The Scandal Is Legal
There is no such thing as an accidental fraud. What separates error from fraud is intent, the accidental from the intentional. Assume ABC’s financial statements contain material false statements: Were they caused by error or fraud? The problem with proving intent is that it requires determining a person’s state of mind. As a result, intent usually is proven circumstantially. In NSE colocation, circumstantial evidence galore in admitted positions, findings by audit and SEBI's Cross Function Team (CFT).
Audit firm Deloitte said: "There were no documents, policies and protocols about the functioning of Colocation, TBT (Tick By Tick) system, connection or allocation of servers to brokers, etc."
Most information was provided to Deloitte orally and often information shared differed in various discussions. Deloitte also could not find any historical information due to the absence of protocols on data retention, email and other information for certain key employees of NSE. It was all indeed an ‘Orwellian’ state of affair.
Concealment: Honest people rarely have the motive to conceal their acts. Therefore, if, for example, the CEO ordered the destruction of key ABC documents prior to an audit, this could be powerful circumstantial evidence of intent.
In the NSE colocation case missing emails, lost trails, contradictory statements and ominous silence of exchange employees mark the forensic audit that highlighted clear possibilities of NSE’s total disregard for rules and running a national exchange without well-laid-down protocols only to favour and give preferential treatment to a few brokers. The exchange was also caught disposing of key material and evidence as 'e-waste.'
Admitted Facts, Sebi Could Not Ignore
"There is no dispute to the fact that NSE did not have a detailed defined policy for the use of the Colocation facility. It even failed to monitor the use of the Secondary Server by TMs (Trading Members) without sufficient reason. The defence put forward by NSE about the issuance of welcome email in the form of ‘registration enablement mail’ at the time of providing Colo facility to TMs, can’t be said to be justifying its role as a First Level Regulator. Issuance of guidelines without its monitoring showed lack of due diligence. These findings are also contained in the 2023 SAT Order qua NSE," the WTM Varshney has said in his September, 2024 order. Preponderance of Probability?
In his April 2019 order, former SEBI WTM G Mahalingam said, "After a detailed investigation was done for the period 2009-16, issues were split into different SCNs in 2018. One set of SCNs issued on July 03, 2018 detailed the allegations pertaining to issue (i) stated above and was issued to 8 Noticees (including 6 out of the said 15 Noticees to whom the 2017 SCNs were issued, along with 2 additional Noticees). Subsequently, Supplementary SCNs were issued on July 31, 2018 (2018 SSCN), to cover a factual aspect of 'Inconsistency in response of NSE,' which was missed out to be mentioned in the earlier SCN issued on July 03, 2018, and was issued to the said 8 Noticees. Preponderance of Probability?
Mahalingam's order, which is the basis of Varshney's order, agreed that there were "inconsistencies in NSE's response, which were missed out to be mentioned in earlier SCNs by SEBI."
Hence, fact remains that SEBI conveniently dropped Jagdish Joshi, among the key links between NSE and OPG, from the SCN despite his name cropping up in various investigations and also ignored Nagabhushan's angle. Why? The conscious omission of Jagdish Joshi from show cause notices, is a mystery that needs to be unraveled. Is this not connivence, SEBI? Contradictions and inconsistencies galore in SEBI order, which clearly says that law demands a review of such orders by independent courts since SEBI itself is conflicted.
Chitra Ramkrishna And Omnesys Conduit
NSE was the second largest shareholder of Omnesys, which by virtue of being NSE's colocation technology vendor, had the knowledge of the advantages of connecting to faster servers and also the configuration of the server and speed. The icing on the cake here is that NSE's MD Chitra Ramkrishna was the board of directors of Omnesys. OPG employed the staff of Omnesys and NSE and we will see below how Chitra Ramkrishna was prompt and gave priority to issues of OPG. Preponderance Of Probability?
An email found by Deloitte showed Chitra Ramkrishna giving instructions to the NSE staff on high preference for meetings with OPG. Emails also revealed how other high ranking NSE officials including the top boss Ravi Narain were meeting the Trading Member OPG, who had an 'unfair' access to NSE colocation systems. Preponderance of Probability?
