Niskalp

Investments, they are not spot delivery contracts. Moreover, MCX Stock Exchangehas beenheld by the Supreme Court to be not binding on SEBI.37

30.

Secondly, in addition to the judgements cited above, it has also been held that in a

contingent contract, the contingency contemplated should be outside the control of the

parties.38 In the present case, even if it is assumed that the contingency is that of the call

31 See Letter of Offer to the Shareholders of Cairn India Limited, April 8, 2011, available at

http://ww.sebi.gov.in/takeover/cairnlof.pdf (Last visited on February 10, 2012).

32

Securities and Exchange Board of India, Notification No. S.O. 184(E) (March 1, 2000).

33 MCX Stock Exchange Limited v. Securities & Exchange Board of India & Ors., (2012) 2 Comp LJ 473(Bom).

34Jethalal C. Thakkar v. R. N. Kapur of Bombay, AIR 1956 Bom 74 [Jethalal C. Thakkar].

35Niskalp Investments and Trading Company Limited v Hinduja Tmt Limited, 2008 143 CompCas 204 Bom.

[Niskalp Investments].

36Niskalp Investments, 2008 143 CompCas 204 Bom at 11.

37Securities and Exchange Board of India v. MCX Stock Exchange Ltd. and Ors., MANU/SC/0904/2012.

38Balwant Singh v. Rajaram, AIR 1975 Raj 73.


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9

option being exercised by LinkPark, it is within the control of one of the parties, i.e.

LinkPark. Thus, the call option agreement in question does not fulfil the definition of a

contingent contract.

31.Hence, it is submitted that the call option agreement entered into between LinkPark

and Freddie is illegal on the ground of it not being a contingent contract and as a

consequence, not falling under the definition of a spot delivery contract, a contract

permitted under the Securities Act.

ii. In any event, Call Option is still void under the Act

32.In the event it is held that a call option is a contingent contract, it is still void under

the Securities Act. The only instance where a contingent contract of similar nature as a call

option39was held to be legal and valid was in Jethalal C. Thakkar. However, as stated in

Niskalp Investments, the relevant securities law that was up for consideration in Jethalal C.

Thakkarwas the Bombay Securities Contracts Control Act, 1925 [Bombay Act], which is

no longer in force, and not the Securities Act.

33.

While the buy back arrangement in question was held to be valid in Jethalal C.

Thakkar on the basis that it constituted a ready delivery contract40

which was permitted

under the Bombay Act, the same could not be held in Niskalp Investmentsas the term used in

the Securities Act was a spot delivery contract which is substantially different from a ready

delivery contract. While under a ready delivery contract, the contract is supposed to be

performed either immediately or within a reasonable time, in case of a spot delivery

contract, the act of delivering the shares and paying the consideration is to be performed on

the same day of the contract or on the next day. In the case at hand, it is submitted that though

the call option agreement entered into on March 15, 2012 might have been valid had the

relevant legislation in place been the Bombay Act, but since there is no guarantee that the

delivery of shares and the payment of consideration therein will happen on the same day or

the next day of the contract, the agreement between the parties does not fall within the

definition of a spot delivery contract and is thus invalid under the Securities Act.

39The contract in that case dealt with a buy back arrangement wherein after the lapse of a certain period of time,

the defendants were supposed to buy back the shares of the plaintiff.

40Section 3(4) of the Bombay Securities Contracts Control Act, 1925 defines a ready delivery contract.


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[C]. IN ANY EVENT,THE CALL OPTION VIOLATES SECTION 18AOF THE SECURITIES

CONTRACT REGULATION ACT,1956

34.Section 18A of the Securities Act prohibits trading in derivatives unless these are

traded and settled on a recognized stock exchange. Derivatives have been defined under

Section 2(ac) of the Securities Act. Options are recognized as derivatives since they derive

their value from the underlying shares.41

Furthermore, derivatives are of two types:42

a. Over the Counter (OTC) Derivatives These are traded directly between the

parties without involving the stock exchange.

b. Exchange Traded Derivatives (ETD) These are traded and settled on a

recognized stock exchange.

