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In an insider trading case involving shares of Orchid Chemicals, securities market regulator Sebi on Wednesday booked a former Ranbaxy independent director, relying extensively for the first time on wiretaps to establish the case.
Not just that, Sebi also pointed out that the New York district court dismissed a plea to reject the Galleon conspiracy case where Rajaratnam had argued that “relying on calls and trading records without any direct evidence of the content of the calls asks the jury to engage in impermissible speculation.”
The case against VK Kaul and his wife Bala Kaul was that they bought shares of Orchid Chemicals on the basis of information gathered by the former as an independent director on the board of Ranbaxy. The Delhi-based pharma major decided to invest Rs 200 crore, or less than 15 per cent, in Orchid Chemicals through its subsidiary Solrex.
Sebi slapped a fine of Rs 50 lakh on VK Kaul (another Rs 10 lakh on his wife Bala Kaul), who was independent director of Ranbaxy during March, 2008. On March 17, 2008, US investor (and now bankrupt) Bear Sterns sold large quantities of shares of Orchid, resulting in a fall of the stock from Rs 201 to Rs 196.
The promoters of Orchid had substantial number of shares pledged with Indiabulls Financial Services and Religare Finvest. When margin calls were triggered, Orchid promoters could not meet the same, forcing the lenders to sell the shares. The stock plunged to Rs 116, before recovering to Rs 165 on April 1, 2008 and to Rs 319 on April 16.
Sebi found that the husband-wife duo bought Orchid shares on March 27 and March 28, 2008, before Ranbaxy arm Solrex invested in the company, thereby profiting from insider information. The two sold the shares at higher prices after Ranbaxy made the announcement.
Bala Kaul bought 35,000 Orchid shares at an average price of Rs 131.71 and sold them on April 10, 2008 at an average price of Rs 219.94. The initial alerts of insider trading were generated at both NSE and BSE, leading Sebi to begin an investigation into the matter.
Solrex had started buying Orchid shares from March 31, 2008, Sebi said.
To establish the case, Sebi’s chief general manager and adjudicating officer D Ravi Kumar relied on telephonic records of Kaul with Malvinder Mohan Singh (the then CEO and MD of Ranbaxy) and Omesh Sethi (who was vice-president and head of global finance at Ranbaxy).
Sebi said on March 24, 2008, Malvinder Mohan Singh spoke to the Kauls four times for 25 minutes. The next day, Kaul spoke to Omesh Sethi and then Sethi spoke to the noticee three times for 20 minutes. On March 26, Malvinder Mohan Singh spoke to Kaul twice for 15 minutes.
Spokespersons for Ranbaxy and Orchid Chemicals declined to comment on the issue. “It is seen from the telephonic records that the noticee was in constant touch with (Shri) Malvinder Mohan Singh and (Shri) Omesh Sethi from March 24 to 26 (last week of March, 2008), who had received/access to UPSI (unpublished price-sensitive information) and, thereafter, the frequency of the telephonic contact reduced considerably,” Sebi said.
The market regulator also quoted the US insider trading conviction case of McDermott where the government built its case almost entirely on circumstantial evidence, linking records of telephone conversations between McDermott and Gannon with the records of trading activities of Gannon and Pomponio.
“Although the government was unable to produce direct evidence of the content of any conversation during which McDermott transferred material, non-public information to Gannon, the Second Circuit held ‘that rational minds could infer such a conclusion from the above evidence’…,” Sebi quoted.
(With inputs from D Govardan in Chennai and Kumar Shankar Roy in Delhi)
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