LIC front running trade case: Sebi bans 5 entities from securities mkt; impounds Rs 2.44 cr

Sebi on Thursday barred five entities, including an employee of Life Insurance Corporation of India (LIC), from the securities market and impounded illegal gains of Rs 2.44 crore made by them, in a case pertaining to front-running the trades of the state-owned insurer.

Also, they have been asked to "cease and desist" from engaging in any fraudulent, manipulative or unfair trade practice, including front-running.

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These five entities prohibited by Sebi are -- Yogesh Garg, who was working in the investment department of LIC through which trades on behalf of the insurer were placed; his mother Sarita Garg; his mother-in-law Kamlesh Agarwal; Ved Prakash HUF and Sarita Garg HUF, the capital markets regulator said in its interim order.

Going by Sebi's order, Yogesh Garg is still professionally associated with LIC. Sebi has been informed by LIC that Yogesh Garg has been transferred from the investment department of the company to another department of the insurance firm.

The five entities are connected through family relations, common address and common phone number.

In its order, Sebi found that Yogesh Garg, being a dealer in LIC, was in possession of non-public information regarding impending orders of LIC and acted as an information carrier. He has also, prima facie, used the account of one late Ved Parkash Garg to trade on the basis of the non-public information of LIC.

With respect to other four entities, they or their accounts were prima facie instrumental in front running trades of LIC.

"It is prima facie concluded that Noticees 1 to 5 (five entities) were involved in a scheme to front run the trades of the Big Client (LIC) and therefore they are prima facie jointly and severally liable for the proceeds generated from the front-running trades," Sebi said.

These entities are alleged to have made illegal gains by way of the prima facie front-running activity amounting to Rs 244.09 lakh.

By indulging in such trades, they, prima facie, violated the provision of PFUTP (Prohibition of Fraudulent and Unfair Trade Practices) rules.

Accordingly, Sebi has restrained the five entities from buying, selling, or dealing in securities, either directly or indirectly, in any manner whatsoever until further orders.

Front-running refers to an illegal practice in the stock market where an entity trades based on advanced information from a broker or analyst before the information has been made available to its clients.

The order came after Sebi's alert system generated front-running alerts for January to March 2022 against these five entities suspected to be front-running the trades of LIC or big client.

Based on the alerts, an examination was conducted for the period January 2020 to March 2022 to examine possible violations of regulatory norms by the suspected entities.

The strategies commonly used to front-run trades are -- Buy-Buy-Sell and Sell-Sell-Buy.

In Buy-Buy-Sell (BBS) trading pattern, the alleged front-runner, by using the non-public information regarding an impending buy order of the big client, places his buy order before the big client's buy order. As and when the big client places a buy order, the price of the security rises and the alleged front-runner sells the securities bought earlier, at the raised price, thereby pocketing the difference between the newly raised price of the security which is established post big client's buy trades and the price at which he had bought his securities.

Further, in the Sell-Sell-Buy (SSB) trading pattern, the alleged front-runner by using the non-public information regarding an impending sell order of the big client, places his sell orders before the big client's sell order. When the big client places a sell order, the price of the security falls which allows the alleged front-runner to buy back the securities at a lower price to meet his obligations which he had created earlier by selling securities.