35.

Options have been recognized as Over the Counter Derivatives,43 and are therefore

prohibited under Section 18A of the Securities Act since they are not traded and settled on a

stock exchange. Hence, it is submitted that irrespective of the option agreement between

LinkPark and Novio being void under Section 16, it is prohibited under Section 18A of the

Securities Act.

Securit ies and Exchange Board of I ndia v. Freddie Balsara, M ike Bennington, Purple

F loydeon I nvestments Pri vate Limited

36.

It has been established inAnil Harish,44 that under the Securities and Exchange Board

of India (Prohibition of Insider Trading) Regulations, 1992 [SEBI PIT Regulations] in

order to prove insider trading, SEBI is required to establish that:

a. The concerned person was an insider

b. S/he was in possession of unpublished information that was price sensitive in

nature

c.

S/he traded while in possession of such information.45

41Rajshree Sugars and Chemicals Limited v. Axis Bank Limited, (2008) 8 MLJ 261[Rajshree]; SeeSecurities

and Exchange Board of India, Letter addressed to Vulcan Engineers Limited, May 23, 2011, available athttp://www.sebi.gov.in/informalguide/Vulcan/sebilettervulcaii.pdf (Last visited on February 10, 2012).

42Rajshree, (2008) 8 MLJ at 9.

43Rajshree,(2008) 8 MLJat 9.

44Anil Harish v. SEBI,[2012] 114 SCL 407 [Anil].


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11

37.It is submitted that in this case, all these requirements have been satisfied and

therefore, the Respondents are guilty under the SEBI PIT Regulations.

III.THE INFORMATION OF THE 10% INVESTMENT BY LINKPARK FOR DEVELOPMENT

OF THE MESSENGER WAS UNPUBLISHED PRICE SENSITIVE INFORMATION [UPSI]

37. It is submitted that the information regarding LinkParks investment in Novio to fund

The Messenger was firstly unpublished [A] as well as price sensitive [B]. Secondly, it is

submitted that the Respondents themselves believed the information to be unpublished and

price sensitive, which attributes to them the necessary mental element for Insider Trading

[C].

[A].

INFORMATION WAS UNPUBLISHED

38.Unpublished information is that which has not been published by the company or its

agents, and which is not specific in nature.46 In the given case, it is true that matters

pertaining to Novios quest for an investment company were in the public domain. However,

this information along with the identity of the investor and the precise terms of the

investment was not published by the company.47Therefore, since the information was not

specific in nature and there were only speculative media reports, hence it is submitted that the

information about the 10% investment by LinkPark LLC in Novio was unpublished

information.48 Moreover, the information about Novio developing a new game The

Messenger was unknown to the market. Thus, the information about the game too was

unpublished.

45Anil, [2012] 114 SCL 407.

46Regulation 2(k), SEBI PIT Regulations, 1992.

47Factsheet,18.

48

According to the Explanation under Regulation 2(k), SEBI PIT Regulations, 1992 , Speculative reports inprint or electronic media shall not be considered as published information.


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[B]. INFORMATION WAS PRICE SENSITIVE

39.Any information which is related either direct ly or indirectly to a company and which,

if published is likely to materially affect the prices of securities of that particular company is

called price sensitive information.49

40.

Firstly, in the given case, LinkPark was a picky investor and had an immaculate track

record in investing in gaming companies that were hugely successful.50

Moreover, prices of

securities of Novio rallied upwards following the announcement about LinkParks

investment.51

Therefore, it can be reasonably concluded that the information about

LinkParks 10% investment, for the development of the new game was price sensitive.

Secondly, that fact that LinkParks acquisition granted it substantial control over Novio, can

also be deemed to be price sensitive information.

