Stock Market Scams in India

INTRODUCTIONIntroduction Financial scams have a habit of cropping up with an alarming regularity in the

Indian financial system. We have reconciled to financial irregularities to such an extent that we

simply do not pay heed to smaller scams that take place around us on a daily basis. I am, or

rather was, a part of the financial machinery for a few years, and trust me even the private sector

is not entirely free of the machinations of unscrupulous and enterprising scamsters. The scope of

the money involved multiplies manifold in the public sector, with a corresponding drop in

accountability.

India has seen some of the most high-profile scandals where investors have lost billions of

rupees just because a few people in high places could not control their greed. The Satyam

Computer Services fraud is neither the first nor will it be the last corporate scam to have hit

India, so investors must be on guard and ask for more information before making any

investment decision, says former Sebi chairman M Damodaran.

But with corporates, brokers, banks, politicians, regulators colluding at times, many a multi-

crore scam has hit India. And the saga is likely to go on.

India has seen some of the most high-profile scandals where investors have lost billions of

rupees just because a few people in high places could not control their greed.

Over the Years there have been numerous fraud and scandals in the Indian Stock Market.

These scams have had a very major impact on the stock markets. A very in-depth knowledge of

all the scams is still not available. However, let us study and understand a few of the scams as

follows:

THE SATYAM SCAM:

The Satyam Computer Services fraud is neither the first nor will it be the last corporate scam to

have hit India, so investors must be on guard and ask for more information before making any

investment decision, says former Sebi chairman M Damodaran.

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Stock Market Scams in India

The biggest corporate scam in India has come from one of the most respected businessmen.

Satyam founder By Ramalinga Raju resigned as its chairman after admitting to cooking up the

account books.

His efforts to fill the "fictitious assets with real ones" through Maytas acquisition failed, after

which he decided to confess the crime.

With a fraud involving about Rs 8,000 crore (Rs 80 billion), Satyam is heading for more trouble

in the days ahead.

On Wednesday, India's fourth largest IT company lost a staggering Rs 10,000 crore (Rs 100

billion) in market capitalization as investors reacted sharply and dumped shares, pushing down

the scrip by 78 per cent to Rs 39.95 on the Bombay Stock Exchange.

The NYSE-listed firm could also face regulator action in the US.

"I am now prepared to subject myself to the laws of the land and face consequences thereof,"

Raju said in a letter to SEBI and the Board of Directors, while giving details of how the profits

were inflated over the years and his failed attempts to "fill the fictitious assets with real ones."

Raju said the company's balance sheet as of September 30 carries "inflated (non-existent) cash

and bank balances of Rs 5,040 crore (Rs 50.40 billion) as against Rs 5,361 crore (Rs 53.61

billion) reflected in the books."

Satyam On a cold January morning in 2009, Ramalinga Raju , chairman of Satyam Computer

Services, admitted to falsification in the company accounts and various other irregularities, and

sent a chill down the collective spine of the Indian financial system. Coming on the back of the

global recession, this incident promised to bust the Indian outsourcing industry and the stock

market, but for some deft bailout work by the government. The matter is still under investigation

and litigation, and the true extent of the scam will be known in the future, perhaps. Mr Raju

himself had admitted to irregularities worth around Rs 12,000 crores .

The Satyam Computer Services scandal was a corporate scandal that occurred in India in 2009

where chairman Ramalinga Raju confessed that the company's accounts had been falsified. The 2

Stock Market Scams in India

Global corporate community was shocked and scandalised when the chairman of

Satyam, Ramalinga Raju resigned on 7 January 2009 and confessed that he had manipulated the

accounts by US$1.47-Billion.

PricewaterhouseCoopers was the statutory auditor of Satyam Computer Services when the

report of scandal in the account books of Satyam Computer Services was broke out. The Indian

arm of PwC was fined $6 million by US Securities and Exchange Commission for not following

the code of conduct and auditing standards while pursuing its duties while auditing the accounts

of Satyam Computer Services

Ramalingam Raju along with 2 other accused of the scandal, had been granted bail from

Supreme court on 4 November 2011 as the investigation agency CBI failed to file the

chargesheet even after more than 33 months Raju being arrested.

Raju had appointed a task force to address the Maytas situation in the last few days before

revealing the news of the accounting fraud. After the scandal broke, the then-board members

elected Ram Mynampati to be Satyam's interim CEO. Mynampati's statement on Satyam's

website said:

"We are obviously shocked by the contents of the letter. The senior leaders of Satyam stand

united in their commitment to customers, associates, suppliers and all shareholders. We have

gathered together at Hyderabad to strategize the way forward in light of this startling

revelation."

