Indian Stock market scams


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Indian Stock market scams

  1. 1. A Group 3
  2. 2. OLD SKOOL(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 from any actual profit earned by the individual or organization running the operation. The Ponzi scheme usually entices new investors by offering higher returns than other investments •.The scheme is named after Charles Ponzi who became notorious for using the technique in 1920.
  3. 3. OLD SKOOL(BUCKET SHOP)•As defined by the U.S. Supreme Court a Bucket shop is "an establishment, nominally for the transaction of a stock exchange business, or business of similar character, but really for the registration of bets, or wagers, usually for small amounts, on the rise or fall of the prices of stocks, grain, oil, etc., there being no transfer or delivery of the stock or commodities nominally dealt in." •Without an actual underlying transaction, the customer is betting against the bucket shop operator, not participating in the market. Alternatively, the bucket shop operator "literally 'plays the bank,' as in a gambling house, against the customer."
  4. 4. OLD SKOOL(PUMP AND DUMP) "Pump and dump" is a form of microcap stock fraud that involves artificially inflating the price of an owned stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price. Once the operators of the scheme "dump" their overvalued shares, the price falls and investors lose their money. Stocks that are the subject of pump-and- dump schemes are sometimes called "chop stocks".
  5. 5. OLD SKOOL(BROILER ROOM) •A boiler room usually has an undisclosed relationship with the company being promoted or undisclosed profit from the sale of the house stock they are promoting. The managers of the boiler room usually have close ties to the same owners of the company whose stock is being promoted. •Once the insider investors are in place, a boiler room promotes these thinly traded stocks where there is no actual market. The brokers of the boiler room actually "create" a market by attracting buyers, whose demand for the stock drives up the price; This gives the owners of the company enough volume to sell their shares at a profit, a form of pump and dump operation where the original investors profit at the expense of the investors taken in by the boiler room operation.
  6. 6. Harshad Mehta : The Big Bull In April 1992, the first press report appeared indicating that there was a shortfall in the Government Securities held by the State Bank of India. In a little over a month, investigations revealed that this was just the tip of an iceberg which came to be called the securities scam, involving misappropriation of funds to the tune of over Rs. 3500 crores (about $ 1.2 billion).
  7. 7. Harshad Mehta : The Big Bull •Cost Of Finance Money Market-18-20% Stock market-35-40% •It is quite clear therefore that there were enormous profits to be had for anybody who could find a way of breaching the artificial wall separating the two markets and arbitrage between them. That in essence was what the scam was all about. •The Ready Forward Deal The crucial mechanism through which the scam was effected was the ready forward (RF) deal. The RF is in essence a secured short term (typically 15 day) loan from one bank to another bank. The lending is done against government securities, exactly the way a pawnbroker lends against jewellery or other valuables.
  8. 8. Harshad Mehta : The Big Bull •Bank Receipts •In an RF deal, as we have discussed it so far, the borrowing bank delivers the actual securities to the lender and takes them back on repayment of the loan. In practice, however, this is not usually done. Instead, the borrower gives a Bank Receipt (BR) which facilitates liquidity and reduces cumbersomeness. •During the scam, the brokers perfected the art of using fake BRs to obtain unsecured loans from the banking system. They persuaded some small and little known banks – the Bank of Karad (BOK) and the Metropolitan Cooperative Bank (MCB) - to issue BRs as and when required. These BRs could then be used to do RF deals with other banks.
  9. 9. Harshad Mehta : The Big Bull •The immediate impact of the scam was a sharp fall in the share prices. The Index fell from 4500 to 2500 representing a loss of Rs. 100,000 crores in market capitalization. Though one may be tempted to blame the steep decline in prices on the scam, we think that the reason for this fall was not scam directly. Purely technically speaking, scam just resulted in withdrawal of about Rs. 3,500 crores from the market, which for a market ofthe size of Rs. 250,000 crores (at an index level of 4500) is a very small amount, and therefore should have little impact on the prices. There were however two major reasons for the fall, both related to the government's knee jerk response to the scam. First was the phenomenon of tainted shares which created panic in the market and second was the perceived slow down of the reform process which destroyed the very foundation on which the boom was based.
  10. 10. ENRON: The Fall Of a Wall Street Darling • Enron is a company that reached dramatic heights, only to face a dizzying collapse. The story ends with the bankruptcy of one of America's largest corporations. Enron's collapse affected the lives of thousands of employees, many pension funds and shook Wall Street to its very core. To this day, many wonder how a company so big and so powerful disappeared almost overnight.
  11. 11. ENRON: The Fall Of a Wall Street Darling • In Enron's case, 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 revenue from the power plant was less than the projected amount, instead of taking the loss, the company would then transfer these assets to an off-the-books corporation, where the loss would go unreported. This mark to market accounting may work well for securities but proves to be disastrous for companies.
  12. 12. ENRON: The Fall Of a Wall Street Darling •By the summer of 2001, Enron was in a free fall. CEO Ken Lay had retired in February, turning over the position to Skilling, and that August, Jeff Skilling resigned as CEO for "personal reasons." By Oct.16, the company reported its first quarterly loss. •Shortly after, the SEC announced it was investigating Enron. In addition, 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. The final blow was dealt when Dynegy (NYSE:DYN), a company that had previously announced would merge with the Enron, backed out of its offer on Nov. 28. By Dec. 2, 2001, Enron had filed for bankruptcy.