41.Though it is a well settled rule that information which is related to the ordinary course

of a companys business is not price sensitive in nature;52

it is submitted that information

regarding investments and takeovers for a software development company such as Novio is

not in the ordinary course of business and is therefore price sensitive.

42.Thus, it is submitted that the information about LinkParks 10% investment in Novio,

for the development of The Messenger was UPSI.

IV.THE RESPONDENTS AREINSIDERS

43.It is submitted that Mike [A]and Freddie [B]both can be classified as insiders under

the SEBI PIT Regulations. Further, Purple Floydeon must also be a party to the suit, and

therefore liable along with the other insiders [C].

[A]. MIKE BENNINGTON WAS AN INSIDER

44.

It is submitted that Mike Bennington was an insider firstly, because he was in a

position to receive and have access to UPSI, given his relationship with Freddie and Novio

[i]. Secondly, even if he did not in fact have access to UPSI, it is submitted that he was still an

49Regulation 2(ha), SEBI PIT Regulations, 1992.

50Factsheet,3.

51Factsheet,9.

52Gujarat NRE Minerals Ltd. v. SEBI, [2012] 106 CLA 37;Anil[2012] 114 SCL 407.


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13

insider given that he was a connected personwho was reasonably expectedto have access

to UPSI [ii].

i. Mike had access to UPSI

45.It has been expressly stated in the SEBI PIT Regulations53that an insider will be any

person who has received or has access to UPSI. Firstly, in the given case, Mike Bennington

shared a professional relationship with the company Novio, under a consulting agreement

entered into by both the parties. According to this agreement, Mike was required to provide

strategic advisory services on matters relating to the financial as well as business aspects of

the company, in return for which he also received an annual consulting fees of Rs. 10 lakhs. 54

Therefore, there existed a professional relationship between Mike and Novio. Secondly, Mike

and Freddie had been friends since college and maintained close contact with each other,

speaking at least once a week and vacationing together at least twice a year. Moreover, the

two also shared information relating to the gaming and tech industries so that each could gain

from the experience of the other.55 Therefore, it can be reasonably concluded that in this

professional capacity, Mike had access to the information about LinkParks investment in

Novio, which, as has been proved above is UPSI.

46.It was also held in the case of SEC. v. Lund56 that a friend who provided advisory

services to a firm was an insider. Moreover, it was noted in the landmark case of Dirks v.

SEC57 that sometimes, under special circumstances, outsidersmay, become fiduciaries to

shareholders, and therefore, be under the same duty to disclose or abstain, as an insider. This

was so if those outsidersgained access to UPSI for corporate purposes, by virtue of being in

a special confidential relationship with the company in question. In addition, Chiarella,58

established that any person, whether corporate insider or not, who receives material non-

public information of a company must not use that information to trade in securities of that

particular company.

53Regulation 2(e), SEBI PIT Regulations, 1992: insider means any person who, has received or has had

access to such unpublished price sensitive information.

54Factsheet,16.

55Factsheet,15.

56SEC v. Lund, 570 F. Supp. 1397 (1983) [Lund].

57

Dirks v. SEC, 103SCt 3255(1983).58

Chiarella v. United States, 445 U.S. 222 (1980).


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14

47.Therefore, it is submitted that Mike had access to material non-public information

about the LinkPark investment on account from his personal relationship with Freddie as well

as his professional position as a strategic advisor to Novio.

ii.

Mike was a connected person reasonably expected to have access to UPSI.

48.

Assuming, that Mike did not have access to UPSI, it is submitted that he was an

insider due to him being a connected personand that he was reasonably expectedto have

access to it. According to Regulation 2(c) of the SEBI PIT Regn., Connected person means

any person who holds a position involving a professional or business relationship between

himself and the company (whether temporary or permanent) and who may reasonably be

expected to have an access to unpublished price sensitive information in relation to that

company.59The SEBI Regulations further define an insider as a person who is connected to

the company, and is reasonably expected to have access to UPSI.60

49. Given Mikes personal relationship with Freddie61

and professional relationship with

Novio,62it is submitted that Mike was a connected person. In addition to this, the SEBI PIT

Regulations clearly state that an investment advisor, such as Mike, is deemed to be a

connected person.63

On account of these connections with Novio and its promoter-director

Freddie, he may be reasonably expected to have access to UPSI and is therefore, an insider.