Here's what NSE's Chief Technology Officer told SEBI during his interrogation:
To a question from SEBI on what were the advantages of early login (in TCP/IP/TBT), NSE's former technology chief Ravi Apte said, "Yes, there could be an advantage of a few microseconds." Preponderance of Probability?
After NSE confirmed completion of data restoration exercises from all TBT servers during the audit, we came across additional TBT servers, which had not been put through the restoration process. The NSE team was unaware of them. We also found that in various instances, statements given to us by the NSE team conflicted with emails that we came across in the course of our review.” Deloitte’s report said.
“We noted an email by Bhavya Gandhi who wrote to the COLO support team providing a list of 24 IPs of nine brokers, stating that they were connecting to the secondary servers. The email requested COLO support to ask the brokers to connect to Primary Servers. This indicates that there was a mechanism to monitor connections,” Deloitte said.
Often, brokers wrote emails to key COLO officials asking them to move their connections to the secondary servers at their own will.
“OPG wrote to Jagdish Joshi, requesting to be moved to a different TBT server, citing performance degradation. (Ironically), the email was not marked to COLO support that was tasked with handling members’ queries. Joshi instructed the COLO team to move four of OPGs IPs to a different server. The COLO team resisted, telling Joshi that there was neither proof of performance degradation nor approvals but he insisted that this was to be done to mitigate risk. Eventually, the team deactivated the IPS of another member to accommodate OPG. Server logs also indicated that after these IPS were migrated, OPG was successful in frequently establishing the first 5 connections on (the fastest) server,” Deloitte said. Preponderance of Probability?
“Confirm that you have shifted Way2Wealth and GKN to Sampark to the new set-up. This has to be done on a priority,” Nagendra Kumar, an NSE employee wrote to a colleague. Who had ordered him to do so? When confronted by SEBI why he wrote such an email, he said, “My boss Ravi wanted to know.” That was incriminating.
Investigations also found that Way2Wealth left no stone unturned to acquire latency as low as possible by avoiding switches / hops, by shortening distances of the cable paths or by positioning the cable path in such a manner that it always remains ahead of the other trading members in terms of accessing the market data feeds through its connectivity at NSE COLO and BSE COLO.
One KK Daga of Millennium Securities, a Kolkata broker, kept pleading his case with the NSE for allowing his firm to connect to the COLO grid but got no, or just lame responses from the exchange staff for weeks and months. Once in a while, the NSE staff would reply to his emails titled ‘My Grievance’ and insist that an office inspection of his brokerage was required before allowing him to enter the COLO farm. But then, for brokers like OPG and Way2Wealth, the NSE top brass was just a phone call or email away.
Once when OPG wrote to Chitra Ramkrishnan informing her about some issues and that he intended to buy more ‘full racks’, at the server farm, she immediately put people to work. “Do the needful, ASAP and revert,” she directed the exchange team. The immediate response to OPG’s requests seems to contrast with responsiveness received by other members. Barclays Capital raised some queries on December 29, 2011 and followed up on January 30, 2012, since they had still not received any response. COLO chief Jagdish Joshi then suggested a call and missed it twice. Preponderance of Probability?
The entire system ran on the whims and fancy of NSE officials. Deloitte has repeatedly pointed in its report that the exchange lacked a clearly documented policy on every aspect in COLO. There were absolutely ‘no set procedures’ that should have been in place for such a vital installation. But strangely, SEBI still felt the COLO scam at NSE was just a procedural lapse. According to the TAC, none of the circulars issued by NSE since 2009 with regard to TBT data sharing or COLO had any details about the backup server. It was a trading system designed to be exploited. Only a few insiders had the means and the ways around them.
