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What is Scalping in Securities Law?

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SEBI has recently passed a confirmatory order order that barred a former TV Channel show host along with his family from the securities market for allegations of indulging in fraudulent and unfair trade practices. As per SEBI, there were was a huge correlation between their trades and the recommendation made in the show Stock 20-20, which was aired on the reputed TV Channel.

Indian securities laws looks at applicability of SEBI Act, 1992 and SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 in these kind of cases. The concept of duty to disclose, conflict of interest, prohibition of trading, intent and the kind of liability usually arise in such cases which are fact specific.

Without commenting on the merits of this case, securities law ethusiasts as a concept to read must study the famous US Supreme Court case in the matter of US Securities and Exchange Commission v. Capital Gains Research Bureau, Inc. (375 US 180) (1963).

Capital Gains Research Bureau, Inc. was a registered investment adviser in the US who repeatedly engaged in the practice of buying shares of stock it intended to recommend and then selling them after the recommendation caused the stock’s value to rise. The SEC filed an action seeking an injunction mandating disclosure of this practice to clients. The district court held that such an injunction could not issue without a showing of intent to deceive and the court of appeals affirmed. However, the Supreme Court granted review and held that an intent to deceive does not appear to be required by the language of US Investment Advisor Act and self-dealing by an investment adviser regarding suggested investments at the very least allows for a strong possibility for conflicts of interest and so should be disclosed. There are many subsequent judgements also and the debate in legal circles continues on different aspects but this judgements continues to be not overturned.

In the Indian context, you may also read views of our founder Sumit Agrawal in the BusinessToday article to understand and analyse some of the the legal aspects of it !

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