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Ponzi Schemes Start with an Apparently Legitimate Or Legal Purpose

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Ponzi Schemes Start with an Apparently Legitimate Or Legal Purpose Knowledge PARTNERS PONZI A Ponzi scheme is a fraudulent investment scheme where money brought in by the newer investors is used to pay off the claims of older investors. This creates SCHEMES an impression of a successful investment scheme. Of course, as long as money entering the scheme is greater than the money leaving it, all is well. The moment the situation is reversed, the scheme collapses. The scheme takes after the name of Carlo Ponzi (1920s), an Italian fraudster who promised to double the investment of clients in 3 months’ time, basing the model on cash flows from new investors and the arbitraging gains from discounted postal reply coupons between Europe and US. The scheme collapsed in a year’s time and caused loss of US$20 Mn to investors. Characteristics of a Ponzi scheme: 1. The scheme appears to be a genuine investment opportunity, but at the same time it is obscure enough to prevent any scrutiny by the investors. 2. The operators in the scheme persuade investors to roll over the profits into the next investment cycle. So the returns for investors remain on paper. Since the money remains with the operator the Ponzi scheme keeps running. 3. Most Ponzi schemes start with an apparently legitimate or legal purpose. 4. Brand building is an inherent part of a Ponzi scheme. Ponzi schemes eventually become too big and collapse under their own weight. The original investors gained only because the latter investors subscribed. No new wealth gets created. Typically, the investors are persuaded to reinvest their money back into the scheme and wait for a bonanza at a later day. The attraction of easy wealth is something that investors cannot resist. Ponzi schemes offer huge returns in a short period of time vis-a-vis other investments available in the market at any point in time. In a country like India, where the poor populace constantly looks for new revenues to meet needs, the chances of people falling for Ponzi schemes continue to remain high. Many of the rich in their greed for quick money fall for such schemes. The only way out of this menace is by quickly and in an exemplary way punishing people who run Ponzi schemes. Driven by the lack of safe and legitimate savings schemes for the rural poor, inadequate regulations and political patronage, hundreds of illegal Ponzi schemes masquerading as collective investment schemes or Chit Funds have played havoc across India. National THE CURRENT STATUS Conference on “Capital Market On March 14, 2013 Corporate Affairs Minister Sachin Pilot presented a list of 87 Frauds and such companies in Parliament, against whom complaints had been received for Malpractices - indulging in Ponzi schemes. Seventy-three of these were from West Bengal. Eight Genesis, Resolution companies of the Saradha Group figure in the list, as do 16 companies owned by and Prevention” Rose Valley, a sponsor of the IPL team Kolkata Knight Riders. The ministry has ordered the Serious Fraud Investigation Office (SFIO) to fast-track investigations 10 October 2013 into the working of these organisations. In April 2013, Securities and Exchange Board of India (SEBI) Chairman U.K. Sinha said at a seminar in Mumbai more than Rs 10,000 crore had been raised by so-called money circulation schemes, or by people who run Collective Investment Schemes but refuse to come under any sort of regulations. PHDCCI National Conference on Capital Market Frauds and Malpractices 1 Knowledge PARTNERS THE LAW A major reason for the proliferation of Chit Funds and fraudulent Collective Investment Schemes is the absence of adequate regulations and, in some cases, the lack of clarity in laws. Chit Funds are monitored by state governments, Collective Investment Schemes by SEBI, and nonbanking finance companies (NBFCs) by the Reserve Bank of India (RBI). With an aim to provide effective power to SEBI for taking on perpetrators of Ponzi Schemes and other fraudulent activities, the government has proposed to arm SEBI with direct powers to carry out search and seizure operations and for attachment of assets. Besides, it has also been proposed to provide SEBI with powers to seek information, such as telephone call data records, from any persons or entities in respect of any securities transactions being probed by it. After getting the Cabinet's approval, the government plans to introduce the Securities Laws (Amendment) Bill, 2013 in Parliament to carry out the proposed changes for grant of stronger powers to SEBI. It is proposed to revamp the existing Market Research & Analysis Unit (MRAU) in the Serious Fraud Investigation Office (SFIO) to enable it to function as an Intelligence Unit. In its new avatar, the SFIO will be a statutory body with the ability to initiate