FROM THE EDITORS
The Financial Bulletin Money Matters Club IBS, Hyderabad Estd.—2005
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Dear Readers, It gives us immense pleasure to come up with the December, 2017 issue successfully. In this issue, we bring to you the famous scams that shook the entire world like The Fodder Scam, Enron Scandal, Commonwealth Game Scam etc. Happy reading!!!
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The Collapse of ENRON
What was Enron? Enron was a Texas-based energy trading giant and utilities company, it was formed in 1985 following a merger between Houston Natural Gas Co. and Omaha-based InterNorth Inc. Following the merger, Kenneth Lay, who had been the CEO of Houston Natural Gas, became Enron's CEO and chairman and re branded Enron into an energy trader and supplier. The Rise of Enron After the approval of United States Congress legislation for deregulating the sale of natural gas, the markets made it possible for Enron to sell energy at higher prices, thereby significantly increasing its revenue. In 1992 Enron became the largest seller of natural gas in North America. The company owned and operated a variety of assets such as gas pipelines, electricity plants, water plants, and broadband services across the globe. It also gained additional revenue by trading contracts for setting up of power plants etc. Enron's stock increased by 311% from the start of the 1990s till the end of 1998, higher than the average rate of growth in the Standard & Poor 500 index. However, in 1999 the stock increased by 56% and a further 87% in 2000. Further Enron's stock was priced at $83.13 and its capitalization of market exceeded $60 billion, 70 times earnings and six times book value, an indication of the stock market's high expectations about its future prospects. Enron was praised for its expansions and ambitious projects and named "America's Most Innovative Company" by Fortune for six consecutive years between 1996 and 2001.
The Ultimate Downfall
By the fall of 2000, Enron was starting to crumble, CEO Jeffrey Skilling resorted to hide financial losses and make the company appear to be more profitable than it really was by using mark-to-market accounting, that is the company would build an asset, such as a power plant, and immediately claim the projected profit on its books, even though it hadn't made one dime from it. If the power plant generated a revenue less than the projected amount, instead of reporting loss, the company would transfer the assets to an off-the-books corporation, where the loss would go unreported. This type of accounting enabled Enron to write off losses. Use SPVs to Hide Debt The CFO Andrew Fastow and others started a scheme to forge the accounting realities with use of off-balance-sheet special purpose vehicles (SPVs) or special purposes entities (SPEs) which helped to hide huge debt and toxic assets from investors and creditors. The primary aim of these SPVs was to hide accounting realities, rather than operating results. The Risky Business with Arthur Andersen In addition to Andrew Fastow, a major player in the Enron scandal was the accounting firm Arthur Andersen LLP and its partner David B. Duncan, who oversaw Enron's accounts. Despite Enron's poor practices, Arthur Andersen offered its stamp of approval, which was enough for investors and regulators alike, for a while. However, the game couldn't go on and by April 2001, many analysts interrogated the transparency of Enron's earnings, and Andersen and Enron were ultimately prosecuted for their reckless fraud. The Shock around Wall Street By 2001, Enron was in a free fall, analysts began to downgrade their rating for Enron's stock, and the stock descended to a 52-week low of $39.95. The company restated earnings going back to 1997. Enron had losses of $591 million and had $628 million in debt by the end of 2000. In December 2001 Enron ultimately filed for bankruptcy. The Enron scandal gave the Sarbanes-Oxley Act of 2002, which serves to enhance transparency and criminalize financial manipulation. Further, as a result of Enron's wrongdoings, the Financial Accounting Standards Board (FASB) standards were strengthened. By: K Aishwarya Pillai
The Bihar Fodder Scam Backdrop The ‘Fodder Scam’ is a collective term for a set of 53 criminal cases concerning the embezzlement of about Rs.1000 crore from Bihar government’s treasury. Exposed in January 1996, the corruption scandal involved the falsification of numerous herds of ‘fictitious livestock’ for which fodder, medicines and other animal husbandry equipment were believed to be procured. Amongst those incriminated were Lalu Prasad Yadav, Bihar’s then Chief Minister, Jagannath Mishra, the state’s former Chief Minister, and Dr. Dinneshwar Prasad Sharma, the then General Secretary of Bihar Veterinary Association (BVA). Development of the Fraud – Origin & Evolution In 1985 the then CAG of India, T.N. Chaturvedi, notified to and warned Bihar’s then Chief Minister Chandrashekhar Singh that the frequent delays in monthly account submissions by the State Treasury could be