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SEBI’s Investigation Unveils Front Running Case at Quant Mutual Funds
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The Securities and Exchange Board of India (SEBI) recently uncovered a significant front running case involving Quant Mutual Funds. This article delves into the details of how this scheme was executed, the individuals involved, and the consequences that followed.
SEBI’s system found suspicious transactions matching the transactions of Quant Mutual Fund.
An alert by SEBI’s monitoring system revealed that the transactions of some entities were matching with the transactions of Quant Mutual Fund, raising suspicion of information leak. A source close to the investigation said, “SEBI’s system found that the transactions of the suspicious entities were matching with the transactions of Quant Mutual Fund.”
Therefore, SEBI suspects that a dealer of Quant Mutual Fund or a broking firm handling the orders of the fund may have leaked the trade information. During the search operation, SEBI seized digital devices including mobile phones and computers to collect evidence. The examination of these devices will help in finding out who was sharing confidential trade information.
Based on the initial findings, SEBI plans to question individuals who had access to the trade information of Quant Mutual Fund. The special focus is on officials who knew the size and timing of the orders and who could have passed on this information to external beneficiaries.
Quant Mutual Fund has issued a clarification on the matter, confirming that it has received an inquiry from SEBI and assuring investors that it is “fully committed” to cooperating with the market regulator. “As a matter of policy, we do not comment on media reports. However, it is important to clarify certain points in order to maintain transparency with all our stakeholders,” it said.
“Recently, Quant Mutual Fund has received an inquiry from SEBI, and we would like to address any concerns you may have regarding this matter. We would like to assure you that Quant Mutual Fund is a regulated entity, and we are always fully committed to cooperating with the regulator during any review. We will provide all necessary assistance and continue to provide data to SEBI regularly and as required,” Quant said.
What is Front Running?
Front running is the illegal practice of using non-public information about an upcoming substantial order to trade securities. The perpetrator buys the same securities before the order is executed, anticipating that the price will rise, thereby benefiting from the transaction. SEBI defines front running as a severe violation of market regulations.
A Regular Day at a Fund House
At a typical fund house, a fund manager is responsible for making investment decisions for a scheme, including which stocks to buy or sell and at what price. However, the actual trades are not executed by the fund manager. Instead, the manager communicates their decisions to a dealer via a Bloomberg order management system. The dealer then executes the trades, ensuring they occur at the best possible price and within the desired timeframe. Both the fund manager and the dealer operate under strict surveillance, with personal mobile phones and email IDs prohibited in the office to prevent information leaks.
Axis Mutual Funds Case of Front Running
During the COVID-19 pandemic, Axis AMC installed Bloomberg trading terminals on the laptops of dealers so they could work from home. This remote working setup created an opportunity for misconduct. In September 2021, Veeresh Joshi, a dealer at Axis Mutual Fund, hatched a plan to exploit the situation for personal gain. He approached his friend and market operator, Sumit Desai (also known as Pintu Bhai), to arrange for trading accounts through which they could front run trades.
Desai then contacted Pranav Vora, who secured suitable trading accounts from Marfatia Trading Company. These accounts were used to conduct trades with minimal suspicion. A trading terminal belonging to Marfatia Stock Broking Company was installed in Dubai on the computer of Brijesh Kurani, another participant in the scheme. Kurani used this terminal to place trades based on information provided by Joshi.
Execution of the Scheme
Joshi communicated with Kurani using a personal mobile phone not registered with Axis Mutual Fund. He would pass on information about upcoming trades, allowing Kurani to execute orders in advance. This scheme allowed them to benefit from price movements before the mutual fund’s trades were executed.
For instance, on a particular day, Joshi instructed HDFC to buy shares of Gland Pharma for Axis Mutual Fund. Simultaneously, he inquired about the best available price for the same shares from Motilal Oswal for his personal accounts, executing the trade before Axis Mutual Fund’s order. This sequence of trades demonstrated clear front running, with Joshi taking advantage of non-public information for personal gain.
Financial Impact and Investigation
The wrongful gains from this scheme were substantial. The Marfatia group amassed wrongful gains of ₹9.49 crore, while the Woodstocks group gained ₹14.07 crore. The Kurani group benefited to the tune of nearly ₹7 crore. The total wrongful gains amounted to ₹30.55 crore.
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The scheme came to light following a whistleblower complaint from Bhavan Shaha, who had lent his trading account to Marfatia Stock Broking. On January 19, 2022, Shaha sent an email to various regulatory agencies, including SEBI. This email was discovered by Axis Mutual Fund during an internal investigation, leading to further scrutiny and the eventual uncovering of the entire scheme.
SEBI’s Response and Conclusion
SEBI’s detailed investigation, documented in a nearly 100-page report, highlights the severity of the misconduct. The report includes extensive details of the WhatsApp chats and Bloomberg messages exchanged between Joshi and the brokers involved.
As a result of this investigation, SEBI has initiated parallel and separate proceedings involving different entities. The regulatory body has emphasized the importance of maintaining strict surveillance and ensuring that such violations do not recur.
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Personal Actions
In light of the findings, the author has decided not to invest further in Axis Mutual Fund but will not withdraw existing investments immediately, awaiting further orders from SEBI. The ongoing investigations and proceedings by SEBI will determine the final outcome for the entities involved.
SEBI’s thorough investigation and well-drafted report serve as a testament to the regulatory body’s commitment to maintaining market integrity and protecting investors’ interests.
For those interested in the detailed report by SEBI, it is available via the link provided in the description box below. This case serves as a reminder of the importance of strict regulatory measures and the potential consequences of circumventing market rules for personal gain.
For any further queries or detailed advice, always consider consulting a financial expert.