On 10 January 2009, the Company Law Board decided to bar the current board of Satyam from

functioning and appoint 10 nominal directors. "The current board has failed to do what they are

supposed to do. The credibility of the IT industry should not be allowed to suffer." said

Corporate Affairs Minister Prem Chand Gupta. Chartered accountants regulator ICAI issued

show-cause notice to Satyam's auditor PricewaterhouseCoopers (PwC) on the accounts fudging.

"We have asked PwC to reply within 21 days," ICAI President Ved Jain said.

On the same day, the Crime Investigation Department (CID) team picked up Vadlamani

Srinivas, Satyam's then-CFO, for questioning. He was arrested later and kept in judicial custody.

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Stock Market Scams in India

On 11 January 2009, the government nominated noted banker Deepak Parekh,

former NASSCOM chief Kiran Karnik and former SEBI member C Achuthan to Satyam's

board.

Analysts in India have termed the Satyam scandal India's own Enron scandal. Some social

commentators see it more as a part of a broader problem relating to India's caste-based, family-

owned corporate environment.

Immediately following the news, Merrill Lynch (now a part of Bank of America) and State

Farm Insurance terminated its engagement with the company. Also, Credit Suissesuspended its

coverage of Satyam. It was also reported that Satyam's auditing firm PricewaterhouseCoopers

will be scrutinised for complicity in this scandal. SEBI, the stock market regulator, also said

that, if found guilty, its license to work in India may be revoked.[5][6][7][8][9] Satyam was the 2008

winner of the coveted Golden Peacock Award for Corporate Governance under Risk

Management and Compliance Issues,[10] which was stripped from them in the aftermath of the

scandal.[11] The New York Stock Exchangehas halted trading in Satyam stock as of 7 January

2009.[12] India's National Stock Exchange has announced that it will remove Satyam from its

S&P CNX Nifty 50-share index on 12 January. The founder of Satyam was arrested two days

after he admitted to falsifying the firm's accounts. Ramalinga Raju is charged with several

offences, including criminal conspiracy, breach of trust, and forgery.

Satyam's shares fell to 11.50 rupees on 10 January 2009, their lowest level since March 1998,

compared to a high of 544 rupees in 2008. In New York Stock Exchange Satyam shares peaked

in 2008 at US$29.10; by March 2009 they were trading around US$1.80.

The Indian Government has stated that it may provide temporary direct or indirect liquidity

support to the company. However, whether employment will continue at pre-crisis levels,

particularly for new recruits, is questionable.

On 14 January 2009, Price Waterhouse, the Indian division of PricewaterhouseCoopers,

announced that its reliance on potentially false information provided by the management of

Satyam may have rendered its audit reports "inaccurate and unreliable".

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Stock Market Scams in India

On 22 January 2009, CID told in court that the actual number of employees is only 40,000 and

not 53,000 as reported earlier and that Mr. Raju had been allegedly withdrawing 200

million (US$3 million) every month for paying these 13,000 non-existent employees

On 13 April 2009, via a formal public auction process, a 46% stake in Satyam was purchased by

Mahindra & Mahindra owned company Tech Mahindra, as part of its diversification strategy.

Effective July 2009, Satyam rebranded its services under the new Mahindra management as

"Mahindra Satyam". After a delay due to tax issues Tech Mahindra announced its merger with

Mahindra Satyam on 21 March 2012, after the board of two companies gave the approval. The

companies are merged legally on 25 June 2013

HARSHAD MEHTA

He was known as the 'Big Bull'. However, his bull run did not last too long.

He triggered a rise in the Bombay Stock Exchange in the year 1992 by trading in shares at a

premium across many segments.

Taking advantages of the loopholes in the banking system, Harshad and his associates triggered

a securities scam diverting funds to the tune of Rs 4000 crore (Rs 40 billion) from the banks to

stockbrokers between April 1991 to May 1992.

Harshad Mehta worked with the New India Assurance Company before he moved ahead to try

his luck in the stock markets. Mehta soon mastered the tricks of the trade and set out on

dangerous game plan.

Mehta has siphoned off huge sums of money from several banks and millions of investors were

conned in the process. His scam was exposed, the markets crashed and he was arrested and

banned for life from trading in the stock markets. He was later charged with 72 criminal

offences.

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Stock Market Scams in India

A Special Court also sentenced Sudhir Mehta, Harshad Mehta's brother, and six others,

including four bank officials, to rigorous imprisonment (RI) ranging from 1 year to 10 years on

the charge of duping State Bank of India to the tune of Rs 600 crore (Rs 6 billion) in connection

with the securities scam that rocked the financial markets in 1992. He died in 2002 with many

litigations still pending against him.

