Stock Market Frauds & how to be aware of them

Thousands & thousands of people invest their hard earned blood money in stock market to make some money . But is the stock market the safest way to earn money? I would like to think before I act.

The aim of this Communication is to provide a holistic approach on how to reduce the risk of financial and corporate malpractice covering also taxation and law enforcement.
There are four lines of "defence" against corporate malpractice: internal control in a company, independent third parties, and supervision and enforcement.

The four lines of "defence" against corporate malpractice that focus on a series of measures involving matters ranging from the internal control in a company, through auditors and supervision to measures necessary to comply with the law.

First line of defence - internal control in a company and corporate governance

Boards of companies have fiduciary obligations towards the company itself and its shareholders as well as obligations towards stakeholders at large.

• enhance transparency of intra-group transactions as well as of transactions with related parties;
• clarify the responsibilities of board members for financial statements and key non-financial information;
• oblige all listed companies to make public annually a corporate governance statement.

Second line of defence - independent third parties

The second line of defence is made up, above all, of the auditors, but accounting firms, banks, investment bankers and lawyers, as well as rating agencies and financial analysts, also have an important role to play. At this control level, transactions must be transparent and conflicts of interest reduced to a minimum.

The proposal provides for:

• full group auditor responsibility for consolidated accounts;
• the establishment of audit committees in public-interest entities;
• auditor rotation;
• strengthening of sanction regimes.

Third line of defence - supervision

More than one authority is involved in supervising the institutions operating on financial markets. In the Commission's view, it is important to develop deeper cooperation between sectors:

As part of more wide-ranging cooperation between these two levels, the Commission would like to see improved transparency of tax systems by facilitating access to, and the exchange of, information.

Fourth line of defence - law enforcement

This line of defence is concerned mainly with police forces and the judicial authorities responsible for investigations and prosecutions that may have both a preventive and a repressive effect. There should be a government body set up only  to investors with more effective legal instruments to combat financial crime.

Cooperation between regulatory bodies and law enforcement services;

Cooperation between the financial and other business sectors and law-enforcement authorities as part of a close partnership between the public and the private sector;

Financial investigation, which must be accompanied by severe penalties for the wilful destruction of documents;

Stock market losses are due to stockbroker misconduct, including excessively risky investment recommendations, or the failure to perform due diligence by your stockbroker, may serve as the basis to file a lawsuit.

The investment industry is subject to a strict set of central regulations and self-regulatory rules that are purportedly designed to protect investors. When investment professionals break these rules and harm investors, injured parties may pursue a a claim for stock market fraud  in arbitration before the

Common types of stock fraud perpetrated by investment professionals include claims of churning or excessive trading, unsuitable or excessively risky recommendations, over concentration, the failure to disclose risk, the failure to conduct due diligence, and placing their interests ahead of yours.

If you believe that your stockbroker or investment professional engaged in stock market fraud or securities fraud through the sale of proprietary investment products, or defective financial products, or made false promises and misled you with fraudulent investment or financial planning advice to further their own financial interests, or the financial interests or production requirements of their brokerage firm, you may be able to recover your losses attributable to stock market fraud.

But sometime or other most of these big daddy's have violated the rules played the mischief's and cheated the investors. Here is the comprehensive compilation of how the brokerage firm cheats the small investors.

In the last decade of twentieth century IPO was the buzzword of the stock markets. Investors were lured due to the hefty returns on the listings. It was the IPO boom. There were however no stringent norms for the companies to come out with an IPO.

Though brokerage firms in India do these kind of misguidance to its investors very frequently but are never proved to be misleading advise however in USA they are frequently brought into the courtrooms.

Technology has entered in almost every aspect of our life and the Stock Market operations are no exception to that. Stock markets have become more susceptible to the frauds perpetrated by using or manipulating the technology.

Market manipulations

History is witness to Stock Market Frauds

1.      Manipulating the share prices on large scale. Ketan Parekh and Harshad Mehta get the dubious distinction of being the Stock Market Fraudsters.

