BEFORE THE SUPREME COURT OF ISLANDIA

At Republic of Islandia

Appeal under Article 136 of the Constitution of Islandia

SLP(C) No. _____/2015

M/S GOODENOUGH JONES

...APPELLANT

Versus

SECURITIES & INVESTMENT REGULATOR

OF ISLANDIA

...RESPONDENT

Memorandum Submitted to the Honble Chief Justice of Islandia and His Companion Justices
of the Supreme Court of Islandia

MEMORANDUM FILED ON BEHALF OF THE APPELLANT

MEMORANDUM ON BEHALF OF THE APPELLANT

TABLE OF CONTENTS
TABLE OF CONTENTS ....................................................................................................... II
INDEX OF AUTHORITIES ................................................................................................ IV
LIST OF ABBREVIATIONS ............................................................................................. VII
STATEMENT OF JURISDICTION ................................................................................ VIII
STATEMENT OF FACTS ................................................................................................... IX
STATEMENT OF ISSUES .................................................................................................. XI
SUMMARY OF ARGUMENTS ......................................................................................... XII
ARGUMENTS ADVANCED .................................................................................................. 1
I.

THAT

THE

SIRI

OUGHT TO HAVE DECIDED THE QUESTION OF JURISDICTION AS A

PRELIMINARY ISSUE BEFORE PROCEEDING TO ADJUDICATE THE MATTER ON MERITS....... 1

A.

That the existence of a jurisdictional fact has not been established. ....................... 1

B.

That the question of jurisdiction in the present case is a pure question of law. ...... 1

II. THAT

THE WRIT PETITION FILED BY

GOODENOUGH

WAS MAINTAINABLE BEFORE

THE HIGH COURT OF ESSOS.................................................................................................. 2

A.

That there was no order within the meaning of 15T of the SIRI Act. .............. 2

B.

Alternatively, that the writ jurisdiction of the High Court of Essos can be invoked.
3

III.

THAT THE SIRI DOES NOT HAVE JURISDICTION TO INQUIRE INTO THE CONDUCT OF

A CHARTERED ACCOUNTANT REGISTERED WITH THE

SCAI

AND ISSUE DIRECTIONS

AGAINST A CHARTERED ACCOUNTANT.................................................................................. 4

A.

That the SIRIs allegations are inadmissible as they have come to Court with

unclean hands by violating 24A (1) (ii) of the Chartered Accountants Act, 1949 ......... 5
B.

That the show cause notice is violative of the principle of audi alteram partem.... 6

C.

That the body of Chartered Accountants do not fall within the ambit of the

expression persons associated with securities market. .................................................... 7

D.

That there was no order passed by the Board under the SIRI Act directing

investigation against Goodenough. .................................................................................... 7

II

MEMORANDUM ON BEHALF OF THE APPELLANT

E.

That the SIRI should have made a reference to the Council under the CA Act for

disciplinary proceedings. ................................................................................................... 8

F.

That there is no complaint of actual investors to the effect that they were misled

by wrongful disclosure. ...................................................................................................... 8

IV.

THAT IT IS NECESSARY FOR THE SIRI TO ESTABLISH MENS REA FOR A VIOLATION

OF THE SIRI ACT AND FUTP REGULATIONS FRAMED THEREUNDER. ................................ 9

A.

That mens rea is an essential ingredient of the offence under SEBI Act and FUTP

Regulations thereunder. ..................................................................................................... 9

B.

That mens rea has to be proved, in case of entities aiding and abetting the

principal violator. ............................................................................................................. 12

PRAYER ............................................................................................................................. XIV

III

MEMORANDUM ON BEHALF OF THE APPELLANT

INDEX OF AUTHORITIES
STATUTES
Chartered Accountants Act of 1949 ........................................................................................... 8
The SIRI Act of 1992 ............................................................................................................. 2, 7
REGULATIONS
Code of Federal Regulations .................................................................................................... 11
SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market)
Regulations of 2003 ................................................................................................................. 10
INDIAN CASES
Arun Agarwal v. Nagreeka Exports Pvt. Ltd., (2002) 10 SCC 101 ........................................... 2
Arun Kumar and Ors. v. Union of India and Ors., [2006] 155 TAXMAN 659(SC) ................. 1
D K Trivedi & Sons & Ors. v. State of Gujarat & Ors., AIR 1986 SC 1323 ............................ 5
Dr. (Smt.) Kuntesh Gupta v. Management of Hindu Kanya Mahavidyalaya, Sitapur (U.P) &
Ors., AIR (1987) SC 2186 ......................................................................................................... 4
Harinarayan G Bajaj v. Securities Appellate Tribunal, (2003) 42 SCL 548 (Bom) .................. 3
Hasmat Rai v. Raghunath Prasad, (1981) 3 SCC 103................................................................ 3
Jiyajirao Cotton Mills Ltd. & Anr. v. Madhya Pradesh Electricity Board & Anr., AIR 1989
SC 788........................................................................................................................................ 5
K Ramanathan v. State of T.N. & Anr., (1985) 2 SCC 116 ...................................................... 5
M/s Karnavati Fincap Ltd. & Anr. v. Securities and Exchange Board of India, [1996] 87
Comp Cas 1869 .......................................................................................................................... 7
Rakesh Agarwal v. SEBI, [2004] 1 Comp LJ 193 ..................................................................... 9
Ramdayal Umraomal v. Pannalal Jagannathji, AIR 1979 MP 153............................................ 2
SEBI v. Mangalore Stock Exchange, (2005) 10 SCC 274 ........................................................ 2
Smt. Indira Nehru Gandhi v. Raj Narain & Anr., AIR 1975 SC 1590 ...................................... 6
State of Maharashtra v. Hans George, AIR 1965 SC 722 ......................................................... 9
State of West Bengal v. North Adjai Coal Co. Ltd., (1971) 1 SCC 309 ................................... 4
Subodh Kr Trivedi v. State of U.P. & Ors., (2001) 1 AWC 515 (All) ...................................... 4
Whirlpool Corporation v. Registrar of Trade Marks, Mumbai & Ors., (1998) 8 SCC 1........... 4