KETAN PAREKH

Ketan Parekh followed Harshad Mehta's footsteps to swindle crores of rupees from banks. A

chartered accountant he used to run a family business, NH Securities. Ketan however had bigger

plans in mind. He targeted smaller exchanges like the Allahabad Stock Exchange and the

Calcutta Stock Exchange, and bought shares in fictitious names.

His dealings revolved around shares of ten companies like Himachal Futuristic, Global Tele-

Systems, SSI Ltd, DSQ Software, Zee Telefilms, Silverline, Pentamedia Graphics and Satyam

Computer (K-10 scrips).

Ketan borrowed Rs 250 crore from Global Trust Bank to fuel his ambitions. Ketan along with

his associates also managed to get Rs 1,000 crore from the Madhavpura Mercantile Co-

operative Bank.

According to RBI regulations, a broker is allowed a loan of only Rs 15 crore (Rs 150 million).

There was evidence of price rigging in the scrips of Global Trust Bank, Zee Telefilms, HFCL,

Lupin Laboratories, Aftek Infosys and Padmini Polymer.

Securities Scam Ketan Parekh – That our system never learns its lessons was proved by this

scam. Ketan Parkekh , a qualified CA, and a stock broker, identified a number of stocks

(popularly called the K-10), and took up huge positions in these. For this purpose, he used a

large number of Benami accounts and smaller stock exchanges, such as the Kolkata and

Ahmedabad stock exchanges. He also borrowed heavily from banks such as Global Trust Bank

and Madhavpura Mercantile Cooperative Bank. Unfortunately, he was stuck in a bear cartel, and

was soon pounded to pulp on the stock exchange. The extent of the scam was estimated to be

around Rs 1,500 crores

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Stock Market Scams in India

C R BHANSALI (CRB SCAM)

The Bhansali scam resulted in a loss of over Rs 1,200 crore (Rs 12 billion).

He first launched the finance company CRB Capital Markets, followed by CRB Mutual Fund

and CRB Share Custodial Services. He ruled like a financial wizard 1992 to 1996 collecting

money from the public through fixed deposits, bonds and debentures. The money was

transferred to companies that never existed.

CRB Capital Markets raised a whopping Rs 176 crore in three years. In 1994 CRB Mutual

Funds raised Rs 230 crore and Rs 180 crore came via fixed deposits. Bhansali also succeeded to

raise about Rs 900 crore from the markets.

However, his good days did not last long, after 1995 he received several jolts. Bhansali tried

borrowing more money from the market. This led to a financial crisis.

It became difficult for Bhansali to sustain himself. The Reserve Bank of India (RBI) refused

banking status to CRB and he was in the dock. SBI was one of the banks to be hit by his huge

defaults

CRB Scam This scam took place in the years 1992-1996, the period immediately following the

Harshad Mehta fallout. This makes the scam even all the more daring and surprising. CR

Bhansali , the perpetrator of this scam, floated more than 100 companies, such as CRB Mutual

Funds and CRB Capital Markets. The primary purpose of these companies was to attract huge

funds from the public by promising high rates of interest. This interest was later paid form

further borrowings, and so on. In 1995, the stock market collapsed, and this proved to be the

undoing of CR Bhansali . He was investigated, and later arrested. After a brief 3-month stint in

jail, he has disappeared without a trace, and nobody is asking!

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Stock Market Scams in India

C R Bhansali’s web of deceit was elaborate. He had floated 133 companies to pull in funds and

suck them out. Money came easy; he was inspiring with his grandiose plans, high interest rates

and entry into mutual fund and banking. 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.

Forget investors, even credit-rating agencies didn’t see it coming. CARE, a leading agency,

gave ‘AAA’ rating at a time when the company was going down.

Born in Rajasthan, raised in Kolkata, Bhansali became a dada in the financial capital —

Mumbai — before he turned 40.

First came the finance company (CRB Capital Markets), after which the mutual fund (CRB

Mutual Fund) and CRB Share Custodial Services followed. Then he planned to get into

banking, and he almost made it.

He had a dream run from 1992 to 1996 collecting money from the public through fixed deposits,

bonds and debentures. He 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 a record 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, when the market was in the post-Harshad Mehta bear phase, Bhansali

managed to raise close to Rs 900 crore.

Post-1995, he got a beating on the stock markets. His investments in the property market did not

pay off because of the slump.

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Stock Market Scams in India

Caught in a financial trap, Bhansali tried borrowing more money from the market. ‘‘To repay

the interest rate on amounts he borrowed later, Bhansali was forced to borrow once again. This

went on and on, and he got stuck in a financial quicksand,’’ says a former employee, refusing to

be named.