indicative of false expense report submissions and even continual small-scale embezzlements. Investigation & Prosecutions 1. In January ,1996 acting on the information provided by Dr. Dharmendra Singh and Dr. Biresh Prasad Sinha (Ex-office bearers of BVA), Amit Khare, the then Deputy Commissioner of West Singhbhum District, raided the Animal Husbandry Department at Chaibasa District. The documents confiscated clearly evidenced the siphoning of hundreds of crores of rupees by an organized mafia of top government officials and bureaucrats. After that a Public Interest Litigation was filed with the Supreme Court, the Patna High Court ordered the CBI to take over the probe. On June 23rd, post an inquiry by the CBI, and the subsequent prosecution of Bihar officials and legislators, the CBI filed charge sheets against 56 accused, including: • •
Chief Minister Lalu Prasad Yadav Former CM Jagannath Mishra
• •
•
Science & Technology Secretary Mahesh Prasad Labour Secretary K. Arumugam Animal Husbandry Department Secretary Beck Julius
2. On July 25th succumbing to pressure, Mr. Prasad resigned as the Chief Minister, but not before installing his wife Rabri Devi in the post. Lalu’s charge sheet was against the case RC 20-A/96, relating to fraudulent withdrawals of Rs.37 crores from the Chaibasa Treasury. It was based on statutes including Indian Penal Code sections 420 (Cheating), 120(B) (Criminal Conspiracy), and Section 13(2) of the Prevention of Corruption Act, 1988. 3.
On July 30th, Mr. Prasad surrendered before CBI, and was sent to judicial custody.
Status Quo On September 30th, 2013 Lalu Prasad Yadav, along with 44 other accused, was convicted by CBI court at Ranchi, arrested, and taken to Birsa Munda Central Jail. Consequently, upon his conviction, Mr. Yadav stood disqualified as MP and was made ineligible to contest public election for next six years. He has been given a jail sentence of five years and a fine of 25 lakh rupees.The court also announced a 4-year sentence and a fine of Rs.2,00,000 for Jagannath Mishra. Presently, both the convicted ministers are out on bail. By: Nimit Jain
Sahara India Pariwar Scam The high profile saga started with Sahara Prime City, a real estate ventures of the group, filing a Draft Red Herring Prospectus (DRHP) with SEBI on September 30, 2009. DRHP is an initial document that a company needs to file with SEBI to bring out an IPO or initial public offer of shares to public investors. While going through this DRHP, SEBI sensed certain large scale fund raising exercises by two
Sahara firms - Sahara India Real Estate Corp Ltd (SIRECL) and Sahara Housing Investment Corp Ltd (SHICL). Soon, SEBI received two complaints, one on December 25, 2009 and the other on January 4, 2010 alleging illegal means used by the two firms in issuance of certain bonds, called OFCDs (Optionally Fully Convertible Debentures), to the public throughout the country for many months. The second complaint was
from Roshan Lal, which was received by SEBI through National Housing Bank. Based on these complaints, SEBI began seeking clarifications from the group, initially through their investment bankers Enam Securities and later directly. Further investigations found that the funds were raised through OFCDs after filing RHPs (Red Herring Prospectus) with the Registrar of Companies. Eventually, SEBI restrained Sahara India Real Estate Corp Ltd and Sahara Housing
Investment Corp Ltd from raising funds in the form of OFCD and passed interim order against the two companies on November 24, 2010, asking them to refund the money collected from investors. In June,2011 SEBI issued advertisements cautioning investors. A final order was passed by the regulator on June 23, 2011, while the group challenged these directions before the Securities Appellate Tribunal. However, the SEBI orders were upheld by the Tribunal on October 18, 2011, and the companies were asked to refund Rs.25,781 crore to over three
crore investors.
The group then appealed in Supreme Court that SEBI, which also passed a
historic order on August 31, 2012, asking the two companies to deposit outstanding amount of over Rs. 24,000 crores with them for refund to the investors. Saharas were also asked to deposit details of all investors to SEBI, which was mandated to refund the money after verifying their genuineness. SEBI then moved the Supreme Court alleging noncompliance by the group to the previous orders, pursuant to which the apex court passed another order on December 5, 2012, and asked the two firms to deposit the money in three
instalments beginning with an immediate payment of Rs.5,120 crore. While the group paid the first instalment, it failed to meet the deadline for other two payments and rather claimed to have already paid more than Rs 20,000 crore directly to the investors. Unconvinced with Saharas' claims, SEBI passed orders on February 13, 2013, to attach bank accounts and other properties of the group and later issued summons for personal appearance of Subrata Roy and other three directors before it. Finally, in February 2014, Subrata Roy was
arrested.
