AL MAL SECURITIES & SERVICES LTD. (Plaintiff) VS SECURITIES & EXCHANGE COMMISSION OF PAKISTAN (Defendant)

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ORDER SHEET

IN THE HIGH COURT OF SINDH, KARACHI

Suit No.l343 of2008

Date Order with signature ofJudge

Plaintiffthrough Mr. Shahab Sarki, advocate.

Defendants Nos.l and 3 through Mr. Ejaz Ahmed, advocate.

Defendant No.2 through Mr. Jehanzeb Awan, advocate.

lntervenor-Muhammad lrfan Nisar though Mrs. Masooda eureshi, advocate.

t MUHAM KARIM KHAN AGHA. J.. The brief facts of the case are that the plaintiff is a colporate brokerage house, whose operations were suspended by the defendant No.2 pursuant to a Notice dated 02.9.2008, issued by defendant No.l in exercise of its powers under Section 7 of the Central Depository Company (Establishment and Regulation), Rules, 1996 read with Sectior 6(g) ofthe Securities and Exchange Commission of Pakistan Act, 1997 (hereinafter referred to as the "Impugned Notice").

2.Through the Impugted Notice the plaintiff has been prcvelted ftom carrying out its busircss until the findings of an Inquiry by the defendant No.l. The case of the plaintiff is that due to the Impugned Notice it has suffered irreparable loss, hence the plaintiffhas filed this suit for Declamtion, Permanent Injunction and Damages of Rs.206,000,0001, against the deferdants.

3.Aloqwith the suit the plaintiff filed an application urder Order X)CflX, Rules l&2, CPC, for suspension ofthe Impugned Notice.

4.Leamed counsel for the plaintiff has contended that if there has been any wrong doing on the part of Norrie Textile Mills Limited (hereinafter referred to as "NORT), whose shares were haded through the plaintiffs brokerage house, the plaintiff has no liability and that the liability, if any, rests with NORT and as such it has been penalized for no reason. As such the operation of the lmpugned Notice should be stayed. According to the plaintiff, NORT wanted to increase its share capital from approximately 4.8 million to around 5.9 million through a rights issue. According to the plaintiff, NORT applied to defendant No.2 to enter its share capital of Rs.48,600,000/-, which defendant No.2 mistakenly entered as Rs.589,600,000/-. This error enabled millions of NORT'S shares which weie not in existence to be haded by the public through defendant No.3. The contention of the plaintiff is that if there was any fraud involved, the defendant No.2, acting on the directions of defendant No.l, should have frozen the sub-accounts of Abdul Ghani and Basant (x Kumar, who were trading in the shares ofNORT. lnstead, the defendant No.2, acting

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on the instructions of defendant No.l, suspended the plaintiff from iS "/,i:$!. .i"-i participant status and froze CDC sub-account of Abdul Ghani and Basant fu.i*.'].1 rjt' Accoding to the plaintiff, they should not be blamed because the CDC had failed to veriry that NORT's shareholding was not 539,600,000/-.

5.Furthermore, leamed counsel has contended that other brokerage houses have been treated differently by the defendants since where such suspected fraudulent activity has been detected the brokerage house as a whole has not been preve[ted from carrying on business only the suspicious sub-accounts have been frozen. He has alleged that the plaintiffhas been discriminated against and that he has been deprived of his right to carry out business. He contends that the plaintiff has nothing to do with the affairs of NORT except that Chief Executive Officer (Noor eadir) of the plaintiff has a minimum shareholding (5OO out of approximately 4.6 million) in NORT in which he is also a Director, however, he played no active role in the affairs ofNORT and was more ofa slqeping Director.

6.In addition, the plaintiff submits thar it was given no right of being heard prior to the suspension by the defendant No.2 of its participation status. The plaintiff was not even issued with a show-cause notice. It had, therefore, not been given the right to defend itselfin accordance with the principles of natural j ustice.

7.In essence, the case ofthe plaintiff is that the plaintiff is distinct from NORT, which is a separate legal entity and, therefore, no action should be taken againsl it. The plaintiff, therefore, has a prima facie case, the balance of convenience is in his favour and the plaintiff will suffer ineparable loss to the rune of Rs.300,000/_ to Rs.500,000/- per day ifthe operation ofrhe Impugned Notice is nor suspended.

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8.Mrs. Masooda Qureshi, has filed an application on behalfofthe Intervcnor_ Muhammad lrfan Nisar and contends that she suppods the grant of the stay against the Impugned Notice as the InteNenor is one of the customers ofthe plaintiffand is being seriously prejudiced by the suspension ofthe plaintiffs trading rights. She has contended that due to the suspension ofthe plaintifl many innocent account holders like the Intervenor have become worst sufferers.