Bhansali made a determined effort to get out of the trap by investing in some high-risk ventures.

He is believed to have even made a Hindi commercial film. Again, the gamble failed.

In the end, Bhansali was borrowing funds from banks through questionable means. All was well

till December 1996. Then the Reserve Bank of India (RBI) refused banking status to CRB and

contemplated action for various irregularities.

Pradip Bhavnani, President of National Association of Small Investors, says: ‘‘There was a lot

of confusion about how to act against CRB, considering its NBFC status. When he started

defaulting, public sector banks like the State Bank of India were the first to be hit. Had the SEBI

and RBI acted fast, investors wouldn’t have lost money.’’

Bhansali spent three months in jail in 1997. He is out now but nobody knows where he lives and

if they do, they are not snitching.

COBBLER SCAM

Sohin Daya, son of a former Sheriff of Mumbai, was the main accused in the multi-crore shoes

scam. Daya of Dawood Shoes, Rafique Tejani of Metro Shoes, and Kishore Signapurkar of

Milano Shoes were arrested for creating several leather co-operative societies which did not

exist.

They availed loans of crores of rupees on behalf of these fictitious societies. The scam was

exposed in 1995. The accused created a fictitious cooperative society of cobblers to take

advantage of government loans through various schemes.

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Stock Market Scams in India

Officials of the Maharashtra State Finance Corporation, Citibank, Bank of Oman, Dena Bank,

Development Credit Bank, Saraswat Co-operative Bank, and Bank of Bahrain and Kuwait were

also charge sheeted.

IPO SCAM

The Securities and Exchange Board of India barred 24 key operators, including India Bulls and

Karvy Stock Broking, from operating in the stock market and banned 12 depository participants

from opening fresh accounts for their involvement in the Initial Public Offer scam.

It also banned 85 financiers from capital market activities.

Suzlon Energy Ltd's Rs 1,496.34 crore (Rs 14.963 billion) public issue (September 23-29,

2005). The retail portion was oversubscribed 6.04 times and the non-institutional portion was

oversubscribed 40.27 times. Key operators used 21,692 fictitious accounts to corner 323,023

shares representing 3.74 per cent of the total number of shares allotted to retail individual

investors.

Jet Airways's Rs 1,899.3 crore (Rs 18.993 billion) public offer (Feb 18-24,2005). The retail

portion was subscribed 2.99 times and the non-institutional portion by 12.5 times. Key operators

used 1186 fake accounts for cornering 20,901 shares representing 0.52 per cent of the total

number of shares allotted to retail investors.

National Thermal Power Corporation Ltd's Rs 5,368.14 crore (Rs 53.681 billion) IPO (Oct 7-14,

2004). The retail portion was oversubscribed 3.73 times and the non-institutional portion by

11.93 times. Key operators used a total of 12,853 afferent accounts for cornering 2,750,730

shares representing 1.3 per cent of the total number of shares allotted to retail investors.

Tata Consultancy Services's Rs 4,713.47 crore (Rs 47.134 billion) public offer (Aug 19-23,

2004). The retail portion was oversubscribed 2.86 times and the non-institutional portion by

19.15 times. Key operators used 14,619 'benami' accounts to corner 261,294 shares representing

2.09 per cent of the total shares allotted to retail individual investors.

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Stock Market Scams in India

Patni Computer System Ltd's Rs 430.65 crore (Rs 4.306 billion) public issue (Jan 27-Feb 5

2004). The retail portion was oversubscribed 9.36 times and the non-institutional portion by

39.22 times. A lone key operator used 2541 afferent account for cornering 127,050 shares

representing 2.71 per cent of the total number of shares allotted to retail investors.

DINESH DALMIA

Dinesh Dalmia was the managing director of DSQ Software Limited when the Central Bureau

of Investigation arrested him for his involvement in a stocks scam of Rs 595 crore (Rs 5.95

billion).

Dalmia's group included DSQ Holdings Ltd, Hulda Properties and Trades Ltd, and Powerflow

Holding and Trading Pvt Ltd.

Dalmia resorted to illegal ways to make money through the partly paid shares of DSQ Software

Ltd, in the name of New Vision Investment Ltd, UK, and unallotted shares in the name of

Dinesh Dalmia Technology Trust.

Investigation showed that 1.30 crore (13 million) shares of DSQ Software Ltd had not been

listed on any stock exchange.

VIRENDRA RASTOGI

Virendra Rastogi chief executive of RBG Resources was charged with for deceiving banks

worldwide of an estimated $1 billion.

He was also involved in the duty-drawback scam to the tune of Rs 43 crore (Rs 430 milion) in

India.