IV

MEMORANDUM ON BEHALF OF THE APPELLANT

FOREIGN CASES
Central Bank of Denver, N.A v. First Interstate Bank of Denver, N.A., 511 U.S 164 (1994) 12
E. Aaron v. Securities and Exchange Commission, 446 U.S 680 (1980) ................................ 11
Ernst and Ernst v. Hochfelder, 425 U.S. 185 (1976) ............................................................... 11
Securities and Exchange Commission v. U.S Environmental, Inc., 155 F.3d 107 .................. 11
SAT JUDGMENTS/ ORDERS
B P Kanani v. Securities Exchange Board of India, [2000] 29 SCL 308 (SAT) ....................... 3
Bharat Jayantilal Patel v. Secutites and Exchange Board of India & P.K.Bindlish Designated
Authority, Appeal No. 126/2010, SAT Order dated 15th September 2010 ............................... 3
DLF Ltd. and Ors. v. SEBI, Appeal Nos. 331, 392-96 & 415/2014, SAT Order dated 13th
March 2015 ................................................................................................................................ 8
Gold Multifab Limited & Ors. v. Chairman, Securities and Exchange Board of India & Ors.,
[2003] 48 SCL 249 (SAT) ......................................................................................................... 7
Kishore R. Ajmera v. SEBI, Appeal No. 13/2007, Order dated 5th February 2008 ............... 12
Pan Asia Advisors v. SEBI, 2013 SAT judgement .................................................................... 2
Piyush P. Avalani v. SEBI, Appeal No. 131/2002, Order dated 16th July 2012; Kasat
Securities (P) Ltd. v. SEBI, Appeal no. 27/2006, Order dated 29th January 2003 ................. 12
ESSAYS, ARTICLES AND REPORTS
Report of Justice Dhanuka Committee on Securities Law, Pertaining to Draft Securities Bill
and Draft Depositories (Amendment) Act, 1998........................................................................ 8
T. V. Narayanaswamy, Essential Ingredient for Prosecuting Insider for violation of Insider
Trading Regulations, 16 CLA (Mag.) 118 (2014) ................................................................... 10
BOOKS
1 HALSBURYS LAWS OF INDIA (Lexis Nexis 2004) ................................................................... 4
1 HALSBURY'S LAWS OF ENGLAND (5th ed., Lexis Nexis 2009) ................................................ 2
KAUSHIK LAIK, UNFAIR TRADE PRACTICES

IN

SECURITIES MARKET (1st ed., Taxmann 2013)

.................................................................................................................................................. 12
M. P. JAIN, INDIAN CONSTITUTIONAL LAW (7th ed., Lexis Nexis.2014).................................... 3
S. AGRAWAL & R. J. BABY, A LEGAL COMMENTARY ON SECURITIES AND EXCHANGE BOARD
OF INDIA ACT, 1992

(Amit Agrawal ed., Taxmann Publications Pvt. Ltd. 2011) ..................... 5

MEMORANDUM ON BEHALF OF THE APPELLANT

LEXICONS
BRAYAN A. GARNER, BLACK'S LAW DICTIONARY (9th ed., West Publishing 2009) ........... 3, 11
THE SHORTER OXFORD ENGLISH DICTIONARY (3d ed., Oxford University Press 2001) ........... 5

VI

MEMORANDUM ON BEHALF OF THE APPELLANT

LIST OF ABBREVIATIONS
Anr.

Another

CA Act

Chartered Accountants Act 1949

Constitution

The Constitution of India

FUTP Regulations, 2003

Prohibition of Fraudulent and Unfair Trade

Practices Relating to Securities Market

TrueTech

TrueTech Limited

Goodenough Jones

Goodenough

Ors.

Others

Section

SAT

Securities Appellate Tribunal

SEC Act, 1934

Securities Exchange Act of 1934

SCN

Show Cause Notice

SCAI

Society of Chartered Accountants of Islandia

SIRI

Securities and Investment Regulator of Islandia

U.S.

United States

&

And

Paragraph

VII

MEMORANDUM ON BEHALF OF THE APPELLANT

STATEMENT OF JURISDICTION
The Appellant, Goodenough has filed a Petition for grant of Special Leave before The
Honble Supreme Court of Islandia, pursuant to Article 136 of the Constitution of Islandia,
which reads as under:
136. Special leave to appeal by the Supreme Court.(1) Notwithstanding
anything in this Chapter, the Supreme Court may, in its discretion, grant special leave to
appeal from any judgment, decree, determination, sentence or order in any cause or matter
passed or made by any court or tribunal in the territory of India.
(2) Nothing in clause (1) shall apply to any judgment, determination, sentence or
order passed or made by any court or tribunal constituted by or under any law relating to the
Armed Forces.
Appellant humbly submits that this Court has the appropriate jurisdiction to hear the
matter and adjudicate accordingly.