[B].

FREDDIE IS AN INSIDER

50.Since, Freddie is the founder and one of the directors of Novio, he is a connected

person of the company.64 Moreover, since he is the only director acting in an executive

capacity, it is reasonable to expect that he would have access to UPSI. Therefore, it is

submitted that Freddie is an insider.

59Regulation 2(c)(ii), SEBI PIT Regulations, 1992.

60Regulation 2(e), SEBI PIT Regulations, 1992.

61Factsheet, 15.

62Factsheet, 16.

63 Regulation 2(h)(iii), SEBI PIT Regulations, 1992: person is deemed to be a connected person if such

personis an Investment Advisorwith the company.

64

Regulation 2(c)(i), SEBI PIT Regulations, 1992: connected person means any person who- is a director, asdefined in clause (13) of Section 2 of the Companies Act, 1956


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[C]. PURPLE FLOYDEON PURCHASED SHARES OF NOVIO WHEN IN POSSESSION OF

UPSI

51.It is further submitted that Purple Floydeon Investments Private Ltd., a hedge fund

managed by Mike, is also liable for insider trading, and hence must be a party to this suit. The

SEBI PIT Regulations65prohibit companies from dealing in securities of a company while in

possession of unpublished price sensitive information.66

During the time leading up to the

announcements made by Novio, Purple Floydeon (and not Mike) invested in Novio.67 It is

submitted that Purple Floydeons liability arises out of Mikes breach of duty as an insider, as

he used it as an investment vehicle. Where law seeks to impose liability on juristic persons

for offences that require personal fault or mens rea, the fault of directors or managers may be

treated as the fault of the company. 68Common Law jurisprudence has determined that when

a companys objectives can only be achieved through agency of individuals, who then act

fraudulently, such acts and associated knowledge shall be attributable to a company, similar

to how a private employer may be liable for the acts of his agents.69In this case, the decisions

to invest for a hedge fund are made by its officials. Therefore, it is submitted that if such a

decision is made with fraudulent or guilty intent, such knowledge may be attributed to Purple

Floydeon. Thus, this attribution of knowledge and guilt of a companys officials may render

it guilty of an offence committed by them. This principle was first developed in Lennard70

wherein one of the directors was found to be the directing mind and will of the company. It

was held that the company could not dissociate itself from the director and liability on

account of his actions and could not raise the defence of no actual fault or privity. This

Director or such a person in a similar position is the embodiment of the company, one that

65Regulation 3A, SEBI PIT Regulations, 1992: No company shall deal in the securities of another company or

associate of that other company while in possession of any unpublished price sensitive information.

66Regulation 3A, SEBI PIT Regulations, 1992.

67Factsheet, 14.

68Samsung India Electronics Pvt. Ltd. v. State of Assam, 2012(4)GLT546 [Samsung India]; HL Bolton Co.

Ltd. v. TJ Graham and Sons, 1956 All ER 624; Assistant Commissioner, Bangalore v. Velliappa Textiles Ltd.,(2003) 11 SCC 405.

69Ranger v. Great Western Ry. Co., (1854) 5 HLC 72.

70Lennard's Carrying Co. Ltd. v. Asiatic Petroleum Co. Ltd, [1915] A.C. 705.