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Stock Market Scams in India

The CBI said that five companies, whose directors were the four Rastogi brothers -- Subash,

Virender, Ravinde and Narinder -- exported bicycle parts during 1995-96 to Russia and Hong

Kong by heavily over invoicing the value of goods for claiming excess duty draw back from

customs.

THE UTI SCAM

Former UTI chairman P S Subramanyam and two executive directors -- M M Kapur and S K

Basu -- and a stockbroker Rakesh G Mehta, were arrested in connection with the 'UTI scam'.

UTI had purchased 40,000 shares of Cyberspace between September 25, 2000, and September

25, 2000 for about Rs 3.33 crore (Rs 33.3 million) from Rakesh Mehta when there were no

buyers for the scrip. The market price was around Rs 830.

The CBI said it was the conspiracy of these four people which resulted in the loss of Rs 32 crore

(Rs 320 million). Subramanyam, Kapur and Basu had changed their stance on an investment

advice of the equities research cell of UTI.

The promoter of Cyberspace Infosys, Arvind Johari was arrested in connection with the case.

The officails were paid Rs 50 lakh (Rs 5 million) by Cyberspace to promote its shares.

He also received Rs 1.18 crore (Rs 11.8 million) from the company through a circuitous route

for possible rigging the Cyberspace counter.

UTI Scam The UTI scam involved the flagship US-64 scheme of UTI, which was meant to

channel the funds of small investors into instruments bearing high returns. Gradually, US-64

developed a investor base of around 2 crore investors. The economic liberalization in India,

coupled with the absolute opacity in the operations of UTI, led to a situation wherein the

Government was forced to announce a huge bailout of about Rs 3,500-4,000 crores in an order

to prevent default in payments to the investors. The consequences of such a situation are

unimaginable. But the story does not end here. Later, it turned out that the UTI Chairman

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Stock Market Scams in India

appointed at this time, Mr P S Subramanyam , along with a couple of executive directors, acted

wrongly to selectively benefit a powerful coterie of brokers and industrialists, while at the same

time, jeopardizing the interest of lakhs of small investors.

UDAY GOYAL

Uday Goyal, managing director of Arrow Global Agrotech Ltd, was yet another fraudster who

cheated investors promising high returns through plantations. Goyal conned investors to the tune

of over Rs 210 crore (Rs 2.10 billion). He was finally arrested.

The plantation scam was exposed when two investors filed a complaint when they failed to get

the promised returns.

Over 43,300 persons had fallen into Goyal's trap. Several criminal complaints were filed with

the Economic Offences Wing.

The company's directors and their relatives had misused the investors' money to buy properties.

The High Court asked the company to sell its properties and repay its investors.

SANJAY AGARWAL

Home Trade had created waves with celebrity endorsements.

But Sanjay Agarwal's finance portal was just a veil to cover up his shady deals. He swindled a

whopping Rs 600 crore (Rs 6 billion) from more than 25 cooperative banks.

The government securities (gilt) scam of 2001 was exposed when the Reserve Bank of India

checked the acounts of some cooperative banks following unusual activities in the gilt market.

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Stock Market Scams in India

Co-operative banks and brokers acted in collusion in abid to make easy money at the cost of the

hard earned savings of millions of Indians. In this case, even the Public Provident Fund (PPF)

was affected.

A sum of about Rs 92 crore (Rs 920 million) was missing from the Seamen's Provident Fund.

Sanjay Agarwal, Ketan Sheth (a broker), Nandkishore Trivedi and Baluchan Rai (a Hong Kong-

based Non-Resident Indian) were behind the Home Trade scam.

INSURANCE SCAM:

Insurance Scam This scam had originated and prospered in the period immediately following

Independence in 1947. At that time, the insurance sector was not nationalized, and a handful of

private companies ruled the roost. These companies were more concerned with providing

benefits to selected industrialists, and ignored the interests of the common man. The government

responded by nationalizing the insurance sector, and the LIC was founded under an special Act

passed by the Parliament. This scam laid the foundation of the nationalization culture in India.

HOME TRADE

Home Trade Around the year 2000, a finance portal emerged on the financial landscape, and

gained quick recognition on the back of endorsements by personalities like Hrithik Roshan,

Sachin Tendulkar and Shahrukha Khan. The portal, owned by Sanjay Agarwal , claimed to deal

in gilts. Soon, RBI got suspicious of activities of some cooperative banks in the gilt market, and

a scam was uncovered. The same old saga – brokers and bankers combining to rob people of

their hard earnings – was repeated. Funds from Seaman’s Provident Fund and PPF were

affected. The total scam size was reported to be around Rs 300 crores , and more than Rs 200

crores were spent on publicity costs alone.