VIII

MEMORANDUM ON BEHALF OF THE APPELLANT

STATEMENT OF FACTS
I.
Goodenough, a registered partnership firm with the SCAI was the statutory auditor for
TrueTech, a public limited company, for the period April, 2003 to September, 2013.
II.
Mr Pradyuman, Chairman of TrueTech confessed to various financial irregularities and
fraud in TrueTech through a letter addressed to the national stock exchanges. Subsequently,
he was arrested on various charges and a number of Regulatory Authorities commenced
investigation in the fraud.
III.
The investigation conducted by the SIRI into the affairs of Truetech revealed substantial
difference between the balance shown in the books of accounts of TrueTech, and the balance
as per official bank statements. It concluded that sales/revenue figures in TrueTechs books
had been inflated which distorted the decision of millions of investors.
IV.
In view of the investigation a SCN was issued to Goodenough alleging that the audit was
not conducted as per the prescribed standards and that the firm failed in its duties while
auditing. Furthermore, it was alleged that Goodenough was liable for having participated in
the fraud and was called upon to show cause as to why an action should not be taken against
them for violating the provisions of the SIRI Act and the rules and regulations thereunder.
V.
In reply to the notice, Goodenough raised a preliminary objection to the jurisdiction of the
SIRI to investigate into this matter. The SIRI disposed of the objection by an order which
held that the question of jurisdiction is a mixed question of fact and law and cannot be
determined that this stage.
VI.
Goodenough filed a writ petition before the High Court of Essos challenging the order of
the SIRI contending that the SIRI ought to decide the question of jurisdiction as a preliminary
issue. However, the petition was subsequently rejected and the High Court upheld the
arguments of the SIRI.

IX

MEMORANDUM ON BEHALF OF THE APPELLANT

VII.
Goodenough sought for a special leave before the Honble Supreme Court of Islandia
against the order of the High Court. While contesting the jurisdiction of the SIRI in the
present matter it argued that the issue of jurisdiction ought to have been decided as a
preliminary issue. The question as to what would be the standard of care to be adopted by
auditors while auditing and whether the establishment of mens rea was necessary for
violation of the Act and regulations thereunder arose for consideration of the court.
VIII.
Leave was granted and the matter is listed for hearing on the issues framed by the
Honble Court.

MEMORANDUM ON BEHALF OF THE APPELLANT

STATEMENT OF ISSUES
I. WHETHER THE SIRI OUGHT TO HAVE DECIDED THE QUESTION OF JURISDICTION AS A
PRELIMINARY ISSUE BEFORE PROCEEDING TO ADJUDICATE THE MATTER ON
MERITS?

II. WHETHER A WRIT

PETITION FILED BY

GOODENOUGH BEFORE

THE

HIGH COURT

OF

ESSOS WAS MAINTAINABLE IN VIEW OF THE REMEDIES ENVISAGED UNDER THE SIRI
ACT?
III. WHETHER

THE

SIRI

HAS JURISDICTION TO ENQUIRE INTO THE CONDUCT OF A

CHARTERED ACCOUNTANT

REGISTERED WITH THE

SCAI

AND ISSUE DIRECTIONS

AGAINST A CHARTERED ACCOUNTANT?

IV. WHETHER IT IS NECESSARY FOR THE SIRI TO ESTABLISH MENS REA FOR A VIOLATION
OF THE SIRI ACT AND FUTP REGULATIONS FRAMED THEREUNDER?

XI

MEMORANDUM ON BEHALF OF THE APPELLANT

SUMMARY OF ARGUMENTS
I. That the SIRI ought to have decided the question of jurisdiction as a preliminary
issue before proceeding to adjudicate the matter on merits.
The question of jurisdiction in the present case is a pure question of law and therefore the
SIRI ought to have decided the same before it could proceed to adjudicate the matter on
merits. In view of the same a composite order on jurisdiction and merits could not be passed.
Further, the existence of a jurisdictional fact which is a sine qua non for exercising
jurisdiction by a court has not been established.
II. That a writ petition filed by Goodenough before the High Court of Essos was
maintainable.
The writ petition filed by the Appellant was maintainable as the order of the SIRI was
only a step in aid of the proceedings and therefore not appealable u/s. 15T of the Act. In the
absence of any recourse under the Act, the Appellant can invoke the extraordinary
jurisdiction of the High Court. In the alternative, it is argued that the High Court is
empowered to entertain a petition even if the aggrieved party has not exhausted the remedies
available under a statute.
III. That the SIRI does not have jurisdiction to inquire into the conduct of a Chartered
Accountant registered with the SCAI and issue directions against a Chartered
Accountant.
The SIRI has absolutely no power to issue any direction against the Chartered
Accountants as it would amount to regulating the professions of Chartered Accountants
which is expressly forbidden under 24-A of the CA Act, 1949. Further, the auditors do not
have any direct association with the securities market and consequently they do not fall
within the category of persons identified under the provisions of 11B of the Act. Further,
there was no order passed by the SIRI directing investigation against Goodenough which is
a requirement under the enactment. There is no evidence adduced by the SIRI with regards to
the investors being misled by the alleged conduct of the auditors.
IV. That it is necessary for the SIRI to establish mens rea for a violation of the SIRI Act
and FUTP Regulations framed thereunder.
Though the provisions of the enactments do not expressly envisage the requirement of
mens rea for holding a person liable for its contravention, the intention of the party is a

XII

MEMORANDUM ON BEHALF OF THE APPELLANT

relevant ingredient and should be read into the provisions for proving any violation of the
SIRI Act and the FUTP Regulations. Furthermore, in case of persons who have aided and
abetted the principal violator of the enactments, mens rea has to be proved.

XIII

MEMORANDUM ON BEHALF OF THE APPELLANT

ARGUMENTS ADVANCED
I.

THAT

THE

SIRI

OUGHT TO HAVE DECIDED THE QUESTION OF JURISDICTION AS A

PRELIMINARY ISSUE BEFORE PROCEEDING TO ADJUDICATE THE MATTER ON MERITS.