  13. 13. ENRON: What did we learn Enron shows us what a company and its leadership are capable of, when they are obsessed with making profits at any cost. One of Enron's lasting effects was the creation of the Sarbanes-Oxley Act of 2002, which tightened disclosure and increased the penalties for financial manipulation. Second, the Financial Accounting Standards Board(FASB) substantially raised its levels of ethical conduct. Third, boards of directors became more independent, monitoring the audit companies and quickly replacing bad managers.
  14. 14. •Insider trading is the trading of a corporation’s stock or other securities(e.g. bonds or stock options) by individuals with potential access to non-public information about the company. •A former director of Goldman Sachs and Procter & Gamble and the longtime head of McKinsey & Company, the elite consulting firm, Mr Gupta has been under investigation over whether he leaked corporate secrets to Raj Rajaratnam, the hedge fund manager who was sentenced this month to 11 years in prison for trading on illegal stock tips. RAJAT GUPTA : THE WALL STREET POSTER BOY
  15. 15. RAJAT GUPTA : THE WALL STREET POSTER BOY •While there has been no indication yet that Mr Gupta profited directly from the information he passed to Mr. Rajaratnam, securities laws prohibit company insiders from divulging corporate secrets to those who then profit from them.
  16. 16. RAJAT GUPTA : THE WALL STREET POSTER BOY • The SEC's original case also outlined evidence that could potentially be used at trial. That includes Mr. Gupta's phone records of on September 23, 2008. That day, the Goldman board met via telephone to consider Mr Buffett's $5 billion investment in Goldman. • "Immediately after disconnecting from the board call, Gupta called Rajaratnam from the same line," the SEC filing says. A minute later, Galleon funds bought more than 175,000 shares of Goldman just before the market closed, the agency says, and later netted a $900,000 profit when the deal was announced.
  17. 17. Mutual Fund Investments are subject to market risks. Please read the Scheme Information Document carefully before investing. THE UTI US 64 : DISTRUST IN TRUST •UTI was established through a Parliament Act in 1964, to channelise the nation’s savings via mutual fund schemes. By February 2001, UTI was managing funds worth Rs 64,250 crore through over 92 saving schemes such as US-64, Unit Linked Insurance Plan, Monthly Income Plan etc. •Unlike the usual practice for mutual funds, UTI never declared the NAV of US-64. Analysts remarked that the practice of not declaring US-64’s NAV in the initial years was justified as the scheme was formulated to attract the small investors into capital markets.
  18. 18. •The US 64 was giving assured returns of around 18% during its peek which sucked in more and more investors who considered 18% to be almost risk free as it was basically an income scheme and there was blind trust in the government. •Till the 1980s, the equity component of US-64 never went beyond 30%. UTI acquired public sector unit (PSU) stocks under the 1992-97 disinvestment program of the union government. The US-64 was forgetting its identity as an income scheme, supposed to provide fixed, regular returns by primarily investing in debt instruments. THE UTI US 64 : DISTRUST IN TRUST Year Dividend declared 1989-90 18% 1991-92 25% 1993-94 26% 1995-96 20% 1997-98 20% 1999-00 13.75% 1990-91 19.50% 1992-93 26% 1994-95 26% 1996-97 20% 1998-99 13.50% 2000-01 10.00%
  19. 19. THE UTI US 64 : DISTRUST IN TRUST •Even a typical balanced fund (equal debt and equity) usually did not put more than 30% of its corpus into equity. A Business Today report claimed that eager to capitalize on the 1994 stock market boom, US-64 had recklessly increased its equity holdings. By the late 1990s the fund’s portfolio comprised around 70% equity. •The management failed to offload the equities when the market started declining. While the book value of US-64’s equity portfolio went up from Rs 7,943 crore (June 1994) to Rs 13,627 (June 1998), the market value had actually declined in the same period from Rs 18,334 crore to Rs 10,029 crore.
  20. 20. THE UTI US 64 : DISTRUST IN TRUST •Inspite of all this, UTI was able to declare dividends as it was paying them out of its yearly income, its reserves and by selling the stocks that had appreciated. This kept the problem under wraps till the reserves turned negative and UTI could no longer afford to keep the sale and purchase prices artificially inflated. •Following the public outrage against the whole issue, UTI in collaboration with the government of India began the task of controlling the damage to US-64’s image.
  21. 21. Madoff investment scandal: The Mugshot • The Madoff investment scandal broke in December 2008 when former NASDAQ chairman Bernard Madoff admitted that the wealth management arm of his business was an elaborate Ponzi scheme. • On June 29, 2009, he was sentenced to 150 years in prison with restitution of $170 billion. Madoff's business, in the process of liquidation, was one of the top market makers on Wall Street and in 2008, the sixth-largest.
  22. 22. Madoff investment scandal: The Mugshot Madoff started his firm in 1960 as a penny stock trader with $5,000.In order to compete with firms that were members of the New York Stock Exchange trading on the stock exchange's floor, his firm began using innovative computer information technology that eventually became NASDAQ. At one point, Madoff Securities was the largest buying-and-selling "market maker" at the NASDAQ. •In 1992 Madoff explained in an interview to The Wall Street Journal that a return of 16.3% tracking returns as good as S&P 500 was not that tough. He explained that he took advantage of futures and options to take a cushion against his investments. He invariably used a collar staregy.
  23. 23. Madoff investment scandal: The Mugshot •In his guilty plea, Madoff admitted that he hadn't actually traded since the mid-1990s, and all of his returns since then had been fabricated. •The federal complaint stated that Madoff had defrauded his clients of almost $65 billion – thus spelling out the largest Ponzi scheme in history, as well as the largest investor fraud committed by a single person.
  24. 24. Sources • • • • collapse.asp#axzz1h1spSA8B • 2006/archives/2001/sep2k1/uti.htm • • • • sketch-js.html