DSQ SOFTWARE:

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Stock Market Scams in India

DSQ Software Though this scam was modest in terms of money involved (only Rs 600 crores),

and did not affect the general public to a great extent, yet it is notable for how it came into

being. The main player in the scam was Mr. Dinesh Dalmia, who was the MD of DSQ Software

Ltd. This company issued around 1.3 million shares in 2001, and these shares were allotted to

four companies on a preferential basis. NSDL, a stock depository, dematerialized and helped in

delivering the shares. Nothing wrong in that, except that the shares were not even listed on any

stock exchange

BOFORS SCANDAL

The Bofors scandal was a major corruption scandal in India in the 1980s and 1990s, initiated by

Congress politicians and implicating the prime minister, Rajiv Gandhi and several others who

were accused of receiving kickbacks from Bofors AB for winning a bid to supply

India's 155 mm field howitzer.[1] The scale of the corruption was far worse than any that India

had seen before and directly led to the defeat of Gandhi's ruling Indian National Congress party

in the November 1989 general elections. The Swedish company paid 640

million (US$9.8 million) in kickbacks to top Indian politicians and key defence officials. The

case came into light during Vishwanath Pratap Singh's tenure as defence minister, and was

revealed through investigative journalism by a team led by N. Ram of the newspaper The

Hindu. The journalist who secured the over 350 documents that detailed the payoffs was Chitra

Subramaniam reporting for The Hindu. Later the articles were published in The Indian

Express and The Statesman when The Hindu stopped publishing stories about the Bofors

scandal under immense government pressure and Chitra Subramaniam moved to the two

newspapers. In an interview with her, published in "The Hoot" in April 2012 on the 25th

anniversary of the revelations Sten Lindstrom, former chief of Swedish police discussed why he

leaked the documents to her and the role of whistle-blowers in a democracy

EVENTS & INVESTIGATION

On 24 March 1986, a $285 million contract between the Government of India and Swedish arms

company Bofors was signed for supply of 410 155mm Howitzer field guns. About a year later,

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Stock Market Scams in India

on 16 April 1987, Swedish Radio alleged that Bofors paid kickbacks to top Indian politicians

and key defence officials to seal the deal.

The middleman associated with the scandal was Ottavio Quattrocchi, an Italian businessman

who represented the petrochemicals firm Snamprogetti.

Quattrocchi was reportedly close to the family of Rajiv Gandhi and emerged as a powerful

broker in the 1980s between big businesses and the Indian government. While the case was

being investigated, Rajiv Gandhi was assassinated on 21 May 1991 for an unrelated cause by

the LTTE. In 1997, the Swiss banks released some 500 documents after years of legal battle. On

22 October 1999 (when National Democratic Alliance government led by the Bharatiya Janata

Party was in power) the Central Bureau of Investigation (CBI) filed the first chargesheet against

Quattrocchi, Win Chadha, Rajiv Gandhi, the defence secretary S. K. Bhatnagar and a number of

others. In second half of 2001, Win Chadha and S. K. Bhatnagar died.

On 10 June 2002, Delhi High Court quashed all proceedings in the case so far. However, this

was reversed by Supreme Court of India on 7 July 2003.

Meanwhile the central government changed and Indian National Congress came to power

after 2004 Lok Sabha elections. On 5 February 2004, the Delhi High Court quashed the charges

of bribery against Rajiv Gandhi and others, On 31 May 2005, the Delhi High Court dismissed

the allegations against the British business brothers, Shrichand, Gopichand and

Prakash Hinduja, but charges against others remain. In December 2005, Mr. B. Daat,

the Additional Solicitor General of India, acting on behalf of the Indian Government and the

CBI, requested the British Government that two British bank accounts of Ottavio Quattrocchi be

unfrozen on the grounds of insufficient evidence to link these accounts to the Bofors payoff.

The two accounts, containing €3 million and $1 million, had been frozen. On 16 January, the

Indian Supreme Court directed the Indian government to ensure that Ottavio Quattrocchi did not

withdraw money from the two bank accounts in London. The CBI, the Indian federal law

enforcement agency, on 23 January 2006 admitted that roughly Rs 210 million, about US $4.6

million, in the two accounts have already been withdrawn by the accused. The British

government released the funds later.

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Stock Market Scams in India

However, on 16 January 2006, CBI claimed in an affidavit filed before the Supreme Court that

they were still pursuing extradition orders for Quattrocchi. The Interpol, at the request of the

CBI, has a long-standing red corner notice to arrest Quattrocchi. Quattrocchi was detained

in Argentina on 6 February 2007, but the news of his detention was released by the CBI only on

23 February. Quattrocchi was released by Argentinian police. However, his passport was

impounded and he was not allowed to leave the country.