In its reply to the SCN, Goodenough raised a preliminary issue of jurisdiction contending
that the SIRI lacked jurisdiction to enquire into the conduct of professional Chartered
Accountants who are members of the SCAI.1 However, the SIRI rejected this contention of
Goodenough and passed an order holding that the present issue at hand was a mixed question
of law and fact and that the jurisdictional fact can be determined only upon a complete
inquiry on merits.2 It is thereby submitted that, in the instant case that, [A] The SIRI ought to
have decided on the existence of a jurisdictional fact before it could proceed with the inquiry
on merits and; [B] The question of jurisdiction in the present case is a pure question of law.
A. That the existence of a jurisdictional fact has not been established.
A jurisdictional fact is a fact which must exist, before a Court, Tribunal or an Authority
assumes jurisdiction over a particular matter. If the jurisdictional fact does not exist, the
court, authority or officer cannot act.3 In the instant case, the jurisdictional fact is whether the
SIRI has the requisite mandate to control the conduct of the Chartered Accountants. It is
thereby submitted that the existence of the jurisdictional fact has not been established. The
existence of jurisdictional fact is sine qua non or condition precedent for the exercise of
power by a court of limited jurisdiction.4 Therefore, it is contended that the SIRI erroneously
passed an order holding that the present issue at hand was a mixed question of law and fact.
B. That the question of jurisdiction in the present case is a pure question of law.
In view of the information found by the SIRI after investigating into the affairs of
Truetech, a SCN was issued to the Appellants. However, it is contended that, the SIRI should
not be permitted to proceed onto the merits for adjudicating the case in connection with the
allegation levelled against the Appellant in the SCN before deciding the question of
jurisdiction.
The Appellant is a firm of Chartered Accountants registered under the SCAI and is
thereby governed by the CA Act, 1949.5 Upon inquiry into the affairs of TrueTech, the SIRI
observed that Goodenough had participated in the fraud perpetrated by Mr. Pradyuman and
1

8, Moot Proposition.
Id. at 9.
3
Arun Kumar and Ors. v. Union of India and Ors., [2006] 155 TAXMAN 659(SC).
4
Id.
5
Supra note 1, at 2.
2

MEMORANDUM ON BEHALF OF THE APPELLANT

the management of TrueTech, thereby violating the provisions of the FUTP Regulations,
2003 along with that of the SIRI Act, 1992. It is submitted that the SIRI cannot proceed with
adjudication on the merits of the matter without settling the question of jurisdiction.6 The
Chartered Accountants are professionals who are governed by a separate legal regime and
that their actions are beyond the scope of the SIRI Act. Therefore, whether the SIRI has
jurisdiction to enquire into the conduct of Chartered Accountants is a pure question of law.
The obligation to try the issue of jurisdiction as a preliminary issue arises only when it is
a question of law.7 If, at the inception of an inquiry by an inferior tribunal, a challenge is
made to its jurisdiction, the tribunal has to make up its mind whether to act or not and can
give a ruling on the preliminary or collateral issue.8
Therefore, as there has been a challenge effected with regards to the jurisdiction of SEBI
in the instant matter and it is recognized that the question of jurisdiction is a pure question of
law, it is humbly submitted by the Appellant that the SIRI ought to decide the question of
jurisdiction as a preliminary issue before delving into the merits of the case.
II.

THAT THE WRIT PETITION FILED BY GOODENOUGH WAS MAINTAINABLE BEFORE THE HIGH
COURT OF ESSOS.
The SIRI passed an order dated 23rd February 2014, holding that the issue of
jurisdiction was a mixed question of law and fact and that the jurisdictional fact can only be
determined upon a complete inquiry on merits.9 As against this order, the Appellant filed a
writ petition under Article 226 in the High Court of the State of Essos.10 The writ petition
filed by the Appellant was maintainable as the order of the SIRI was only a step in aid of the
proceedings and therefore not appealable u/s.15T of the Act [A] and in any case a writ under
Article 226 of the Constitution of India could be issued in the present case [B].
A. That there was no order within the meaning of 15T of the SIRI Act.
15T of the SIRI Act, 1992 provides that any person aggrieved by an order of the Board
under this Act, or the rules or regulations made thereunder11 may prefer an appeal to a
Securities Appellate Tribunal having jurisdiction in the matter. Before such an appeal can be
preferred, an important requirement is that an order be passed by the SIRI. And once such
6

SEBI v. Mangalore Stock Exchange, (2005) 10 SCC 274; Pan Asia Advisors v. SEBI, 2013 SAT judgement.
Ramdayal Umraomal v. Pannalal Jagannathji, AIR 1979 MP 153; Arun Agarwal v. Nagreeka Exports Pvt.
Ltd., (2002) 10 SCC 101
8
1 HALSBURY'S LAWS OF ENGLAND 1035 (5th ed., Lexis Nexis 2009) [hereinafter HALSBURY].
9
Supra note 1, at 9.
10
Supra note 1, at 10.
11
The SIRI Act of 1992, 15T(1)(a) [hereinafter The Act].
7

MEMORANDUM ON BEHALF OF THE APPELLANT

an order has been passed and the appellant is aggrieved by such an order, an appeal under this
provision can be sought.12
In the instant case, as noted earlier, the SIRI passed an order dated 23rd February 2014
holding that the issue of jurisdiction was a mixed question of law and fact and that the
jurisdictional fact can only be determined upon a complete inquiry into the merits. Such an
order cannot be said to be an order within the meaning of the 15T. The word "order" means
"a mandate; precept; command; or direction authoritatively given; rule or regulation".13 The
Tribunal in the case of B.P Kanani v. SEBI has expressly held that an

order covers

commands or directions that something shall be done, discontinued or suffered and does not
include a finding.14
Moreover, while making a reference to the erstwhile provisions of the Act, a restrictive
interpretation was observed that not every order can be appealed against unless the order
formally adjudicates and affect rights of the parties.15 The SAT has also opined that the
orders which are merely procedural cannot be appealed against.16
In the instant case, the impugned interlocutory order passed by the SIRI did not formally
adjudicate thereby affecting the rights of the parties and therefore would not be appealable u/s
15T of the Act. It was a mere procedural order holding that in the instant case the
jurisdictional fact can only be determined upon a complete inquiry on merits.17 As a result,
the only legal recourse that was left to the Appellant was to approach the High Court praying
for a writ to quash the order of the SIRI. Therefore, it is submitted that the Appellants rightly
invoked the extraordinary jurisdiction of the High Court of Essos to appeal against the SIRI
order dated 23rd February 2014.
B. Alternatively, that the writ jurisdiction of the High Court of Essos can be invoked.
Aggrieved by the order passed by the SIRI dated 23rd February 2014, the Appellant
approached the High Court of Essos as under Article 226 of the Constitution of Islandia,
seeking for a writ to quash the above order. The High Court under Article 226 is empowered
to issue various writs, directions or orders as it may deem fit.18 The High Court has the power
to entertain a writ petition even if the litigant has not exhausted the remedies available to
12

Hasmat Rai v. Raghunath Prasad, (1981) 3 SCC 103.