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16

hears and speaks through its persona. Within his appropriate sphere, he is the mind of the

company and if it is a guilty mind, then the guilt may be attributed to the company.71

52.Considering the fact that Mike held a managerial position, as well as a considerable

stake in Purple Floydeon, a privately held hedge fund, it is a reasonable inference that Mike

used Purple Floydeon as an investment vehicle in order to gain from his special knowledge of

Novio. Hence, it is submitted that the price sensitive special knowledge that Mike possessed

may be attributed to Purple Floydeon, given his position in the company. This is because

Mike was in the position to be the directing mind and willof the corporate body. The acts

and state of mind of such persons are, in law, the acts and state of mind of the corporation

itself.72

V.

MERE TRADING IN THE SCRIP OF NOVIO WHILE IN THE POSSESSION OF UPSI

RAISES A PRESUMPTION OF GUILT AGAINST THE INSIDERS

53.Firstly, there is a presumption against an insider in possession of UPSI thatany trade

he makes in the relevant securities is on the basis of or motivated by his special knowledge,

rendering him guilty of insider trading [A]. Secondly, even if this presumption is not

sustained, it is submitted that the Respondents believed the information regarding LinkParks

investment to be UPSI and therefore traded accordingly [B].

[A].

THE BURDEN OF PROOF LIES ON THE RESPONDENTS TO SHOW THAT THE TRADE

WAS NOT ON THE BASIS OF UPSI.

54.It was held in the case of Chandrakala73 that if an insider trades or deals in

securities of a listed company, it may be presumed that he / she traded on the basis of

unpublished price sensitive information in his / her possession unless contrary to the same is

established. Therefore, the burden of proving that the same did not happen, and he/she

traded on some other basis, is on the insider himself. Hence, only if an insider shows that

he/she did not trade on the basis of UPSI, he/she shall not be held liable for violation of SEBI

Regulations. Therefore, in the given case, the burden of proof lies on the Respondents to

71Tesco Supermarkets Ltd. v. Nattrass, (1971) 2 All ER 127.

72Samsung India, 2012 (4) GLT 546.

73Chandrakala v. SEBI, (2012) 2 CompLJ 391 [Chandrakala].


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17

prove that they did not trade on the basis of UPSI, i.e. information about LinkParks

investment in Novio, for development of the new game The Messenger.

[B]. THE RESPONDENTS BELIEVED THE INFORMATION TO BE UPSIAND THEREFORE

TRADED ON THE BASIS OF IT.

55.

It is observed that Purple Floydeon purchased 50,000 shares of Novio on March 7,

2012, prior to the public announcement of LinkParks investment.74

Further, this was the first

and only investment by Purple Floydeon in Novios scrip, although it did invest and divest in

other companies.75

This situation is extremely similar to the case of SEC v. Lundwherein

Lund, an insider, purchased a substantial amount of stock of a company after learning about a

proposed joint venture with another company. The courts held that Lund himself considered

this information to be material and price sensitive. This was evident from the fact that this

was his only purchase in the companys stocks in a 10 year period. A similar ho lding was

also given in the case of SEC v. Shapiro76

.

56.The fact that only an investment and no divestment in Novios stock was made,

despite Purple Floydeon being a short term trader and regularly investing and divesting in

other companies, shows that it considered this information to have the potential to materially

and positively affect the market price of Novios securities upon being disclosed to the

public, as was also held in Chandrakala. Thus, it is submitted that the Respondents Mike and

Purple Floydeon considered the information to be price sensitive and accordingly purchased

the stock of Novio with the intention of earning profits. This in turn raises a presumption of

guilt against them.

VI.EVIDENCE PROVIDED BY SEBIIS SUFFICIENT TO PROVE THAT RESPONDENTS ARE

GUILTY OF INSIDER TRADING

Due to the nature of the offence, it is rare and problematic to find conclusive evidence against

Insider Trading. Thus, in most instances, the Courts proceed on the basis of circumstantial

evidence [A]. Further, in the given case, even if the circumstantial evidence is not sufficient,

it is submitted that SEBI can access text messages and call records of the Respondents [B].

74Factsheet,14.

75Factsheet,18.

76SEC v. Shapiro, 494 F.2d 1301 (2d Cir. 1974).