2.      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 criminal act 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!

3.      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 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.

4.      Fake Stamp Papers – This scam promised to be the mother of all scams in India, with the initial reports quoting a figure of Rs 30,000 crores as the scam size. Later, RBI clarified that this figure was “rather exaggerated”, and the “correct” figure was around Rs 200 crores. Again, this scam exposes how the India system works – Mr Abdul Karim Telgi, the scam kingpin, paid bribes to get access to the security press in Nasik, where stamp papers and currency notes are printed. He later used this knowledge to print fake stamp papers. At the height of the scam, Telgi’s network spanned 14 states, 125 banks and more than 1,000 employees.

5.      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! 

6.      IPO Scam – A number of key operators, including corporate stock brokers such as Karvy and Indiabulls, were involved in the IPO scam that spanned the years 2004 – 2005. The modus operandi was simple – the operators would open thousands of fake accounts to purchase shares in IPOs, in the hope of selling later at huge profits. A spate of IPOs issued during this period were heavily oversubscribed due to this scam, sometimes by as much as 40 times!.

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 repersenting 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.

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.

7.      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.

8.      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.

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 sheet.

The Intelligence Bureau has unearthed a major stock market scam involving big players such as rogue stockbroker Ketan Parekh (KP), ostensibly banned from trading on the bourses till 2017 by securities market regulator SEBI. The damaging IB report, submitted to the topmost echelons of the government, suggests that KP and his associates are driving up share prices through the creation of false volumes.

According to it, the stock market manipulating firms have been using illegal means to buy shares so that the prices rise in the run-up to an IPO or a qualified institutional placement (QIP). Thesefirms have bought select shares in volumes that range from lakhs to millions on a single day, causing the stock prices to shoot up despite the bearish trend in stock market

 NEW DELHI: After a hunt lasting more than a year-and-a-half, police have arrested a couple for duping around 2 lakh people in one of India's biggest investment frauds involving an estimated Rs 1,100 crore.

The accused  Ulhas Prabhakar Khaire, 33, and his wife Raksha J Urs, 30 had floated a company, Stock Guru India, promising to double investors' money in six months. They had launched a high-profile promotional campaign and even roped in celebrities.

 Masters of disguise, the couple  changed their names to Lokeshwar Dev Jain and Priyanka Dev Jain while running the company and went absconding with the investors' money.

Delhi Police's economic offences wing nabbed the couple from Ratnagiri in Maharashtra, where they had opened another fake investment company. Police said the couple changed their looks and assumed new names based on stolen identities for each of their fraudulent operations.

The scam came to light around April last year after investors complained to the police. In Delhi alone, cops have received 14,303 complaints from investors who had put in money ranging from Rs 10,000 to Rs 60 lakh in Stock Guru India.

Delhi Police and its chartered accountants have so far estimated that Ulhas Prabhakar Khaire and his wife Raksha J Urs, promoters of Stock Guru India, cheated investors of Rs 493 crore but they say it may reach Rs 1,100 crore after the entire list of victims is exhausted.

Police have recovered deposits, cash and investments worth Rs 63 crore from Ulhas and Raksha, including eight flats in Dwarka. The victims were spread across many states of Uttarakhand, Himachal Pradesh, Delhi, Rajasthan, Madhya Pradesh, West Bengal, Haryana, Sikkim and Maharashtra.

Before launching Stock Guru India, the couple had started a fake college in Dehradun using different identities and collected money from prospective students on the promise of giving them diplomas in psychotherapy.

The two operated 94 bank accounts in 20 banks using 13 different identities and invested in properties with the victim's money. The Income Tax department had conducted a raid at the company in January this year and recovered Rs 44 crore. After this, Ulhas, who had been on the run since June last year, had claimed on his website that he was unable to return investors' money due to the IT raid and had even claimed to have left the country for the United States, said sources. A look out notice had been issued against the couple last year.