BRAYAN A. GARNER, BLACK'S LAW DICTIONARY 1334 (9th ed., West Publishing 2009) [hereinafter BLACK].
14
B P Kanani v. Securities Exchange Board of India, [2000] 29 SCL 308 (SAT).
15
Harinarayan G Bajaj v. Securities Appellate Tribunal, (2003) 42 SCL 548 (Bom).
16
Bharat Jayantilal Patel v. Secutites and Exchange Board of India & P.K.Bindlish Designated Authority,
Appeal No. 126/2010, SAT Order dated 15th September 2010.
17
Supra note 1, at 9.
18
M. P. JAIN, INDIAN CONSTITUTIONAL LAW 403-404 (7th ed., Lexis Nexis.2014) [hereinafter JAIN].
13

MEMORANDUM ON BEHALF OF THE APPELLANT

him.19 A writ petition is not maintainable without the litigant having exhausted the alternative
remedy available to him is a rule of practice rather than a rule of jurisdiction.20
Additionally, the Honble Supreme Court in catena of decisions has ruled that availability
of a statutory remedy is not an absolute bar for the High Court21 and it can be entertained
where the order is wholly without jurisdiction22 or where there is violation of principles of
natural justice.23
In the instant case, it is the contention of the Appellant that the SIRI being a regulatory
body lacks inherent jurisdiction to inquire into the conduct of the appellant, who are
Chartered Accountants.
Thus, it is submitted that the existence of an alternative remedy, in the form of an appeal
cannot preclude the court, under Article 226 of the Constitution, from exercising the power of
judicial review.
III.

THAT

THE

SIRI

DOES NOT HAVE JURISDICTION TO INQUIRE INTO THE CONDUCT OF A

CHARTERED ACCOUNTANT REGISTERED WITH THE SCAI AND ISSUE DIRECTIONS AGAINST A
CHARTERED ACCOUNTANT.

The SIRI issued a SCN dated 21st December 2013 to Goodenough calling upon
Goodenough to show cause as to why appropriate action should not be taken against it for
violation of the provisions of the SIRI Act 1992 and the rules and regulations made
thereunder, including why directions should not be issued under 11 and 11 B of the
Securities Act. At the outset, It is submitted that the [A] SIRIs allegations are inadmissible
as they have come to Court with unclean hands. [B] It is further submitted that the SCN is in
violation of the principle of audi alteram partem and [C] that the Chartered Accountants do
not fall within the ambit of the term persons associated with the securities market. [D]
Additionally, before the investigations began there was no order passed by the SIRI directing
investigation and [E] the SIRI should have made a reference to the the Council under the CA
Act for disciplinary proceedings. [F] Further, there is no complaint of actual investors to the
effect that they were misled by wrongful disclosure.

19

1 HALSBURYS LAWS OF INDIA 366 (Lexis Nexis 2004) [hereinafter HALSBURY INDIA].
State of West Bengal v. North Adjai Coal Co. Ltd., (1971) 1 SCC 309.
21
Whirlpool Corporation v. Registrar of Trade Marks, Mumbai & Ors., (1998) 8 SCC 1; Subodh Kr Trivedi v.
State of U.P. & Ors., (2001) 1 AWC 515 (All).
22
Dr. (Smt.) Kuntesh Gupta v. Management of Hindu Kanya Mahavidyalaya, Sitapur (U.P) & Ors., AIR (1987)
SC 2186.
23
Supra note 21.
20

MEMORANDUM ON BEHALF OF THE APPELLANT

A. That the SIRIs allegations are inadmissible as they have come to Court with
unclean hands by violating 24A (1) (ii) of the Chartered Accountants Act, 1949
i. That the SIRI has attempted to regulate the profession of Chartered Accountants.
Goodenough is a partnership firm registered with the SCAI under the CA Act, 1949.24
The preamble of the CA Act lays down clearly that the object of the Act is to make provision
for the regulation of the profession of Chartered Accountants. The SIRI is a regulatory body
established with the objective of regulating the securities market and protection of the interest
of investors in the securities market.25
In the instant case, the SIRI issued an SCN to Goodenough alleging that Goodenough had
failed in its duties while auditing the financial statements of TrueTech. Goodenough was
called upon to show cause why directions should not be issued to them prohibiting them from
issuing audit certificates regarding compliance of obligations of listed companies and market
intermediaries registered with the SIRI and/or restraining Goodenough from accessing the
securities market for a specified period.26 It is important to note here that, 24A (1) (iii) of
the CA Act, prohibits and penalizes any person who seeks to regulate in any manner
whatsoever the profession of Chartered Accountants. An SCN being a court order mandated
Goodenough to explain why such directions should not be issued against them. The term
regulate has not been defined anywhere in the CA Act and it is difficult to give the word a
precise definition.27 The Shorter Oxford English Dictionary28, defines the word "regulate" as
meaning "to control, govern, or direct by rule or regulations; to subject to guidance or
restrictions29 The Court observed the meaning of the term regulate in the context of
Essential Commodities Act, 1955 to imply the power to rule, direct and controlincluding
the power to prohibit under certain circumstances.30 "Regulate" is also defined as meaning
to direct; to direct by rule or restriction; to direct or manage according to certain standards,
laws, or rules; to rule; to conduct; to fix or establish; to restrain; to restrict.31 The show cause
notice issued to Goodenough sought to issue directions against them from issuing audit
24