prosecution when directed by the Central Government. The investigation report filed by the SFIO with the criminal court, for framing of charges, will be deemed to be a report filed by the police under the Code of Criminal Procedure. CASE STUDIES C R BHANSALI (CRB) (1996) The Scheme and people behind it: CRB’s meteoric rise in the early 90s coincided with the boom in the Non-Banking Finance Company (NBFC) sector. His fall in 1996 was equally fast. The credit-rating agencies didn’t see it coming. Rating Agency CARE gave the CRB group a ‘AAA’ rating at a time when the company was sinking. First came the finance company (CRB Capital Markets), after which the mutual fund (CRB Mutual Fund) and CRB Share Custodial Services followed. CRB had a dream run from 1992 to 1996 collecting money from the public through fixed deposits, bonds and debentures. Bhansali floated around 133 subsidiaries and unlisted companies. Most of the money was transferred to these dummy companies. The flagship company, CRB Capital Markets, went public in 1992 and raised Rs 176 crore in three years. In 1994 CRB Mutual Funds, through its Arihant Mangal Growth Scheme, raised Rs 230 crore. Another Rs 180 crore came through fixed deposits. CRB Corporation Ltd. raised Rs 84 core through three public issues between May 1993 and December 1995. CRB Share Custodial Services raised a further Rs 100 crore in January 1995 to set up operations. Between 1992 and 1995 Bhansali had managed to raise a mind boggling figure, in that era, of Rs 900 crore. SEBI Action: Post-1995, CRB lost large amounts on the stock markets. His investments in the property market did not pay off because of the slump. Caught in a financial trap, CRB tried borrowing more money from the market. PHDCCI National Conference on Capital Market Frauds and Malpractices 2 Knowledge PARTNERS To repay the interest on amounts he borrowed, CR Bhansali was forced to borrow once again. CR Bhansali made a determined effort to get out of the trap by investing in some high-risk ventures. This went on, and CRB got stuck in a financial quicksand and was finally charged criminally. Bhansali spent three months in jail in 1997. He is out on bail now but nobody knows where he is. ANUBHAV PLANTATIONS SCAM (1998) Scheme and people behind it: The Chennai-based Anubhav Plantations owned 2,600 acres of land, on which teak plantation was to be cultivated. The saplings were already planted and insured. The deal was to invest money and own a part of the land. The money the investors put in would be used to tend to the plantations. Since the interest earned on plantation schemes was treated as agricultural income, it was exempt from tax. The unit value of the teak schemes was very small, investors could easily afford them. As a result, Anubhav's schemes became very popular. The Anubhav Group was also associated with the World Wide Fund for Nature, adding to its credibility. The Anubhav group of companies never delivered on the Teak scheme. They were found to have duped investors of over Rs. 400 crore. Current Status: C. Natesan, the promoter, was arrested in October 1998 and spent 8 years in jail. In March 2013 the Madras high court dismissed the anticipatory bail petitions of C Natesan and his wife, who again apprehended arrest in connection with an NRI cheating case registered against them in 2008. HOMETRADE.COM (2002) Scheme and people behind it: By claiming a foreign source of money supply, the company - which was nothing more than a financial dot-com web portal - launched an incredible celebrity endorsement based campaign featuring three of the most expensive celebrities in the country, to brand a financial product that nobody could figure out. Nobody knew what Home Trade did or what it sold, or even whether a financial portal could afford to throw around the sort of advertising money that it was. It was masterminded by Sanjay Agarwal, broker Ketan Sheth, Nandkishore Trivedi and Baluchan Rai (- a Hong Kong-based NRI). With funding from Euro Discover Technology Ventures, Mauritius, this group bought off Lloyds Brokerage Ltd, for a paltry Rs 1.5 per share. Lloyds Brokerage changed to Euro Asia Securities, which was listed at the Pune and Bangalore stock exchanges. Euro Asia Securities soon morphed into another avatar and Home Trade was born. Its high profile ensured that nobody delved into its background for over two years, right until the bubble burst. Home Trade was not focused on earning revenues through product sales but seemed focused entirely on raising capital. Its ultimate aim was to tap retail investors through all that hype. Having ensured that its share price was kept at a high at the Bangalore Stock Exchange, it was lobbying to have its shares listed on the BSE and NSE. Hometrade was using its ‘hyped up’ image to cover up its continued borrowings and the illegal government securities trading through an equity broking membership.
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