By: Vachaspati Tiwari
Commonwealth Games Scam (2010) Commonwealth Games (CWG) were introduced in 1930. It is an event which takes place every four years and engages athletes from the Commonwealth of Nations. It includes various sport events played internationally. In 2010, India hosted the CWG which were held in Delhi from 3rd of October, 2010 to 14th of October, 2010.
A lot of corrupt deals happened in the preparatory and conduction phase of the CWG involving misappropriation of money estimated to be 70,000 crore. Even before the event was in limelight, it was exposed to more of proclamation of dishonest or fraudulent conduct. The various contracts were manipulated by Suresh Kalmadi (Chairman of the Organizing Committee of Delhi Commonwealth Games) and his team had allegedly misappropriated huge amounts in the process. The detailed preliminary findings included the award of work contracts at higher prices, poor quality assurance and management, and work contracts awarded to ineligible agencies The athletes were made to shift from the apartments exclusively meant for them to a very shabby and run down apartments just 10 days before the Commonwealth Games. The Central Vigilance Commission found lack of compatibility in tenders like payment to non-existent parties, willful delay in execution of contracts, over inflated price and bungling in purchase of equipment through tendering and misappropriation of funds. There is a big list of people involved in the CWG scam including politicians, bureaucrats and businessmen. Apart from the people, there were also a number of corporations who played a role in the CWG scam. Suresh Kalmadi, representative of the Congress Party to the 15th Lok Sabha from Pune Constituency was the main accused out of the top politicians involved in the scam. Sheila Dikshit, the then Chief Minister of Delhi was also charged with a number of evidence of fraud and irregularities. Robert Vadra, the son in law of Congress President Sonia Gandhi was the other main political head involved in the scam.
Through the financial involvement of Suresh Kalmadi’s son Sumeer Kalmadi, Jaypee group was alleged in having the proceeds of corruption which were parked in their F1 circuit project at Greater Noida. The scam was scooped by the Comptroller and Auditor General of India even before the Commonwealth games started. Suresh Kalmadi along with his team supposed to have unfairly taken huge amount of money in the name of Commonwealth Games by manipulation in clever and unscrupulous way. Indian Government suffered a loss of 95 crores when Kalmadi awarded illegal contracts to a Swiss Firm for Timing-Scoring-Result system. It has been reported by the Enforcement Directorate that prior to the Commonwealth games, a Queen’s Baton Relay was held in London during which lot of funds and forex came in India which was misappropriated by Kalmadi and his team
Conviction in CWG scam case: The first conviction in the CWG scam case was probed by CBI in September 2015. Four Municipal Corporation officials and a managing director of a private company were convicted by a special court of CBI and the convicts were taken into custody. The director was awarded six years of imprisonment. Later in May 2017, a special court awarded two and a half year jail to two directors of a Mumbai based firm and also a fine of rupees 10 lakhs was imposed on their firm – M/S Raja Aederi Consultants Pvt. Ltd. while handing over the jail terms to them. By: Vaidehee Murkar
Uttar Pradesh Food Grain Scam
Uttar Pradesh food grain scam took place between 2002 and 2010, wherein food grain was meant to be distributed amongst the poor worth Rs.350 billion, through Public Distribution System (PDS) and other schemes like Jawahar Rozgar Yojana, Antyodaya Anna Yojana (AAY) and Midday Meal Scheme for Below Poverty Line (BPL) card holders, was diverted to the open market. It was also diverted to Nepal and Bangladesh borders, in 2010 security forces seized Rs.11.7 million worth of food grains like pulses and paddy was smuggled to Nepal. On the Indo-Bangladesh border grains worth Rs.6062000 were confiscated. The Central government allocates food grains to poor at subsidized rates by each state government through ration shops. Under the PDS scheme, an APL (Above Poverty Line) household is entitled to 15 kg and BPL family is eligible for 35 kg of wheat or rice every month. In 2003 the scam first came into notice, in the distribution of food grain in Gonda district meant for the Sampoorna Grameen Rozgar Yojana and soon complaints started pouring in from other districts under the Chief Ministership of Mulayam Singh. Initially ordering an inquiry into the scam Mulayam Singh withdrew it. The initial FIRs in the case were filed in January 2005, when the state government highlighted the scam to be around Rs.450 billion under the Central government sponsored AAY. In 2006, over 5000 FIRs were lodged by The Special Investigation Team (SIT), 65 officials named in the FIR and further over 300 persons were suggested to be involved in the preliminary reports as well. Apart from that six Assistant Deputy Ministers ,a district magistrate, and a few district food and supplies officials were suspended. Subsequently, Mayawati, who was assumed to be the next Chief Minister, ordered a CBI probe into the scam on 1st December 2007. It was dubbed as, "mother of all scams", and media reported the scam which started in 2002 estimated to be at over â‚š2,000 billion.
