Sebi Busts False 'Algo Trading' Racket, Orders Scamsters To Return Unlawful Gains Along With Interest And Penalty

Sebi Algo Trading News: Market watchdog, Securities Exchange Board of India (Sebi) released an interim order against Shivprasad Pattiya and Alkesh Narware. In its order, the market watchdog alleged that both Pattiya and Narware misused online trading kits and lured investors by offering 'guaranteed returns' from an algorithm or software-based trades in illiquid 'Out of the Money' (OTM) stock options.Notably OTM stock options refer to options contracts like calls or puts. However these contracts are less likely to be exercised since their strike price is different from the current market price of the underlying stock. Thus OTM stock options typically have less buyers and sellers.

Sebi's Crackdown On Shivprasad Pattiya and Alkesh Narware

Shivprasad Pattiya and Alkesh Narware have been barred by the market watchdog from accessing the securities market for a period of three years. The market watchdog also directed the duo to return Rs 4.83 crore along with 12 per cent simple interest from February 1, 2022. The disgorgement has to happen within a stipulated time period of 45 days as per Sebi's order. Apart from being directed to disgorge the unlawful gains the market watchdog also directed the duo to pay a penalty of Rs 25 lakh each under the "Section 15HA of the SEBI Act, 1992 ".

"..restrained from accessing the securities market and further prohibited from buying, selling or otherwise dealing in securities (including units of mutual funds), directly or indirectly, or being associated with the securities market in any manner, whatsoever, for a period of Three (3) Years, from the date of this order," SEBI said in the order.

The order by the market watchdog came in light of the complaints filed by multiple investors who were duped by the duo.

Pattiya and Narware's Modus Operandi

Apart from Pattiya and Narware, other people were also allegedly involved in the scam. The market regulator said that apart from the duo a 'Caller Group' played a major role in the scam by luring potential investors via WhatsApp messages and calls. In these calls and messages, the Caller Group lured potential investors by offering guaranteed returns through a "Algo-based" trading strategy.

Once the investors showed interest they were further lured into sharing the credentials for their trading accounts. Parallely the duo established a network of front entities which acted as a counterparty for the trades undertaken. Notably 28 front entities were involved in the fraudulent scheme and claimed they were unaware about the trades.

Once the access to these investor's accounts was taken by the front entities, the duo made a series of buy orders in deep OTM stock options using the accounts. The buy orders were placed at unnaturally high and inflated premium prices in contracts that were very close to expiry.

The OTM options were selected in such a way that any chance of making a profit was unlikely. Simultaneously, the scamsters placed sell orders from the accounts of the Front Entities that matched the price and quantity of the buy orders.

As per the Sebi's investigation, both orders were typically executed within minutes or seconds, and the quantity and price of both legs matched precisely. Since the contracts expired quickly after the trades were placed, this led to complete loss of premium for the investors and gains for the scamsters who had taken corresponding sell positions via the front entities.

Once the unlawful gains were credited into the accounts of the front entities, the funds were withdrawn or rerouted to accounts of other front entities. The duo would finally withdraw the unlawful gains via cash or through multiple transfers between the front entities.

What Sebi Said In The Matter

The market watchdog commented on the matter in the order and said that the actions taken by the duo have caused substantial financial harm, undermined the sanctity of the market and violated principles of fairness and transparency.

"Noticees' actions have caused substantial financial harm to the investors, undermined the sanctity of market integrity, and violated the foundational principles of fairness and transparency governing securities markets. The gravity of the misconduct warrants strong regulatory action, including restraining the Noticees from accessing the securities market, disgorgement of unlawful gains, and levying of penalty under Section 15HA of the SEBI Act. 85," Sebi said in the order.