Ponzi Scheme – Money Game

FROM SCHEME TO SCAM – A JOURNEY

-CS SHIFALI SINGH
EXOTIC FINANCIAL INSTRUMENTS

 An exotic instrument, in finance, is a  instrument which is more complex than commonly

traded "vanilla" products, usually relating to determination of payoff. “Vanilla” signifies
the most basic or standard version of a financial instrument, usually options, bonds, 
futures and swaps, which alters the components of a traditional financial instrument,
resulting in a more complex security.
 Types of Exotic
Financial
Instruments

Collective
Plantation
Investment Chit Funds Ponzi Scheme
Scheme
Schemes
Plantation Scheme

 Came out with big fan fare

 Promised fantastic return in distance future
 Least liquid instrument
 Only a few firms have token presence
 COLLECTIVE INVESTMENT SCHEME
(CIS)

An investment scheme wherein several individuals come together to pool their money for investing in a
particular asset(s) and for sharing the returns arising from that investment as per the agreement reached between
them prior to pooling in the money.
CHIT FUNDS

 A kind of savings scheme practiced in India

 Can be conducted by financial institutions or between group of friends and family.

 Popular because other small savings schemes run by Indian Postal Service etc give low
rate of return.

 Chit Funds are also misused by its promoters and there are many instances of the founders
running what is basically a Ponzi scheme and absconding with their money.
 WHAT IS A PONZI SCHEME ?

 A ponzi scheme is a fraudulent investment operation that pays returns to its investors
from their own money or the money paid by subsequent investors, rather than profit
earned by the organization.
 Offering investment products with extreme high returns in investments that actually don’t
exist.
 They don’t invest the money, but pay the promised returns with the investors own money.
 The money of new investors is being used to pay the old investors.
 HOW DID PONZI SCHEMES GOT ITS NAME?

• Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi, commonly known as Charles Ponzi, was an Italian
businessman and con artist in the U.S. and Canada.

• Charles Ponzi promised clients a 50% profit within 45 days, or 100% profit within 90 days, by buying
discounted postal reply coupons in other countries and redeeming them at face value in the United States as a
form of arbitrage.

• In reality, Ponzi was paying early investors using the investments of later investors
• He duped thousands of New England residents into investing in a postage stamp speculation scheme back in the
1920.

• Ponzi's original scheme was based on the arbitrage of international reply coupons for postage stamps; however, he
soon diverted investors' money to make payments to earlier investors and himself.
Similarities and Differences between Ponzi and Pyramid
schemes?

 Ponzi and pyramid schemes are closely related because they both involve paying longer-standing members with
money from new participants, instead of actual profits from investing or selling products to the public. Here are
some common differences.
 Pyramid Scheme Ponzi Scheme
Typical Hook Earn high profits by making one Earn high investment returns
payment and finding a set with little or no risk by simply
number of others to become handing over your money; the
distributors of a product. The investment typically does not
scheme typically does not exist.
involve a genuine product. The
purported product may not exist
or it may only be “sold” within
the pyramid scheme.
Payments/profits Must recruit new distributors to No recruiting necessary to
receive payments. receive payments.
Interaction with original Sometimes none.  New Promoter generally acts directly
promoter participants may enter scheme at with all participants.
a different level.
 Pyramid Scheme Ponzi Scheme

Source of payments From new participants – always From new participants – never
disclosed. disclosed

Collapse Fast.  An exponential increase in May be relatively slow if existing

the number of participants is participants reinvest money.
required at each level.
Common points to most investment frauds :-

 Abnormally High Guaranteed Returns

 High Initial Investment
 Vague or Complicated Investment Strategy
 Unsustainable Business Model
 Offers of exclusivity and paying back of losses
INVESTOR AWARENESS
PROGRAMMES

 Ministry launch Investor Awareness Programmes in 300 districts in association with ICAI,
ICWAI, ICSI, Stock Exchanges, RBI, SEBI, Trade Chambers etc.
 organized more than 1600 Investor Awareness Programmes under IEPF
 organized more than 800 Investor awareness Programmes through Resource Persons from
July 2011 to November 2012.
Programmes by various regulatory authorities:

The National Stock • extensive investor awareness programmes (IAPs)

Exchange (NSE) • plans to organise 41 more IAPs by the end of 2015-16

Reserve Bank of India • workshop on Ponzi Schemes organised by Multi-Disciplinary School

Bombay Stock • SMC, has number of times, conducted investors' awareness and
protection programs
Exchange
 SARADHA GROUP
 Key People
 Sudipto Sen
 Debjani Mukhopadhdhay

 Originally a financial concern but invested heavily in brand building.