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18

[A]. FINDINGS ARE TO BE BASED ON CIRCUMSTANTIAL EVIDENCE

57.It was held in the case of Sandeep Jain v. SEBI77that because of the complex nature

of investigations in insider trading, the cases are always built on circumstantial evidence. The

primary reason for this is that the accused rarely ever confess to having committed the

offence and the ways to gain access to the communications between the parties are extremely

limited, along with the ascertainment of intent. In such cases, direct evidence is extremely

hard to find, and therefore, circumstantial evidence is used. In the case of SEC v.

McDermott78

, the government had built its case entirely on circumstantial evidence based on

the ongoing affair between McDermott (the tipper) and Gannon (the tippee), telephone

conversations between the two and records of their trading activities. Although no direct

evidence was produced by the government, of the content of any conversation between

McDermott and Gannon, the Second Circuit held that rational minds could infer such a

conclusion from the above evidence.79

It is submitted that in the given case it can be

reasonably drawn from the proposition that Mike and Freddie shared an extremely close

personal relationship.80 Moreover, the two also shared a professional relationship wherein

Mike provided strategic advice to Novio. It is also to be noted that just prior to LinkParks

investment, between March 1-7 2012, Mike and Freddie had exchanged an aggregate of 214

text messages, whereas, for the remainder period, only an aggregate of 41 messages, and nophone calls had been exchanged. This is an odd communication pattern as Mike and Freddie

were otherwise known to converse over the phone at least once a week. It should also be

noted that Mike purchased shares of Novio immediately prior to the announcement of

LinkParks investment.81 Therefore, based on all the evidence that can be clearly inferred

from the circumstances listed above, it can reasonably be concluded that Mike, who was an

insider, did have access to UPSI based on which, he purchased shares in Novio in order to

make a profit. Moreover, drawing on the order of the Court in SEC v. McDermott, even

though SEBI does not yet have access to the content of text messages exchanged between

77Sandeep Jain v. Securities and Exchange Board of India, 2012 Indlaw SAT 111.

78SEC v McDermott,277 F.3d 240 (2d Cir. 2002) [McDermott].

79McDermott, 277 F.3d 240 (2d Cir. 2002).

80

Factsheet,15.

81Factsheet,17.


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Mike and Freddie, still, based on the preponderance of circumstantial evidence submitted by

SEBI82it is submitted that the Respondents should be held guilty of insider trading.

[B]. SEBI SHOULD HAVE ACCESS TO CONTENT OF TEXT MESSAGES EXCHANGED

BETWEEN MIKE AND FREDDIE

58.

According to SEBI PIT Regulations it is the duty of the insider to cooperate with

SEBI and furnish all such records and documents in his custody or control, which relate to

transactions undertaken by him in the securities market, if SEBI is of the opinion that the

same must be investigated.83

It shall be the duty of every director, proprietor, partner, officer

and employee of the insider to give to the investigating authority all assistance in connection

with the investigation, which the insider may be reasonably expected to give.84In the given

case, the documents with the content of the text messages are in control of Freddie and Mike.

Being insiders, it is their duty to cooperate and provide SEBI with any documents that may

be required.

___________________________________________________________________________

PRAYER

Wherefore in light of the issues raised, arguments advanced and authorities cited, it is humbly

prayed that this Court may be pleased to hold, adjudge and declare that;

1. The appeals filed by the Appellant are allowed.

2. The orders of the Securities Appellate Tribunal are reversed.

And pass any other order it may deem fit in the interest of justice, equity and good

conscience.

All of which is humbly prayed,

Team Code ______,

Counsel for the Appellant.

82SEC v. Rajat Gupta, 11-cr-00907, U.S. District Court, Southern District of New York (Manhattan).

83Regulation 7, SEBI PIT Regulations, 1992.

84Regulation 7 (4), SEBI PIT Regulations, 1992.

Documents

Written-Submission Appellant NLSIU