SECP achieves first insider trading conviction

In a historic ruling, Pakistan’s Sindh Special Court (Offences in Banks) has issued the country’s first-ever conviction for insider trading. The court found Zakir Hussain Somji, a former Assistant Vice President (AVP) of Investments at a private bank, guilty of insider trading, a violation of Section 128 of the Securities Act, 2015.

The case originated from an inspection conducted by the Securities and Exchange Commission of Pakistan (SECP) that uncovered suspicious trading activities through an analysis of data from the Karachi Automated Trading System (KATS) spanning from January 1, 2014, to February 2, 2016. It was suspected that Somji, leveraging his position at the private bank and access to its investment decision-making processes, exploited insider information for personal financial benefit.

Upon investigation, it was discovered that Somji had acquired 11,795,100 shares of various companies, with the private bank listed as the counterparty in the purchase of 1,230,900 shares, accounting for 10.43 percent of his total acquisition. Subsequently, he sold 11,836,600 shares, with 4,915,200 shares (41.52 percent) sold back to the private bank, resulting in an illicit profit of Rs2.87 million.

Following a comprehensive inquiry, SECP filed a formal criminal complaint in accordance with Section 128, an offense punishable under Section 159 of the Securities Act, 2015. After a thorough trial, which included testimonies from SECP’s Special Public Prosecutors and defense arguments, the Special Court delivered its verdict.

The court noted a significant pattern in Somji’s trades aligning with those of the bank on 173 occasions, a correlation deemed improbable without access to insider information. Despite Somji’s persistent denial of any wrongdoing and his claim of innocence under Section 342 of the Criminal Procedure Code (CrPC), the court found the prosecution’s evidence to be compelling and irrefutable.

The court dismissed objections raised by the defense regarding unexamined joint account holders and senior officers, asserting that the trades in question were unequivocally linked to Somji through his own Computerized National Identity Card (CNIC). The judgment confirmed the allegations as proven, establishing that Somji had engaged in front running by either trading ahead of the bank’s investment decisions or engaging in direct transactions with the bank to gain unlawful profits.

A financial penalty of Rs8,599,938, three times the unlawful gain, was imposed on Somji, with a stipulation to remit the amount within seven days. Failure to comply would result in Somji’s remand to jail until the full sum is recovered. Despite the lengthy trial, the court opted not to issue a custodial sentence.

This case serves as a significant milestone in the prosecution of insider trading in Pakistan’s capital markets and serves as a warning against violating regulatory obligations. The judgment underscores SECP’s commitment to upholding market integrity, protecting investors, and establishing a robust precedent for future enforcement actions against market abuse and regulatory violations.

Chairman of the Securities and Exchange Commission of Pakistan, Akif Saeed, lauded the legal team for their efforts, highlighting the positive impact of the judgment on investor confidence in Pakistan’s capital markets and capital formation. He expressed optimism that this ruling would set an important benchmark for similar cases and ongoing investigations into insider trading and market manipulation.