A company founded by Mumbai's former police commissioner Sanjay Pandey had allegedly violated SEBI norms in auditing two NSE stock brokers who were using the scam-tainted co-location facility, officials said Monday.
An FIR registered on May 19 against the company, iSec Services, on a reference from the Enforcement Directorate, redflags several violations of SEBI circular by the firm in conducting system audit of stock brokers involved in algorithmic trading using the co-location facility, which is under the CBI scanner now.
The FIR was made public on Monday.
The CBI has alleged that iSec services had conducted audit of two "high risk brokers" -- SMC Global Securities Ltd and Shaastra Securities Trading Private Limited -- in a fraudulent manner when the co-location "scam" was going on.
The CBI had arrested former MD and CEO of NSE Chitra Ramkrishna in co-location scam case, they said.
The SEBI had categorised brokers into low, medium and high risk based on their trading modes and prescribed different norms of conducting system audits according to their risk profiles through various circulars issued from time to time.
These brokers came in the category of high risk, as per SEBI guidelines, for using co-location facilities to carry out altgorithmic trading in the NSE, they said.
The high risk brokers required system audit of their algorithmic trading system every six months with an auditor only allowed to conduct three successive audits.
The company iSec Services Private Ltd, which was founded by Pandey after he resigned from Police Service in March 2001, had audited these traders during 2013-19 continuously, breaking the permissible limit of only three consecutive audits, according to the FIR.
Shaastra Securities was audited during the period April 2013-March 19 and SMC Global Securities from October 2012 to September 2015 by iSEC Services in breach of SEBI circular dated November 6, 2013, it alleged It is alleged that since the company was not eligible to conduct the audit it used services one Prabhpreet Singh of S Dhawan and Associates on a 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 audit was raised by iSec Services on the trading members and payments for the same were also made to iSEC Services by the trading members," the FIR alleged.
"It appears that to overcome the restriction imposed by SEBI guidelines, iSEC services...had got the report(s) for the intervening period signed by Prabhpreet Singh whereas factually the premises were visited by Naman Chaturved, an employee of iSEC," it alleged.
The CBI has alleged that for all purposes, the audit was carried out by iSEC Services and it simply got the reports signed from Singh who never visited the premises of the stock brokers.
"It is clear that iSEC services had fraudulently issued or got issued security and system audit certificates without carrying out actual audit on the input of a person who was not authorised to carry out such audit," the FIR alleged.
The agency has alleged that reports submitted to NSE by iSec were signed by certified experts where the audit were conducted by Chaturvedi who was not qualified to carry out the system audit.
Pandey who had founded the company in 2001 had quit as its director in May 2006. His son and mother later took charge of the company.
The police officer had studied at IIT-Kanpur and Harvard University, is understood to have established the company after he resigned from service.
His resignation was not accepted by the state government and he rejoined but was not immediately given a posting.
He was made Commissioner of Mumbai Police during Uddhav Thackeray led MVA government and retired on June 30.
(Except for the headline, this story has not been edited by NDTV staff and is published from a press release)