September 02, 2024 (MLN): The Securities Exchange Commission of Pakistan (SECP) has flagged the trading activity of Nadeem Ejaz in the shares of Chakwal Spinning Mills Limited (PSX: CLOUD) as unusual and suspicious during the review period from December 21, 2023, to August 12, 2024.

Therefore, to protect the interest of small investors, the commission prohibited Nadeem Ejaz from further trading in the shares of Chakwal Spinning till the conclusion of the Investigation, according to the order issued on August 30, 2024

However, this prohibition will not apply to settlements that are outstanding as of the date of this prohibition.

Background

The share price of Chakwal Spinning increased from Rs2.15 per share to Rs150 per share from December 2023 to August 2024 within seven months and after an initial review of trading data, an investigation into the unusual trading activity in the scrip of Chakwal Spinning has been initiated.

This investigation is being conducted under Section 139 of the Securities Act, 2015 (“Act”) in conjunction with the relevant provisions of the Securities and Exchange Commission of Pakistan Act, 1997 (“SECP Act”) and applicable laws.

Later, Nadeem Ejaz, through his legal counsel, filed a petition at the Lahore High Court challenging the SECP’s prohibition order. He argued that the order was illegal and should be overturned.

On August 23, 2024, the Lahore High Court directed the SECP to review the petition and make a decision within seven days, while suspending the prohibition order until then.

What caused the price to surge to this extent?

The price surge in the shares of Chakwal Spinning was supported by the issuance of a material price-sensitive announcement by Chakwal Spinning on January 09, 2024, regarding its merger/ acquisition with Pakistan one of the largest technology companies having a global presence in UAE, USA, Philippines & China.

However, upon repeated follow-ups by the SECP, Chakwal Spinning failed to provide the details of such a company with whom the merger/acquisition was in the pipeline.

On query by SECP the management of Chakwal Spinning on August 17, 2024, informed that the merger could not be completed within the planned time frame and was withdrawn.

It is important to note that the management of Chakwal Spinning did not disclose this material information to PSX and the general public.

Therefore, it further raised the suspicion that the surge in activity was executed in connivance with the management of the Chakwal Spinning.

Nadeem Ejaz’s trading pattern

Nadeem Ejaz along with three other investors traded heavily in the shares of the Chakwal Spinning during the period from December 2023 to August 2024 and bought around 58.10 million shares and sold around 49.61 million shares thus significantly contributing in volumes and share price.

After analysis of trading data, it was evident that Petitioner with three investors namely Kamran Rasheed, Abdul Waheed Sheikh and Syed Hassan Ali Abbas acted as a “Group” and were engaged in acts, practices and course of business with mala-fide intentions to generate the volumes and activity in the shares of Chakwal Spinning.

Group to influence and turn to their advantage engaged in the sale and purchase of shares to lure the other small investors and the general public to invest in the share of Chakwal Spinning.

It is evident from the record that the total number of investors increased from 390 to 1620 within seven months.

It is also important to mention that Nadeem Ejaz also started trading heavily before the announcement of price-sensitive material information and bought around 1.685 million shares with an average price of Rs7.78 per share and sold around 0.485 million shares at an average price of Rs10.93 per share.

In total, from December 11, 2023, to August 12, 2024, he bought around 12.12 million shares of Chakwal Spinning and sold around 11.19 million shares of Chakwal Spinning.

The SECP’s document further revealed that after suspending the prohibition order dated August 15, 2024, by the Lahore High Court, Nadeem Ejaz sold 141,353 shares of Chakwal Spinning having a value of Rs22.2 million to the general public.

Therefore, the written argument of the Petitioner that the prohibition order was discriminatory is not true as the prohibition order was issued after careful analysis of trading activity of the Petitioner in the shares of the Chakwal Spinning, and to safeguard the interest of the general public.

Response to Petitioner’s challenge

Nadeem Ejaz, through his legal counsel, challenged the Director’s authority to issue the prohibition order under Section 143 of the Act. However, this challenge is incorrect.

The prohibition order was issued lawfully under the authority delegated through an SECP notification (SRO 380(I)/2021) on March 31, 2021, under Section 10 of the SECP Act.

Section 10 allows the Commission to delegate its functions or powers to any Commissioner or SECP officer. The claim that the prohibition order was issued without a hearing is also incorrect.

There is no legal requirement for a hearing before issuing a prohibition order under Section 143, as it is a precautionary measure taken in emergencies to protect the public.

“There is no requirement of law to give an opportunity of hearing while issuing the prohibition order under Section of the 143 Act to the customers,” the SECP document reads.

The prohibition order is a precautionary order in nature which is passed in an emergency to protect the interest of the general public, it added.

Thus, the prohibition order issued on August 15, 2024, under Section 143 of the Act is valid and complies with all applicable laws and regulations.

Additionally, due to unusual trading activity in Chakwal Spinning shares, an investigation order was issued on August 13, 2024, under Section 139 of the Act by the SECP to uncover the facts.

The petitioner, Nadeem Ejaz, has not provided any evidence to support his claim that his fundamental rights under Article 4, 10-A, and 24 of the Constitution of Pakistan have been violated, SECP said in its order document.

Fundamental rights cannot protect someone involved in activities that are prohibited by law.

Moreover, the petitioner has admitted to his trading data and activities, which have artificially influenced the price of Chakwal Spinning shares—a violation under Section 133 of the Act, it said.

No evidence was provided during the hearing to show that his constitutional rights were infringed, it informed.

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