A broker or a dealer with access to your trading account front-runs a large client, or runs matched buy-and-sell trades through your account to manipulate a price. When SEBI investigates, does the penalty fall on the broker alone, or on you as the account holder too? The answer in SEBI's adjudication and in Securities Appellate Tribunal (SAT) jurisprudence is not decided by whose name sits on the account. It turns on knowledge, consent and participation. Where the account holder allowed the account to be used for the fraud, or aided and abetted it, both are penalised. Where a broker did no more than execute a client's instructions without knowledge of any fraudulent design, the broker can be exonerated and only the client held liable. This explainer maps the orders that draw that line.
The Line SEBI Draws: Knowledge, Consent, Participation
SEBI's approach to broker fraud and unauthorised trading on client accounts varies with the account holder's knowledge and participation. Where the account holder allowed use of the account with knowledge, or aided and abetted the broker, both the broker and the account holder have been penalised. Where a broker acted without the account holder's knowledge, consent or participation, and merely facilitated trades as a broker, only the broker is penalised and the account holder may be exonerated. Liability is not strict. It is determined by the degree of knowledge, participation and intent of each party, and SEBI must prove active participation or knowledge, not mere facilitation.
The same test cuts the other way for brokers. A broker can be held liable even for unauthorised actions, but a broker who only carried out client directions, without knowledge of fraud and without negligence or connivance, is not liable simply for having facilitated the trade. The doctrine that reconciles both directions is aiding and abetting, examined below.