Along with other states and Union territories, Uttar Pradesh is allocated a monthly quantity of food grains, i.e. rice and wheat, by the Central government for distribution amongst AAY, BPL and APL families, under PDS managed by the state government. For the period from April 2010 to March 2011, this quantity for the state was 528395 tons. The five countries including Nepal, Bangladesh, Pakistan, South Africa and Bhutan, apart from 34 of the 71 districts in UP were trapped. It involved over 450 class one government officials and another 800 middle- and lower-rung ones, apart from about 10,000 private entities, and would require 5,000 FIRs to cover the scam in totality. The total estimation amounted around Rs.35,000 crore, but the petitioner sees it to be over Rs.2 lakh crore. The net worth of food grain siphoned off between 2001 and 2005 in Gonda alone was estimated to be over Rs.457 crore. The Uttar Pradesh food grain scam also included procurement of the wheat in the name of stocks under the special schemes that were sold it off in the black market and even abroad. The scam was so blatantly executed that the plate numbers of trucks shown to have picked up the stocks from railway dumping to move them to the state food corporation (SFC) godowns were found to be those of scooters and motorcycles.
By: Prachi Majithia
Saradha Chit Fund Scam
The Saradha chit fund scam was one of the major financial scam caused by the collapse of Ponzi scheme (fraudulent activity where the operator creates return for the older investors through money collected from the new investors) run by Saradha group. Saradha chit fund group collected around 200 -300 billion from over 1.7 million people. At the beginning the group collected money by issuing redeemable preferential bonds and secured debentures. It drew the attention of market regulator SEBI so the group mobilized deposits through four of its 239 registered companies, namely, Saradha Tour & Travels, Saradha Realty, Saradha Housing and Saradha Garden Resorts & Hotels. Saradha group used nexus of companies for money laundering. The schemes provided were quite attractive. An investor could invest minimum of Rs 100 and was promised a return of 20% to 30%. The group made close connections with the Bengal Celebrities like Mithoon Chakroborty and Shatabdi Mazumdar who later on became the brand ambassador in order to lure investors. A number of political leaders also received financial support from the group which also includes MPs of Trinamool Congress, the ruling party of West Bengal. SEBI challenged them for the first time in the year 2009 and in the year 2011 it warned the West Bengal Government about the schemes of the company as chit funds are regulated by the State Government and not by SEBI. In 2012 SEBI identified that the group operated CIS (collective investment scheme) and not chit fund. The money collected from small investors, Saradha promised allotment of land or flat but since it was a Ponzi scheme it created an illusion of business which actually did not exist. Although they immediately paid payment in the first year but later agents were asked to make payment with fresh collections from new investors.
Sudipto Sen, the chairman of the Saradha group wrote a confessional letter to CBI April 2013 and fled but later he was arrested. Many recognizable Trinamool Congress leaders were also arrested by CBI for their alleged involvement in the group. Although Trinamool Congress refused to own up responsibility stating that the group was formed in the year 2006 when the left front was in power but as per the report published by the government, the group collection went up to Rs.10.08 billion on 2011-12 and Rs 8.5 billion in the year 2012-13 when Trinamool congress was in power.
In February 2014 the director of Saradha, Sudipto Sen was convicted for his failure to deposit with the provident fund authorities that his firm owned to its employees and also under various provisions of employment law and in December 2014 CBI also arrested West Bengal Transport Minister Madan Mitra on charge of criminal conspiracy and also because of deriving benefits from the group. In the year April 2013 Mamata Banerjee announced 500 crores fund to compensate the victims. She had raised VAT on cigarettes from 15 to 25% which would generate 150 crores for the fund.
By: Deboleena Mukherjee
The Madoff Pyramid (2008) “Everybody was greedy, everybody wanted to go on and I just went along with it,” the words quoted by Bernard Lawrence “Bernie Madoff”, an American who executed the largest Ponzi Scheme in the history. From creating an exemplary front for the public, to wooing the said individuals, Madoff was keen on achieving a lasting success, by whatever means it took.
