A company founded by former Mumbai Police Commissioner Sanjay Pandey allegedly breached SEBI standards by auditing two NSE stockbrokers who used the scam-tainted colocation facility, officials said on Monday.
An FIR filed on May 19 against the company, iSec Services, on referral from the Law Enforcement Branch, reports several violations of the SEBI circular by the company in carrying out a system audit of the securities brokers involved in algorithmic trading using the colocation facility, which is under the CBI scanner now.
The FIR was made public on Monday.
The CBI alleged that iSec services audited two “high-risk brokers” – SMC Global Securities Ltd and Shaastra Securities Trading Private Limited – fraudulently when the roommate “scam” was taking place.
The CBI had arrested former NSE MD and CEO Chitra Ramkrishna in a roommate scam case, they said.
SEBI had classified low, medium and high risk brokers based on their trading patterns and prescribed different system auditing standards based on their risk profiles through various circulars issued from time to time.
These brokers fell into the high-risk category, under SEBI guidelines, for using colocation facilities to perform algorithmic transactions in the NSE, they said.
High-risk brokers required an audit of their algorithmic trading system every six months, with an auditor only allowed to perform three successive audits.
iSec Services Private Ltd, which was founded by Pandey after he resigned from the police service in March 2001, had audited such traders continuously from 2013 to 2019, exceeding the permitted limit of just three consecutive audits, according to the FIR.
Shaastra Securities was audited during the period April 2013 to March 19 and SMC Global Securities from October 2012 to September 2015 by iSEC Services in violation of SEBI Circular dated November 6, 2013, it alleged
It is alleged that since the company was not eligible to carry out the audit, it employed the services of a Prabhpreet Singh from S Dhawan and Associates on payment of Rs 5000 each for three audit reports signed by him – November 14, 2017 and October 14, 2015 for Shaastra Securities and October 14, 2015 for SMC Global.
“…where the bill for such an audit was invoiced by iSEC Services to the Commercial Members and the corresponding payments were also made to iSEC Services by the Commercial Members,” the FIR alleged.
“It appears that to overcome the restriction imposed by the SEBI guidelines, iSEC services… had the report(s) for the interim period signed by Prabhpreet Singh when in fact the premises were visited by Naman Chaturved, an iSEC employee,” he alleged.
The CBI alleged that for all intents and purposes the audit was carried out by iSEC Services and it simply obtained the signed reports from Singh who never visited the stockbrokers’ premises.
“It is clear that the iSEC services had fraudulently issued or obtained security and system audit certificates without performing an actual audit on the entry of a person who was not authorized to perform such an audit”, alleged the FIR.
The agency alleged that the reports submitted to NSE by iSec were signed by certified experts when the audit was carried out by Chaturvedi who was not qualified to perform the system audit.
Pandey, who had founded the company in 2001, left his position as director in May 2006. His son and mother then took over the management of the company.
The police officer had studied at IIT-Kanpur and Harvard University, reportedly started the company after his resignation.
His resignation was not accepted by the state government and he joined but was not immediately assigned to a position.
He was appointed Mumbai Police Commissioner while Uddhav Thackeray led the MVA government and retired on 30 June.