Supra note 1, at 2.
Supra note 1, at 5.
26
Supra note 1, at 7.
27
Jiyajirao Cotton Mills Ltd. & Anr. v. Madhya Pradesh Electricity Board & Anr., AIR 1989 SC 788.
28
2 THE SHORTER OXFORD ENGLISH DICTIONARY 1784 (3d ed., Oxford University Press 2001) [hereinafter
OXFORD].
29
D K Trivedi & Sons & Ors. v. State of Gujarat & Ors., AIR 1986 SC 1323.
30
K Ramanathan v. State of T.N. & Anr., (1985) 2 SCC 116 [hereinafter K Ramanathan]; S. AGRAWAL & R. J.
BABY, A LEGAL COMMENTARY ON SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 54 (Amit Agrawal
ed., Taxmann Publications Pvt. Ltd. 2011) [hereinafter AGRAWAL].
31
K. Ramanathan, Id.
25

MEMORANDUM ON BEHALF OF THE APPELLANT

certificates regarding compliance of obligations of listed companies and market
intermediaries registered with the SIRI and/ or restraining Goodenough from accessing the
securities market for a specified period. it clearly was an attempt to regulate them. As a
result, they were clearly in violation of 24A of the CA Act.
Further, 32 of the SIRI Act, makes it clear that all its provisions shall be in addition to,
and not in derogation of, the provisions of any other law for the time being in force. This
implies that the express prohibition against regulation of the CA profession, as laid down
under the CA Act, 1949, shall prevail over any provisions of the SIRI Act mandating the
same.

That the SIRIs claim is inadmissible as they have approached the Court with
unclean hands.

The doctrine of clean hands provides that he who comes to equity must come with clean
hands.32 In the instant case, as noted above the SIRI has violated 24A of the CA Act in the
process of issuing an SCN to Goodenough. Therefore, it is submitted that the SIRI cannot
make a claim against Goodenough as they have come to court with unclean hands.
B. That the show cause notice is violative of the principle of audi alteram partem.
The SIRI issued an SCN dated 21st December 2013 to Goodenough calling them to show
cause as to why appropriate action should not be taken against it for violation of the
provisions of the SIRI Act 1992 and the rules and regulations made thereunder, including
why directions should not be issued under 11 and 11B of the SIRI Act prohibiting
Goodenough from issuing audit certificates regarding compliance of obligations of listed
companies and market intermediaries registered with the SIRI and or restraining Goodenough
from accessing the securities market for a specified period.33 As per the rule of audi alteram
partem rule, no one should be condemned unheard. A person against whom an action is
sought to be taken or whose right or interest is being affected, should be given a reasonable
opportunity to defend himself.
When the SCN is silent as to which provisions of the SIRI Act or Regulations have not
been complied with, the charge on this count cannot in any case be sustained, as the same is
contrary to the rules of natural justice.34 In the instant case, since the SCN was vague and did

32

Smt. Indira Nehru Gandhi v. Raj Narain & Anr., AIR 1975 SC 1590.
Supra note 1, at 7.
34
Gold Multifab Limited & Ors. v. Chairman, Securities and Exchange Board of India & Ors., [2003] 48 SCL
249 (SAT).
33

MEMORANDUM ON BEHALF OF THE APPELLANT

not particularly make reference to any provisions and regulations that were violated, it is
submitted that the same cannot be sustained as it is in violation of the principle of audi
alteram partem.
C. That the body of Chartered Accountants do not fall within the ambit of the
expression persons associated with securities market.
Under 11B of the SIRI Act, the Board is empowered to issue directions to any person or
class of persons associated with the securities market.35 The expression associated persons
was considered by the Gujarat High Court in the case of Karnavati Finacap Ltd. and Alka
Spinners Ltd, v. SEBI.36 The High Court observed that persons associated with denote a
person having connection or intercourse with the securities market.37 The Court in its
reasoning includes persons like the buyer and seller of scrips in the ambit of the expression.
In the instant case, the SIRI seeks to issue directions to Goodenough as under 11B. It is
submitted that Goodenough being a Chartered Accountants firm who perform the role of
auditors, clearly do not have any connection or intercourse with the securities market. Thus,
they do not fall within the purview of the expression associated persons and this disentitles
the SIRI from issuing directions as under 11B.
D. That there was no order passed by the Board under the SIRI Act directing
investigation against Goodenough.
As under the SIRI Act where the Board has reasonable ground to believe any provisions
of the Act or the rules or the regulations made or directions issues by the Board thereunder, it
may, at any time by order in writing, direct any person to investigate the affairs of such
intermediary or persons associated with securities market.38 In the instant case, the SIRI
issued an SCN to Goodenough after their investigation against TrueTEch revealed that they
published inaccurate financial statements for several years.39 There was no order in writing
directing investigation against Goodenough by the SIRI implying that the later was in clear
violation of the requirements under 11C for initiation of investigation.

35

The Act, supra note 11, 11B(a).

M/s Karnavati Fincap Ltd. & Anr. v. Securities and Exchange Board of India, [1996] 87 Comp Cas 1869.
37
Id.
38
The Act, supra note 11, 11C(1)(b).
39
Supra note 1, at 6-7.
36

