A Phone Leads SEBI To Unearth Scam In Rs 65 Crore Front Running Scheme; Check Details

Markets regulator Securities Exchange Board of India (SEBI) has uncovered a Rs 65.77 crore front-running scam. Former stock broker Ketan Parekh, who was previously convicted in 2008 for his involvement in the 1998-2001 market manipulation scam, is said to be at the centre of this scam.

According to a report by BusinessWorld the SEBI has cracked down on a front-running scheme in which Parekh used non-public information (NPI) to conduct illegal stock market trades. The market regulator has said that Parekh and his associate Rohit Salgaocar used insider information to generate illegal profits of Rs 65.77 crore. A network of mobile phones was used to conduct the scam.

How Did SEBI Uncover The Scam?

SEBI analysts found that Parekh had registered 10 mobile numbers under different names. All the numbers were located at Parekh’s Mumbai residence. The numbers were also found to be travelling with Parekh across different locations. However, the investigation started when a mobile number registered under Parekh’s wife, Mamta Parekh was found to be part of the network of mobile numbers used for the scam, according to the report. The phone number was found to be linked to her Aadhar card.

The report claimed that Parekh submitted his Aadhar card during a visit to SEBI’s office in March 2023. The Aadhaar card contained the phone number “XXX030XXXX’. The market regulator found in its investigation that the number was also linked to Mamta Parekh’s Aadhar card. Parekh also confirmed that “XXX030XXXX” belonged to his wife in a statement given to the SEBI on December 12, 2023.

SEBI analysed the location data of the number and matched the location with other mobile numbers used by Parekh to trace the movement of the phones.

How Were The Mobile Phones Used?

Parekh and his associate Salgaocar used the network of phones to facilitate trades in the securities market on the basis of insider information. Parekh obtained insider information from Salgaocar and then sent stock tips or NPI to his front runners who conducted the trades.

The SEBI found that Salgaocar had access to confidential information about trades placed by a large US-based fund. The fund was referred to as ‘Big Client’ by Salgaocar and Parekh in their communication, as per the report. As a part of the scam, Parekh passed on information to front runners who placed trades before the ‘Big Client’ conducted any transactions.

The manipulation done by front runners allowed them to profit from the resulting price movements. The report cited Salgaocar’s statement to the SEBI in which he said that he used the information from the Big Client to find counterparties for trades, including Parekh. Additionally, Salgaocar admitted that Parekh fulfilled around 90 per cent of the Big Client's trades.

“The dealer of the Big Client provides me with the name of the stock they are interested in. I will check the availability with different market participants including foreign funds, Indian funds, other holders of the shares etc. and lastly with Ketan Parekh," Salgaocar told SEBI.

SEBI Uncovers Patterns In Front Running Methodology

The SEBI found in its investigation that some trading patterns were used in the front-running scam. The report said that the scammers used a ‘Buy-Buy-Sell’ pattern. To execute trades in the ‘Buy-Buy-Sell’ pattern, the front runners would buy shares based on the tips shared by Parekh, following which the ‘Big Client’ would place buy orders, increasing the demand and hiking prices. After the buy order was placed, the front runners would sell the shares at the increased price, resulting in gains.

The report found that a “Sell-Sell-Buy” pattern was also identified in which the front runners would short-sell shares before the Big Client placed their sell orders. The short sellers would then buy the shares back later at a lower price. SEBI analysts studied the trading data, WhatsApp messages and call records to decode the link between Parekh, Salgaocar and the front runners.

A WhatsApp conversation found on the phone of one of the front-running suspects, Sanjay Taparia, read ‘happy birthday’. The message was sent to“Jack Latest” who was later identified as Parekh. The date of birth was the same as that listed on Parekh’s PAN card confirming his involvement.

SEBI’s Action Against Frontrunners

The markets regulator found that brokers such as GRD Securities, Salasar Stock Broking and other entities based in Kolkata helped facilitate the illegal trades. A total of 22 entities were involved in the operations according to the markets regulator after search and seizure operations were conducted across 20 locations.

The SEBI has taken corrective action against those involved in the scam in the form of an interim order barring Ketan Parekh, Rohit Salgaocar and the 22 entities from accessing the Indian securities markets. The regulator has also seized the unlawful gains of Rs 65.77 crore from Parekh, Salgaocar and the other entities involved in the scam.