Sucheta Dalal :Collective Investment Schemes: Ponzis and PMSs?
Sucheta Dalal

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Collective Investment Schemes: Ponzis and PMSs?  

December 12, 2011

Sebi is thinking of acting at last but how long will it be before we get  effective action?

Sucheta Dalal

On 25th November, a caller from Hyderabad—let’s call her Indira—asked if I take up investor grievances. Since I do help cases of ‘genuine’ distress, I asked for details. Indira said that she and a bunch of colleagues working at ITC Ltd had deposited their money from employee stock option plans (ESOPs) in a demat account opened through a lady broker. The broker was a franchisee for a well-known Bengaluru-based firm.

Indira says her group suddenly found that their shares had been transferred to the account of the broker’s husband and then they vanished. The husband, it turns out, was also a franchisee for another top brokerage firm with a national presence. The upshot was that a dozen persons, including a high-profile couple working for a leading television channel, had lost a massive Rs15 crore of their savings.

Outraged? I certainly was, but the story was only partly true. For starters, Indira was vague when I asked why she hadn’t filed a complaint with the Securities and Exchange Board of India (SEBI) and the two all-India stock exchanges. Instead, the group claims to have approached the police who refused to investigate or register a report. This was hard to believe when a high-profile media couple was also involved.

Since a written complaint is the fastest way of checking the veracity of a complaint, I insisted that Indira file an electronic complaint with SEBI and send me a copy with the tracking number. It never happened. Instead, a day later an acquaintance from the brokerage firm called to give me the ‘facts’. Clearly, Indira and her friends had threatened the firm with ‘media exposure’.

The story was extraordinary. The broker franchisee (who has since been sacked and has a complaint registered against her) was apparently running an illegal Ponzi scheme. She had persuaded the 10 ITC employees and the media couple to deposit their money with her on the promise of extremely high monthly returns. And, the money was deposited directly into her husband’s account, rather than the brokerage firm that she represented. She also paid the ‘promised’ returns for a while and had even persuaded the group of investors to entrust her with additional savings in cash. But, like with all Ponzi operators, the scheme vanished one day along with the group’s savings.

The case is eerily similar to the Citibank fraud where Shivraj Puri, a relationship manager, defrauded a set of savvy, wealth-management customers of a whopping Rs350 crore. Those duped included the Munjals of the Hero group as well as Sanjeev Aggarwal, a private-equity founder, who threatened to implicate Citibank’s global CEO in his complaint. Mr Puri used forged papers to tell people they were investing in a ‘SEBI-approved scheme’ offering extraordinary returns. Strangely, these savvy investors happily issued cheques in the name of one Premnath, who was allegedly the trustee to the scheme, without finding anything fishy about it.

Citibank, which obviously didn’t want to upset high-profile customers, seems to have hushed up the case or settled it; it also forked out a Rs25-lakh fine imposed by the Reserve Bank of India (RBI) for violating ‘anti-money laundering’ and KYC (know your customer) norms. Since RBI does not believe in issuing ‘speaking orders’, we are clueless about the true gravity of these charges or how the matter was hushed up. But this, too, is not an isolated example. Over the past few months, we have received several complaints like those of Indira and her colleagues. One is a strange, garbled rant against a top brokerage company listed on the stock exchanges.

Satya, the investor, alleges that his complaint filed with SEBI was dismissed and the stock exchanges want him to file arbitration proceedings, which he thinks is futile. Again, he provides us with no documentation but tries to hustle us into intervening on his behalf and persuade the company to go for an ‘amicable’ settlement. But Moneylife only helps those with legitimate complaints of cheating; whereas this seems another case of greed or foolishness. The burden of Satya’s lament is that the brokerage firm lured him into day-trading and speculation by offering margin funding or leverage to the tune of 20 to 30 times the value of shares held in his demat account (which is opened in the brokerage firm with a power-of-attorney giving it complete access to the shares).

In almost every such case, investors have lost heavily and exited the market. While it is tragic for Satya, clearly an arbitration ruling will favour the broker, not the foolish investor.

A third query from Junagarh (Gujarat), provides a different dimension to how investors are fooled. Alderbrooke Portfolio Management Services, a sub-broker to two well-known, listed, nationwide brokerage entities, offers an incredible 2%-4% per month return to investors by claiming to invest only in stock and index options. It also makes a show of iron-clad security. It requires investors to sign a detailed memorandum of understanding (MoU) with extensive penalty clauses and issues a post-dated cheque covering the principal amount. It also advises clients to register the MoU in a jurisdiction of their choice.

An investor writes to ask if the scheme is safe, although he is aware that SEBI does not permit guaranteed returns, but he is tempted, and half-convinced, because of the links with two reputed brokerage firms.

Think about it. If large insurance companies don’t dare to ‘guarantee’ a 4% annuity, consider the danger of a guaranteed return of 24% to 40%? Does the post-dated cheque have any value, if the firm goes bust?

We forwarded the letter to SEBI but, as usual, it is arbitrary in its response and under no pressure to issue a warning or to initiate swift action that will nip a possibly illegal scheme in the bud. Who pays the price? The investor.
SEBI is stepping in...

SEBI is well aware of mushrooming Ponzis that illegally guarantee returns from stock market profits. In October 2010, it had barred Credent Portfolio Management and its promoters from running a similar scheme. Similarly, Pearls Agrotech Corporation (variously known as Pearls or PACL) is reported to have amassed over Rs20,000 crore by claiming to build land banks. And, finally, there are the optionally convertible instruments issued by two entities of the Sahara group. This case is now before the Supreme Court.

Over the past two decades, thousands of such schemes have looted investors in the name of smart stock market investment by investing in realty. The havoc they have wreaked is evident from the drastic decline in India’s retail investor population—from 20 million to 8 million over two decades of economic liberalisation.

As Moneylife has repeatedly emphasised, tens of thousands of Ponzi schemes of all hues have been looting the savings of Indians across various economic strata because of the faulty design of the Prize Chits and Money Circulation Schemes (Banning) Act which covers such schemes. SEBI can act against such companies under the Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market Regulations of 2003. But it has never shown the same zeal in punishing Ponzi operators as it has in helping wrong-doers file consent terms.

In recent weeks, SEBI has apparently sought powers to regulate Ponzi schemes. If serious, this is an excellent development, because Indian regulators are better known to fight against acquiring new and difficult regulatory turf inhabited by the followers of Charles Ponzi. Moneylife will keenly watch whether this good initiative translates into effective regulation to protect savers.

Sucheta Dalal is the managing editor of Moneylife. Subscribers get free help in resolving their problems with select providers of financial services. She can be reached at
[email protected]

-- Sucheta Dalal