As there was no extradition treaty between India and Argentina, the case was presented in

the Argentine Supreme Court. The government of India lost the extradition case as the

government of India did not provide a key court order which was the basis of Quattrocchi's

arrest. In the aftermath, the government did not appeal this decision because of delays in

securing an official English translation of the court's decision.

A Delhi court provided temporary relief for Quattrocchi from the case, for lack of sufficient

evidence against him, on 4 March 2011. However the case is still going on.

On 12th July 2013, Quattrochi died of a heart attack in Milan.

Despite the controversy the Bofors gun was used extensively as the primary field artillery

during the Kargil War with Pakistan and gave India 'an edge' against Pakistan according to

battlefield commanders

MICROCAP STOCK SCAM

Microcap stock fraud is a form of securities fraud involving stocks of "microcap" companies,

generally defined in the United States as those with a market capitalization of under $250

million. Its prevalence has been estimated to run into the billions of dollars a year.[1][2][3]Many

microcap stocks are penny stocks, which the SEC defines as a security that trades below $5 per

share, is not listed on a national exchange, and fails to meet other specific criteria.[4]

Microcap stock fraud generally takes place among stocks traded on the OTC Bulletin Board and

the Pink Sheets Electronic Quotation Service, stocks which usually do not meet the

requirements to be listed on the stock exchanges. Some fraud occurs among stocks traded on

the NASDAQ Small Cap Market, now called the NASDAQ Capital Market. 17

Stock Market Scams in India

Microcap fraud encompasses several types of investor fraud:

• Pump and dump schemes, involving use of false or misleading statements to hype

stocks, which are "dumped" on the public at inflated prices. Such schemes involve

telemarketing and Internet fraud.

• Chop stocks, which are stocks purchased for pennies and sold for dollars, providing both

brokers and stock promoters massive profits. Brokers are often paid "under the table"

undisclosed payoffs to sell such stocks.

• Dump and dilute schemes, where companies repeatedly issue shares for no reason other

than taking investors' money away. Companies using this kind of scheme tend to

periodically reverse-split the stock.

• Other unscrupulous brokerage practices, including "bait and switch," unauthorized

trading, and "no net sales" policies in which customers are prohibited or discouraged from

selling stocks.

Pump & Dump

Many penny stocks, particularly those that trade for fractions of a cent, are thinly traded.

They can become the target of stock promoters and manipulators. These manipulators first

purchase large quantities of stock, then artificially inflate the share price through false and

misleading positive statements. This is referred to as a "pump and dump" scheme. The pump

and dump is a form of microcap stock fraud. In more sophisticated versions of the fraud,

individuals or organizations buy millions of shares, then use newsletter websites, chat rooms,

stock message boards, press releases, or e-mail blasts to drive up interest in the stock. Very

often, the perpetrator will claim to have inside information about impending news to persuade

the unwitting investor to quickly buy the shares. When buying pressure pushes the share price

up, the rise in price entices more people to believe the hype and to buy shares as well.

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Stock Market Scams in India

Eventually the manipulators doing the "pumping" end up "dumping" when they sell their

holdings.

The expanding use of the Internet and personal communication devices has made penny stock

scams easier to perpetrate. Though not a scam per se, one notable example is rapper 50

Cent's use of Twitter to cause the price of a penny stock (HNHI) to increase dramatically. 50

Cent had previously invested in 30 million shares of the company, and as a result made $8.7

million in profit.[9][10] Another example of an activity that skirts the borderline between

legitimate promotion and hype is the case of LEXG. Described (but perhaps overstated) as "the

biggest stock promotion of all time", Lithium Exploration Group's market capitalization soared

to over $350 million, after an extensive direct mail campaign. The promotion drew upon the

legitimate growth in production and use of lithium, while touting Lithium Exploration Groups

position within that sector. According to the company's December 31, 2010 form 10-Q (filed

within months of the direct mail promotion), LEXG was a lithium company without assets. Its

revenues and assets at that time were zero. Subsequently, the company did acquire lithium

production/exploration properties, and addressed concerns raised in the press.

Penny stock companies often have low liquidity. Investors may encounter difficulty selling their

positions after the buying pressure has abated, and the manipulators have fled.

Fraud in Popular Culture

Microcap stock fraud has been explored in several books and movies.

A book that explored microcap fraud was the 2003 book Born to Steal by Gary Weiss. It

described the microcap underworld of the 1990s through the eyes of a young broker named

Louis Pasciuto. Although the book focuses on Mafia infiltration of brokerages, it also describes

in detail the operation of microcap fraud.