 Bengali film industry
 Local television channels
 Newspapers

 In 2011, Saradha Group buys Global Automobiles, a heavily indebted motorcycle company.
 CSR Activities – Donated motorcycles to Kolkata Police
 The group also invested in football clubs like Mohan Bagan and sponsored Durga Puja.
 SEBI persisted, in 2010, Saradha’s method of raising funds changed
 Collective Investment Schemes like tourism packages, real estate fund launched in
the name of Chit Fund
 In 2011, SEBI warned West Bengal government about the alleged schemes of the
company as the concept of chit fund is regulated by state governments and not by
SEBI
 In 2012, SEBI identified that the group operated CIS and not Chit Fund.
 Saradha group started trading in stock market and siphoning off the proceeds
Reactions -

 On 7 December 2012, RBI governor stated that the West Bengal

government should initiate suo motu action against companies which were
indulging in financial malpractices.
 Sudipto Sen, wrote a confessional letter to CBI in April 2013 and fled. He
was later arrested.
 PIL was filed on 22nd April 2013 in Guwahati High Court and Calcutta
High Court
 CBI investigation started
 LEGAL IMPLICATION AND CURRENT
STATUS

 22 April 2013 West Bengal government announced that a four-member judicial inquiry commission
headed by Shyamal Kumar Sen, retired Chief justice of Allahabad High Court would probe the scam
 On 24 April 2013, Mamata Banerjee announced a controversial Rs 500-crore relief fund for the low
income depositors of the Saradha Group
 In light of the scam, SEBI requested sweeping powers to investigate and prosecute any fraudulent
collective investment schemes.
 On 7 May 2013, Calcutta High Court appointed a three member administrator group to run Tara News and
Tara Muzic
 On 23 May 2013, Chief Minister, Mamata Bannerjee indicated the willingness of West Bengal
Government to take over Saradha owned TV channels Tara News and Tara Muzic, which had earlier been
sent under administration by Calcutta High Court
OPERATIONS AND SCAM

 Started in 2006 with promises of astronomical returns in Ponzi Schemes. Started building
brand by buying and selling media channels
 • Used nexus of companies for money laundering
 • Collected money by using secured debentures and redeemable preferential bond
 • Violation of section 67 of Indian Companies Act
 • SEBI challenged them for the first time in 2009
 • Creation of more than 300 new companies
 SEBI persisted, in 2010, Saradha’s method of raising funds changed
 Collective Investment Schemes like tourism packages, real estate fund launched in the
name of Chit Fund
 In 2011, SEBI warned West Bengal government about the alleged schemes of the
company as the concept of chit fund is regulated by state governments and not by SEBI
 In 2012, SEBI identified that the group operated CIS and not Chit Fund.
 Saradha group started trading in stock market and siphoning off the proceeds
 Highlights of the Securities Law (Amendment) Act, 2014

 empowers SEBI to clamp down on illicit money-pooling schemes, arrest of defaulters, to access
call data records and other frauds.
 setting up of a special SEBI court to fast-track the investigation and prosecution process
 empowered SEBI investigators to conduct searches and seek information from suspected entities,
both within and outside the country.
 empowered the capital market watchdog by giving powers such as attachment of properties, launch
of recovery proceedings, seeking call data records to investigate cases and ordering search and
seizure against manipulators and fraudsters.
HIGHLIGHTS

 brought chit funds with a corpus of more than Rs 100 crore under Sebi’s ambit
and to take action against any entity that has raised Rs 100 crore or more and
was not registered with any other agency like RBI, MCA or Registrar of
Cooperative Societies.
Scams in India through Ponzi Schemes :-

Size of the
Name of the company Remarks
Scam
KBC Multitrade a giving three-times
private limited Rs 2,000 crore return on investment
company in 30 months.

Promise to provide 27
Gold Sukh Rs 200 crore times return in quick
time
Scams

Name of the company Size of the Scam Remarks

Promised Rs. 1.72 lakh on an

Abhinav Guru Rs 100 crore investment of Rs. 6000 in 26
month

Offered a return of 20% per month

for upto Six month & principle
Stock Guru Rs 1000 crore amount invested is returned in the
next six month
 Ponzi Scheme in USA

 US SECURITIES AND EXCHANGE COMMISSION (USA)

 Initiative For defining Warning Sign for Fraudulent Ponzi Scheme (Ponzi scheme “red flags”)
 Ponzi Enforcement 
 Ponzi Enforcement  

U.S.’s two major enforcement organizations that

target Ponzi schemes

Federal Trade US SECURITIES AND

EXCHANGE
Commission COMMISSION
What You Can Do to Avoid Investment Fraud?

Know the

salesperson.
- Research
Be wary of
before you
invest. unsolicited offers

Ask questions.

Know Protect
what to yourself
look for online
 Thank You

ACT SMART AND

PREVENT SUCH
FRAUD ACTIVITIES