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 lac.
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.