9.On the other hand, leamed counsel for the defendants. claim that the plaintiff, I in collusion with NORT, have been involved in a massive scam in order to defraud the public by deliberately and knowingly allowing the trading in non-existence t shares. Accotding to the defendants there has been lto mistake on the part of the defendalt No.2 in registering NORT'S shares rather the plaintiffhas mis-represented NORT's shareholding as 589,600,000 to the CDC as it was the plaintiff which confirmed to the defendant No.2 that NORT paid up capital was 59,860,000 ordinary 1k shares. He, therefore, contends that the plaintiff was dircctly involved in the fraud.

10.Loamed couDsel fo! the defendants contends that there is a close the plaintiff and NORT by pinpointing that the Chief Executive Omcer of the plaintiffis Noor Qadir, who despite only being a minority shareholder in NORT with 500 shares was a Dtector, who played a major role in the running of NORT,S affairs.

I1 . NORT'S Accounts dated, 31.12.2007 reveal that not only was Noor eadir a Director but he was also a member of the Audit Committee and the Managing Committee, which are the only significant Committees of NORT. He contends that NORT delibemtely mis-declared its shareholding to the knowledge of Noor t eadir, who is Chief Executive Officer of the plaintiff and this is bome out by the Issuer Admission Form dated 29.2.2008, which reveals that NORT had a paid_up capital of Rs.598,600,000L and that there was no question of mistake being made by the defendant No.2 in registering NORT,s shareholding. He fufiher contends that the plaintill and NORT are interlinked by tle facr that the plaintiff has, by an Underr.r,riting Agreement dated 17.12.2007, agreed to underwrite NORT,S share issue and that this Agreement is signed by Noor eadir on behalfofthe plaintiff. It is significant that this is the only Underwriting Agreement, which the plaintilfhas ever entered into. He has also pointed to a number of importart documents on record associated with NORT's affairs in connection with this alleged ftaud, which Noor Qadir has signed in his capacity as Director. He further contends that Noor eadir has admitted his own involvement in this fraud, by virtue of a letter dated 19.9.200g, copy ofwhich is reproduced below:-

"The Chief Executive Offi cer Al-Mal Securities & Services Limited Corporate Member-KSE 7ih Floor, PRC Tower M.T. Khan Road Karachi.

Subject: Suspension oftrading rights of Al-Mal Securities & Services Limited

Dear Sir,

This is with reference to the meeting held on September 05,200g at KSE oflice attended by yourself and officials of KSE and CDC to resolve the issue relating to Al-Mal Securities and Services Limited tading right suspension by the Board of Karachi Stock Exchange. The said suspension was put in place due to the improper induction of about 55 million unpaid shares ofNonie Textile Mills in CDC. Since the major chunk of these shares i.e. about 22 million shares were I inducted by your brokerage house [Al Mal Securities & Services Ltd.] in CDC.

In view of the above and as suggested by SECP and CDC, as a first step, you are required to communicate to us the total number ofthese shares presently held in your account along with an authorization to move the same to the panicipant Account of KSE. SECP will then .j> issue necessary direction to give effect to this transfer. With regard to

the balance shares already tmnsferred by your House to accounts, you ate required to deposit n Cash the amount eq uival average pric of these shares prevail mg during the period from March 2 008 to August 2008 l. Rs.2 5 2 per sharc as soon as possible but not later than Wednesdav September )4 2008 v, Once the abovq mentioned process is completed fiom your end and the required shareVcash are received by the Exchange within the above-referred specified time, the Management will hure no hesitation to put up the case ofsuspension oftrading dghrs ofAl Mal Securities & Services Ltd. before the Board for its review.

Thanking you.

Yours sincerely

HAROON ASKARI

General Manger-Operations

Copy to: Mr. Adnan Afridi, Managing Director-KsE Mr. Waqar Ahmad Siddiqui, Joint Director, SMD_SECP Mr. Aftab Dewan, ChiefOperating Officer-CDc,,

: 12. With regard to issuance ofthe show-cause notice the defendants contend that the plaintiff was provided with a show cause notice on the same day as the suspension and that negotiations have already taken place between the plaintiff and the defendants, as evidenced by the above letter. In this situation rhe plaintiffhas not been deprived ofthe right ofbeing heard. Leamed counsel has placed reliance on the case ofCOLLECTOR, SAHIWAL v. MOHAMMAD AKHTAR (1971 SCMR 681).

13.The defendatrts have also argued that it is ir the public irtercst that stay be granted in ordfl to stop the plaintiff in engaging in any further ftaud and in order to protect the public.

14, l,eamed counsel for the defendants have emphasized that &e defendant No.t, being regulatory body, had the duty to act early in order to protect the public interest. Hd has placed reliance on the case of ABDUL TiVAHID v. SECURITIES ANI) EXCHANGE COMMISSION OF PAKISTAN (2008 CLD 57) and SECURTTIES AND EXCHANGE BOARD OF INDIA v. ALKA S\NTHETICS LTD. (AIR 1999 Gnjrur22l).

15.I have heard the leamed counsel at length and have carefirlly reviewed the documents on record.