So, what did Bernie Madoff do? A penny stock trader, Madoff had started his firm in 1960. With an intention to achieve success and compete with the big players like New York Stock Exchange, he started using Information Technology to his advantage. Manipulating his share prices, he had all the major banks willing to give a billion dollars to him.
Claiming to generate large, steady returns, he simply deposited client funds into a single bank account, which he used to pay clients who wanted to cash out. However, this turned ugly when the market turned sharply down in 2008. The sudden decline in the market was what unravelled the whole scheme. If Madoff had not faced the 7 billion redemption, this whole Ponzi scheme would never have seen the light of the day.
It was finally in 2008, that Madoff was caught and charged with 11 counts of fraud, money laundering, perjury and theft. Now, breaking of such a huge scam cannot be left without any scars. Madoff also had a lasting scar in the public’s mind, but not in a good way. All the NGOs, Charity organisations and business houses associated with this scheme had lost a great sense of public trust.
A fraudulent investment with suspiciously high returns should always ring a bell in the head of the investors. Madoff conned his investor out of $65 billion, and had it not been for the market drop, no one would have realised some wrongdoings. Thus, the only learning we can take from this scam is that, sometimes, extremely high returns may also be a sign of frauds, i.e. as rightfully said, “All that Glitters, is not Gold�. By : Jayni Shah
The Harshad Mehta Scam
Harshad Mehta, born on 29th July 1953 in Rajkot, spent his early childhood days in Kandivali, Mumbai, where his father was a small time businessman. Later, the family moved to Raipur, Chhattisgarh. Mehta had started his working life as an employee of the New India Assurance Company. In the late 1970s every evening Harshad and his brother Ashwin started to analyze tips generated from respective offices and investment letters. In the early 1980s, he quit his job and sought a job with stock broker P. Ambalal affiliated to BSE. Then He became a sub-broker and after a while he was unable to sustain his overbought positions and decided to pay his dues by selling his house. The next day Harshad went to his brokers and offered the papers of the house as guarantee. The brokers moved by his gesture gave him sufficient time to overcome his positions. He became stronger after this incident and his brother quit his job to team with Harshad to start their venture ‘Grow More Research and Asset management Company Limited’. By the end of 1980s Mehta rose to prominence in the stock market and media started projecting him as “The BIG BULL” of the Trading Floor and he too started to fuel his own publicity. He felt Proud of his accomplishments and showed off his success to journalists through his mansion which included a billiards room, mini theatre and nine golf courses. This in no time made him a normal broker to the superstar of financial world. He paid 28 crores as advance tax for the F.Y. 1991-92. In the early 1990s Harshad Mehta led the Dreams of every middle class family and lived the life of a King. By the year 1990 Harshad Mehta rose to prominence in the stock market. He bought shares heavily. Few of the shares which attracted his attention were: Associated Cement Co., Apollo Tyres, Reliance, Tata Iron and Steel Co. (TISCO), BPL, Sterlite, etc.
He took the price of ACC from 200 to 9000. That’s an increase of 4400%. The market went up like crazy. Mehta had Replacement cost theory as an explanation. The theory basically argues that old companies should be valued on the basis of the amount of money which would be required to create another such company. On 23rd of April 1992 journalist Sucheta Dalal in a column in The Times of India, exposed the dubious ways of Harshad Mehta. The broker was dipping illegally into the banking system to finance buying. The Author explain: The crucial mechanism through which the scam was effected was the READY FORWARD (R.F.) DEAL. The RF Deal is in essence a secured short term (typically 15 days) loan from one bank to another. In other words the Bank lends against government securities just as a pawnbroker lends against jeweler. The borrowing bank actually sells the securities to the lending Bank and buys them back at the end of the period of the loan, typically at a slightly higher price. It was this RF deal that Harshad and his cronies used with great success to channel money from the banking system. Since Mehta had to all the profits in the end, the day he sold was the day when the market crashed. When, the scam was revealed the chairman of the Vijaya Bank committed suicide by jumping from his office roof. He knew that he would be accused if people came to know about his involvement in issuing cheques to Mehta, then CMD of UCO Bank was arrested. V.Mahadevan, one of the M.D. of India’s largest Bank, the S.B.I. were removed from his office. Consequently Mehta and his brother were arrested by CBI on 9th of November 1992 for allegedly misappropriating more than 27 lacs shares of about 90 companies. He was later charged with 72 criminal offences and more than 600 civil action suits were filed.
By: Shresth Agarwal
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