MEMORANDUM ON BEHALF OF THE APPELLANT

E. That the SIRI should have made a reference to the Council under the CA Act for
disciplinary proceedings.
The CA Act, 1949 has been enacted with the sole objective of regulating the profession of
Chartered Accountants40 and to achieve the same purpose the SCAI has been established.41
Under the Act, the Disciplinary Directorate42 is vested with the responsibility of making
investigations on receipt of a reference and further the Disciplinary Committee is empowered
to take action accordingly.43 Additionally, the Report of Justice Dhanuka Committee on
Securities Laws, made a recommendation for a statutory provision under the SIRI Act
empowering SEBI to make a reference to the Disciplinary Committee of the SCAI for taking
necessary disciplinary action against the members concerned.44 In the instant case, the SIRI
on noting any alleged misconduct on part of Goodenough should have apprised the matter to
the SCAI who would taken necessary disciplinary action. It is therefore submitted that the
SIRIs act of issuing SCN to Goodenough is not justified as they do not have jurisdiction to
enquire into the conduct of the auditors.
F. That there is no complaint of actual investors to the effect that they were misled by
wrongful disclosure.
The Securities Appellate Tribunal in its decision in the case of DLF Ltd. and Ors. v.
SEBI45 is of the view that when remedial power is being used to debar any person from
accessing the Securities market, the Respondents should bring some evidence. In the instant
case, after investigating into the books of accounts of TrueTech, the SIRI was of the view that
the inaccurate financial statements published over several years had distorted the opinions of
millions of investors.46 However, the SIRI has produced no evidence to show that the actual
investors were misguided by any alleged wrong disclosure disallowing them from issuing
directions against Goodenough.
Therefore, in light of the above contentions, it is put forth that the SIRI has no jurisdiction
to inquire into the conduct of a Chartered Accountant register with the SCAI and issue
directions against a Chartered Accountant.

40

Chartered Accountants Act of 1949, Long Title [hereinafter CA Act].

Id. Preamble.
42
CA Act, supra note 40, 21.
43
CA Act, supra note 40, 21B.
44
Report of Justice Dhanuka Committee on Securities Law, Pertaining to Draft Securities Bill and Draft
Depositories (Amendment) Act, 1998, Part IA, Chapter 1.
45
DLF Ltd. and Ors. v. SEBI, Appeal Nos. 331, 392-96 & 415/2014, SAT Order dated 13th March 2015.
46
Supra note 1, at 6.
41

MEMORANDUM ON BEHALF OF THE APPELLANT

IV.

THAT IT IS NECESSARY FOR THE SIRI TO ESTABLISH MENS REA FOR A VIOLATION OF THE
SIRI ACT AND FUTP REGULATIONS FRAMED THEREUNDER.
In the instant case, Goodenough is alleged to have participated in the fraud perpetrated by
Mr. Pradyuman and having aided and abetted in misreporting and manipulating the financial
statements of True Tech Ltd. among other charges, thereby, attracting the relevant provisions
under the SIRI Act and the FUTP Regulations thereunder.47 It is put forth that, (A) an
allegation for violation of the provisions of the SIRI Act and the regulations framed
thereunder cannot be made without satisfying the essential requirement of mens rea.
Furthermore, (B) Goodenough cannot be held liable for aiding and abetting the fraud for the
violation of the provisions of the enactment without establishing that it was done with active
intent.
A. That mens rea is an essential ingredient of the offence under SEBI Act and FUTP
Regulations thereunder.
(i)

That the requirement of mens rea should be read into the provisions of the
enactments.

The Honourable Supreme Court has held that there is a presumption that mens rea is an
essential ingredient in a statutory offence, but this presumption is liable to be displaced either
by the words of the statute creating the offence or by the subject-matter with which it deals.48
It is pertinent to mention the observation of SAT in the case of Rakesh Agarwal v. SEBI49
wherein the Tribunal relied on the aforementioned decision. The Tribunal was faced with a
question of whether an insider could be punished for violation without an intention or motive
to make personal gains. It opined that though the regulations do not specifically bring in mens
rea as an ingredient, however in view of the objective of the SEBI Regulations prohibiting
insider trading and the punishments envisaged for the violations thereof, the intention/motive
of the insider has to be taken cognizance of.
With respect to the issue at hand, a similar view can be taken regarding the FUTP
Regulations and the provisions of 12A of the Act, which are peri materia with Regulation
3. It is an accepted fact that any fraudulent and unfair trade practice requires to be checked
and those who indulge in it should be severely dealt with by awarding harsh penalties.
Considering the gravity of the offence, the Legislature has provided for heavy penalty vide
15HA and 24 of the Act. It is submitted that when viewed from the gravity of the charge
47

Supra note 1, at 7.
State of Maharashtra v. Hans George, AIR 1965 SC 722.
49
Rakesh Agarwal v. SEBI, [2004] 1 Comp LJ 193.
48

MEMORANDUM ON BEHALF OF THE APPELLANT

and penal consequences that could visit a person for indulging in such practice, it is difficult
to accept the proposition that the intention/motive of the person indulging in insider trading is
irrelevant.50
In light of the above, it is submitted that although the Act and FUTP Regulations do not
expressly contain the ingredients of mens rea, however the same has to be proven to bring
home the guilt.
(ii)

That mens rea is essential for an allegation of certain provisions under the US
Securities Exchange Act, 1934.

The Indian Securities law has extensively borrowed legal concepts and principles which have
been established in the United States counterparts. Regulation 3 of the FUTP regulations is
certainly one among them and is strikingly similar to Rule 10b-5 of the U.S. Securities
Exchange Act, 1934. In the year 1942, pursuant to the authority granted under 10(b) of the
aforementioned Act, SEC promulgated Rule 10b-5.
Regulation 3, Chapter II, FUTP Regulations51:
3. Prohibition of certain dealings in securities.No person shall directly or indirectly(a) buy, sell or otherwise deal in securities in a fraudulent manner;
(b) use or employ, in connection with issue, purchase or sale of any security listed
or proposed to be listed in a recognized stock exchange, any manipulative or
deceptive device or contrivance in contravention of the provisions of the Act or
the rules or the regulations made there under;
(c) employ any device, scheme or artifice to defraud in connection with dealing in
or issue of securities which are listed or proposed to be listed on a recognized
stock exchange;
(d) engage in any act, practice, course of business which operates or would
operate as fraud or deceit upon any person in connection with any dealing in or
issue of securities which are listed or proposed to be listed on a recognized stock
exchange in contravention of the provisions of the Act or the rules and the
regulations made there under.
Whereas, Rule 10b-552 reads as follows:
50

T. V. Narayanaswamy, Essential Ingredient for Prosecuting Insider for violation of Insider Trading
Regulations, 16 CLA (Mag.) 118 (2014).
51
SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations of
2003, Regulation 3, Chapter II [hereinafter Regulations].