Microcap fraud was explored in the anonymously written books License to Steal and in The

Scorpion and the Frog. Both books explore pump and dump schemes in some detail but,

unlike Born to Steal, do not provide the real names of the specific firms and people described.

This kind of fraud has also provided the title for a book by Robert H. Tillman and Michael L.

Indergaard called Pump and Dump: The Rancid Rules of the New Economy.

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Stock Market Scams in India

A fictional account of pump and dump schemes can be seen in the movie Boiler Room.

According to press accounts, the director and writer of the film worked briefly as a cold-caller

for the Stratton Oakmont brokerage house, which was shut down by regulators in the late 1990s.

A pump and dump scam was also the subject of several episodes of the popular HBO series, The

Sopranos, pulled off by Matthew Bevilaqua and Sean Gismonte.

On an episode of the legal drama Law & Order, entitled "Trade This," the murder of a

young stockbroker at a prestigious firm is found to be related to his boss's involvement in

several pump and dump scams financed by members of a Mafia crime family. Similarly, in the

franchise's first computer game, Law & Order: Dead on the Money, the victim is a female

stockbroker who was being investigated for a pump and dump scam involving

a biotech company's suspicious IPO. This strategy was also fictionalized by Jeffrey Archer in

his book Not a Penny More, Not a Penny Less.

Stock Regulation

One method of regulating and restricting pump and dump manipulators, is to target the category

of stocks most often associated with this scheme. To that end, penny stocks have been the target

of heightened enforcement efforts. In the United States, regulators have defined a penny stock as

a security that must meet a number of specific standards. The criteria include price, market

capitalization, and minimum shareholder equity. Securities traded on a national stock exchange,

regardless of price, are exempt from regulatory designation as a penny stock, since it is thought

that exchange traded securities are less vulnerable to manipulation. Therefore, Citi

Group (NYSE:C) and other NYSE listed securities which traded below $1.00 during the market

downturn of 2008-2009, while properly regarded as "low priced" securities, were not technically

"penny stocks".

Although penny stock trading in the United States is now primarily controlled

through rules and regulations enforced by the U.S. Securities and Exchange

Commission and Financial Industry Regulatory Authority (FINRA), the genesis of this control

is found in State securities law. The State of Georgia was the first state to codify a

comprehensive penny stock securities law. Secretary of State Max Cleland, whose office

enforced State securities laws was a principal proponent of the legislation.

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Stock Market Scams in India

Representative Chesley V. Morton, the only stockbroker in the Georgia General Assembly at the

time, was principal sponsor of the bill in the House of Representatives. Georgia's penny stock

law was subsequently challenged in court. However, the law was eventually upheld in U.S.

District Court, and the statute became the template for laws enacted in other states. Shortly

thereafter, both FINRA and the SEC enacted comprehensive revisions of their penny stock

regulations. These regulations proved effective in either closing or greatly restricting

broker/dealers, such as Blinder, Robinson & Company, which specialized in the penny stocks

sector. Meyer Blinder was jailed for securities fraud in 1992, after the collapse of his

firm. However, sanctions under these specific regulations lack an effective means to address

pump and dump schemes perpetrated by unregistered groups and individuals.

CONCLUSION

Over the years, there have been more and more of the incidents of the rise in the scams in the

stock markets.

All these scams are the results of the fault & greed of the scamsters who advertantly act in a

manner which is detrimental to the interest of the society as whole.

These although may seem to be civil offences but their impact on the economy is very large and

in a chain procedure.

The growth and the development of the economy is hampered as a result of these malpractices

by the scamsters. However, the regulation / regulatory body have not been able to cut off the

lines and reduce the effect of the scams and also have failed in certain aspects of controlling and

monitoring the market and the stocks.

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Stock Market Scams in India

BIBLIOGRAPHY

• http://ismb-india.blogspot.in/2009/01/indias-biggest-scams.html

• http://www.authorstream.com/Presentation/chhotu007-1349047-top-10-financial-scams-

india/

• http://www.indiaforensic.com/CRBhansali.htm

• ismb-india.blogspot.com/2009/01/indias-biggest-scams.html

• http://in.finance.yahoo.com/photos/revealed-india-s-major-corruption-scams-

controversial-deals-slideshow/

• http://www.masterandstudent.com/2009/12/biggest-scams-in-indian-stock-markets.html

• http://www.niticentral.com/2013/06/13/25-corruption-scandals-that-shamed-india-

89069.html

• articles.timesofindia.indiatimes.com › Collections › Film

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• http://www.slideshare.net/one2million/stockmarketscam

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