Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

SEBI loses case on misleading recommendations

Last week, the Securities and Exchange Board of India (SEBI) lost a
high profile case regarding misleading investment recommendations: the
Securities Appelate Tribunal (SAT) set aside the
SEBI order against Mathew Easow.

SEBI’s order in
September 2006 stated that “While Mathew Easow has been advising
the market to buy a stock, he himself has taken contrary
positions. This indicates an obvious attempt to mislead the investors
through investment recommendations, in a striking posture of
ambivalence coupled with interest. ”

On appeal, SAT was scathing in its criticism:

We cannot uphold any of these findings which are based on a
complete misreading of the recommendations made through the
e-mails. … We are amazed that the adjudicating officer could not
understand this basic concept. Unfortunately, the adjudicating officer
did not apply his mind to the merits of the recommendations made by
Mathew. He did not even make an attempt to understand what the
recommendations meant.

In view of the aforesaid discussion, we allow the appeal, reverse
the findings recorded by the adjudicating officer and set aside the
impugned order. The damage caused to the reputation of Mathew cannot
be undone. However, he will have his costs which are assessed at Rs.1

There is an enormous conflict of interest inherent in a person
making investment recommendations while also trading in the same
securities. Disclosures and disclaimers coupled with investor
education are meant to address this conflict of interest. The facts
that SEBI has brought on record do not appear to be sufficient to
elevate this inherent conflict of interest to the level of a “a
fraudulent or an unfair trade practice”. We do not know whether
a more thorough investigation and a deeper analysis would have led to
a different set of facts and a different set of conclusions. However,
based only on the facts that are available in the SEBI order and the
SAT judgement, I find it difficult to disagree with the SAT.


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