10

MEMORANDUM ON BEHALF OF THE APPELLANT

Employment of manipulative and deceptive devices
It shall be unlawful for any person, directly or indirectly, by the use of any means
or instrumentality of interstate commerce, or of the mails or of any facility of any
national securities exchange
(a)

To employ any device, scheme, or artifice to defraud,

(b)

To make any untrue statement of a material fact or to omit to state a

material fact necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading, or
(c)

To engage in any act, practice, or course of business which operates or

would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.
In the celebrated judgment of Ernst and Ernst v. Hochfelder

53

, the U.S. Supreme Court

inferred the requirement of scienter in the context of Rule 10b-5 when it was faced with a
question of whether an action can lie under the aforesaid provision in the absence of
intention. Scienter is defined as A degree of knowledge that makes a person legally
responsible for the consequences of his or her act or omission; the fact of an acts having
been done knowingly, esp. as a ground for civil damages or criminal punishment.54 In other
words, the word scienter refers to mens rea or knowledge.
The Court also held that, When a statute speaks so specifically in terms of manipulation
and deception, and of implementing devices and contrive implementing devices and
contrivances the commonly understood terminology of intentional wrongdoing and when
its history reflects no more expansive intent, we are quite unwilling to extend the scope of the
statute to negligent conduct.55 Subsequently, the Court of Appeals for the Second Circuit
also ruled that scienter was a necessary ingredient for an action under 10(b)/Rule 10b-556.
Furthermore, Peter E. Aaron v. Securities and Exchange Commission57, fortified the
requirement of scienter in an action under 10(b). In Colin Wilson v. Merill Lynch & Co.,
while analysing the moot issue at hand, the Court of Appeals reiterated a principle well
established in U.S securities jurisprudence by stating that market manipulation requires a
plaintiff to allege (1) manipulative acts; (2) damage; (3) caused by reliance on an assumption
of an efficient market free of manipulation; (4) scienter (mens rea) (5) in connection with the
52

Code of Federal Regulations, Rule 10b-5, Title 17, Part 240 [hereinafter Code].
Ernst and Ernst v. Hochfelder, 425 U.S. 185 (1976).
54
BLACK, supra note 13 at 1373.
55
Supra note 53.
56
Securities and Exchange Commission v. U.S Environmental, Inc., 155 F.3d 107.
57
E. Aaron v. Securities and Exchange Commission, 446 U.S 680 (1980).
53

11

MEMORANDUM ON BEHALF OF THE APPELLANT

purchase of sale of securities; (6) furthered by the defendants use of the mails or any facility
of a national securities exchange. Therefore, it is submitted that the element of mens rea is
required in order to contravene the provisions of the SIRI Act and the FUTP.
B. That mens rea has to be proved, in case of entities aiding and abetting the principal
violator.
In the case of Central Bank of Denver, N.A v. First Interstate Bank of Denver, N.A.,58 the
U.S Supreme Court dealt with a matter pertaining to those persons who do not directly
engage in manipulative or deceptive practices, rather those who aid and abet the violation.
A person who conducts a fraudulent trade or transaction on behalf of his principal or
client can only be liable if he had the mental intent to participate in the fraud and had the
knowledge of market manipulation.59 It has been held in a catena of cases that in order to
establish a case under Regulation 3, strong and compelling evidence needs to be adduced to
conclude that an entity undertook the activities prohibited by the act and the regulations
thereunder.
Additionally, it has been held that intermediaries and other connected persons cannot be
sued or prosecuted for the violation of the FUTP Regulations for their gross negligence until
the two pronged test is satisfied, i.e., (a) knowledge of the clients intention to create a false
market and (b) the intention to participate in market manipulation.60
Therefore, it is submitted that an entity in a securities fraud can be held liable only if
allegations against the principal violator have been clearly established, provided, the two
pronged test mentioned hereinabove have been affirmatively concluded against the entity.
This implies that it is not necessary for the SIRI to establish mens rea for violation of the
SIRI Act and the Regulations framed thereunder.

58

Central Bank of Denver, N.A v. First Interstate Bank of Denver, N.A., 511 U.S 164 (1994).
KAUSHIK LAIK, UNFAIR TRADE PRACTICES IN SECURITIES MARKET 165 (1st ed., Taxmann 2013).
60
Piyush P. Avalani v. SEBI, Appeal No. 131/2002, Order dated 16th July 2012; Kasat Securities (P) Ltd. v.
SEBI, Appeal no. 27/2006, Order dated 29th January 2003; Kishore R. Ajmera v. SEBI, Appeal No. 13/2007,
Order dated 5th February 2008.
59

12

PRAYER
Wherefore, in light of the facts stated, issues raised, arguments advanced and authorities
cited, it is most humbly and respectfully prayed before this Honorable Court that it may be
pleased to grant the leave and hold:
(a) that the SIRI ought to have decided the question of jurisdiction as a preliminary issue
before proceeding to adjudicate the matter on merits.
(b) that the writ petition filed by the Appellants before the High Court of Essos was
maintainable;
(c) that the SIRI does not have jurisdiction to neither enquire into the conduct of a Chartered
Accountant, registered with the SCAI nor issue any directions against them;
(d) that it is necessary for SIRI to establish mens rea for a violation of the SIRI Act and
FUTP Regulations framed thereunder;
And
Pass any other order or grant any other relief in favour of the Appellant, which this
Honorable Court may deem fit to meet the ends of equity, justice and good conscience.

Date: 18th September, 2015

Place: Republic of Islandia

Sd/Counsel(s) for Appellant

XIV