How People Connected To Colocation Vanished Into Oblivion
Deloitte submitted its report to NSE in December 2016. But days before this, SEBI’s Rajiv Agarwal, the WTM who was diligently following the trail and asking pertinent questions to the exchange, lost his job. In the meantime, NSE quietly discontinued its TCP/ IP based infrastructure even before SEBI could examine Deloitte’s report. Also, post the submission of the probe report, Abhishek Soni, the COLO employee who had revealed to Deloitte that ‘oral instructions for server allocations came from seniors’ was asked to quit. Since Deloitte could not find any historical information due to absence of protocols on data retention, email and other information of key employees, the trail to NSE’s top brass was cut short. It is unknown if personal emails records of employees were considered during the probe, as discreet conversations often happen there. After Jagdish Joshi left NSE in 2014, instances of OPG connecting first to NSE’s server fell drastically.
Deloitte remarked that operating systems in the computers used by several employees were installed fresh in 2016. These included Soni, Devi Prasad Singh (NSE network infrastructure and security expert since 1996 who became the VP and Head of IT Operations), Arvind Goyal (who has managed derivative trading and membership operations at NSE since 2004 and headed membership department), Hari K (NSE employee since inception and who was responsible for memberships) and Viral Mody (another technology expert who has been with NSE for more than a decade became VP at the exchange).
How The Charge Of Fraud Against NSE Was Twisted by SEBI
In his order, Varshney says: "Further, there is a finding by Hon’ble SAT agreeing with the findings of WTM that there is no case of invocation of PFUTP Regulation against Noticees indicating that there is no Fraud."
But another SEBI WTM SK Mohanty does not think so. In the case involving laying down of Dark Fibre cables in exchange for speed and connectivity, Mohanty held NSE guilty of Fraud. So there was fraud at the exchange level but no connivence of the staff or top officials?
For letting go NSE of the charges of fraud, what did SEBI WTM Mahalingam do? Cited definitions of fraud " There was no “knowing misrepresentation”, “active concealment”, “false promise”, “representation made in a reckless and careless manner”, “fraudulent act or omission”, “deceptive behavior”, “false statement” etc. which are all ingredients of fraud and, therefore, Regulation 3(a), 3(b), 3(c) and 3(d) were not attracted."
Another WTM Varshney agreed with this definition on the grounds that even SAT agreed with it.
Who Is Sebi Fooling?
Sebi said “alleging fraud against the exchange, in this scenario, tantamount to attributing intention or knowledge of which there is no ‘proof’ and hence it dropped the serious charge of Prevention of Fraudulent and Unfair Trade Practices against NSE and held it responsible only for some procedural lapse.
But the findings of SEBI's own Technical Advisory Committee (TAC) show NSE’s architecture was prone to manipulation, market abuse and some trading members were given preferential access to backup servers giving advantage to them over other trading members, which has been largely accepted by SEBI. Yet, the regulator has pinned it to simple violation of ‘flouting principles underlying conduct of business of a stock exchange.” Fact that NSE ignored complaints of misuse of its architecture has been conveniently ignored by SEBI too.
When all the investigation reports that confirm the misuse of NSE's colocation trading architecture is put to the test of Preponderance of Probability along with the emails of Chitra Ramkrishna, Ravi Narain, OPG and the Jagdish Joshi and Nagabhushan factor, there is Meeting of Minds - The Perfect Colocation Scandal.
“In my understanding, the information advantage accruing to the ‘first connect’ trading member may not continue throughout the day and depending upon the load factor, it may get diffused and diluted in the course of the trading day to a ‘probabilistic’ advantage,” SEBI’s Mahalingam observed in his order. Why would brokers make diligent efforts to connect first?
In Rakhi Trading And Kishore Ajmera the Supreme Court held: "The primary objective of any trade is to make profits and not that of making planned losses." Likewise, the theory goes that for "First Connect" it was to gain preferential advantage, nothing else. 'Preponderance Of Probability' Galore.
Also read: Sebi: Pity, Failure & Conflict
NSE's Trading Systems Abused For Years, Yet Nobody Colluded. SEBI Verdict Lets Down The Fate Of Millions In Stock Markets By Cherry Picking Laws In Blatant Disregard To Supreme Court Landmark Judgements Issued For Judging The Guilty In Quasi Judicial Proceedings. (Part-1)