I 16. Order XXXIX, Rules 1&2 of Code of Civil procedwe, 1908, provides that the following three ingredients must be met for grant oftemporary injunction:- o Existenca ofprima facie case;

(iD Ineparable damage or injury; and O( (iii) Balance of inconvenience

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17.ln essence the plaintiffs need to show that for the stay to be granted all three ofthe above in$edients have been satisfied.

18.Without goiry into the merits of the case, which will need to be decided at the time of final disposal of the suit after recording ofthe evidence, I am ofthe view that the plaintif has failed to make out a prima facie case at this stage. There seems to be ample documentary evidence on file to link the plaintiff to NORT and, in particular, the plaintiffs ChiefExecutive Officer Noor eadir, who is also a Director and shareholder in NORT, who seems to be playing a prominent role in the management ofNORT.

19.In my view it is essential that the public should be protected from any potential fraud and place reliance on the case of ABDUL WAHID (supra), wherein the leamed Judge ofthis Court has observed at page 69 as followsi "20. It is one of the duties of the Securities and Exchange Commission to ensurg adequate protection to the investors by detecting unfair tade practic€s. In case any utfair practice is detected it should take all necessary measure to undo the wrong. This is necessary in order to 6aintain the confidence of ordinarv share- holders ofa company who arc sitring al a distance waiting lo reap the fruits of their invest$ents. They not being part of every decision making pocess of the company repose faith in the management which is expected to make sound commercial decisions for the collective benefit ofall the share-holders. Such faith and trust caurot be allowed to be breached with impunity. The detection of scam by the officers ofthe Commission in the present case is commendable.,,

20.It is also the obligation of regulatory body, like defendant No.l, to act in advance ifneed be in order to p.otect the public interest, as observed in the case of SECURITIES AND EXCHANGE BOARD OF INDIA (supra), wherein it was hetd at pitge No.222 as follows:-

"The very llatule ofthe orders passed by SEpl, shows thet the orders were of interim natue, no linality is attached to the action ta&en by SEBI at this stage aItd hence it cannot be said to bc case in which the money stood impounded or forfeited finally. In this view of the matter, the ordeN camot be said to be the orders so as to take ar ay any eamed benelit for all times to come or alr actioD to the gejudice of any party entenaining any penal consequences for aII times to come. Io absence of any express provision making it l obligatory for the SEBI to hear the panies before taking Juch measues, it cannot be successfully argued that it must have followed the principles of natwal justice before passing the impugned orders.,' 2L. With regard to the right to be heard this right is not absolute in cases where it has not been provided by Statute. Of course under the rules of natural justice no party should be condemned unheard, however, I find in this case that the plaintiff has VJY been fully heard and he has even agr€ed to certain commitments with the delendants

and as such this argument is redundanr ar rhis stage. ,\, ii *" ** COLLECTOR, SAHIWAL (supra) wherein the Hon,ble Supeme Court has held as "r* under:-

"The Couds in Pakistan have taken the vi€w that where the giving ofa notice is provided for by the statute itself, then the failure to give such a notice is fatal and cannot be cured. But where there is no specific statutory provision and reliance is only plac€d on the principles of natural j \stice and audi alteram pdrteu, thete if at sofie stage or other the person aggrieved has been given a fair opportunity of representing his poiit ofview, then the defect, if any, in the initial order may be deemed to have been cured. Each case will have to be determined on its own facts."

t 22. Bearing in mind the above, I am not inclined to suspend the operation ofthe lmpugned Notice and grant stay order in favour ofthe plaintiff. I am, however, fully aware that it is unfair for the plaintiff to suffer considerable loss on a daily basis without having the case proven against it.

23.Leamed counsel for the defendants have submitted that therc is an ongoing inquiry by the defendants against the plaintiff conceming its involvement in the alleged fraud. I hereby direct that:

(a)the plaintiffprovide all the information, which the defendants have so far, requested, \yithin seven days hereof, a copy ofwhich is also filed in the Court and attached to this order;

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O) the plaintiff within seven days provide any further information, requested by the defefldants, which the defendants deem relevant in order to complete its inquiry into this fraud.

(c)the plaintiff fully cooperate wirh the defendants in irs inquiry; and

(d)that defendant No.l shall complete its inquiry within four weeks from the date of this order.

24.Notwithstanding that there is no stay in place to ensure that the other innocent customem of the plaintiff, who have inadvertently been caught-up in this matter l through no fault of their own, will not suffer undue hardship, the defendants, within seven days hereof, will put in place a mechanism whereby the customers of th€ plaintiffmay move their accounts to other brokerage houses, ifthey so choose.

I 25. Put up within four weeks. Ifby that time defendant No.l has not completed

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: vI the inquiry againsr the plaintiff thrcugh no l'ault of the plaintifl the question of

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whether a stay should be granted or not can again be re-agitated by tlie plaintiff under this application (CMA No.924912008)

Adjoumed to a date to be fixed by the office. May be fixed according to Roster.

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