Fraudulent Scheme with flashy return .. meant to fool Investor.

1. Ponzi Scheme – Money Game
FROM SCHEME TO SCAM – A JOURNEY
-CS SHIFALI SINGH

2. 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.

3. Types of Exotic
Financial
Instruments
Collective
Investment
Schemes
Plantation
Scheme
Chit Funds Ponzi Scheme

4. Plantation Scheme
 Came out with big fan fare
 Promised fantastic return in distance future
 Least liquid instrument
 Only a few firms have token presence

5. 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.

6. 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.

7. 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.

8. 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

9. • 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.

10. 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.

11. Pyramid Scheme Ponzi Scheme
Typical Hook Earn high profits by making
one payment and finding
a set number of others to
become distributors of a
product. The scheme
typically does not involve a
genuine product. The
purported product may
not exist or it may only be
“sold” within the pyramid
scheme.
Earn high investment
returns with little or no risk
by simply handing over
your money; the
investment typically does
not exist.
Payments/profits Must recruit new distributors
to receive payments.
No recruiting necessary to
receive payments.
Interaction with original
promoter
Sometimes none. New
participants may enter
scheme at a different level.
Promoter generally acts
directly with all
participants.

12. Pyramid Scheme Ponzi Scheme
Source of payments From new participants –
always disclosed.
From new participants –
never disclosed
Collapse Fast. An exponential
increase in the number of
participants is required at
each level.
May be relatively slow if
existing participants reinvest
money.

13. 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

14. 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.

15. Programmes by various regulatory authorities:
•extensive investor awareness programmes (IAPs)
•plans to organise 41 more IAPs by the end of 2015-16
The National Stock
Exchange (NSE)
•workshop on Ponzi Schemes organised by Multi-Disciplinary
School
Reserve Bank of
India
•SMC, has number of times, conducted investors' awareness
and protection programs
Bombay Stock
Exchange

16. 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.

17.  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

18. 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

19. 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

20. 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

21.  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

22. 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.

23. 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.

24. Scams in India through Ponzi Schemes :-
Name of the
company
KBC Multitrade a
private limited
company
Gold Sukh
Size of the
Scam
Rs 2,000 crore
Rs 200 crore
Remarks
giving three-times
return on
investment in 30
months.
Promise to provide
27 times return in
quick time

25. Scams
Name of the
company
Abhinav Guru
Stock Guru
Size of the
Scam
Rs 100 crore
Rs 1000 crore
Remarks
Promised Rs. 1.72 lakh on an
investment of Rs. 6000 in 26
month
Offered a return of 20% per
month for upto Six month &
principle amount invested is
returned in the next six month

26. 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

27. U.S.’s two major enforcement
organizations that target Ponzi schemes
Ponzi Enforcement
US SECURITIES AND
EXCHANGE
COMMISSION
Federal Trade
Commission

28. What You Can Do to Avoid Investment Fraud?
Ask questions.
Know the
salesperson.
Be wary of
unsolicited offer
s
Protect
yourself
online
Know
what to
look for
- Research
before you
invest.

29. Thank You
ACT SMART AND
PREVENT SUCH
FRAUD ACTIVITIES