ACST734/834: Investment Scams and Ponzi Schemes - Case Analysis

This report provides an in-depth analysis of investment scams and Ponzi schemes, using the Pearls Group case as a primary example. It explores how such schemes attract investors through false promises and pyramid structures, and how operators allay suspicion by fabricating financial reports and offering consistent, albeit unusual, returns. The report details the uncovering of the Pearls Group scam, the punishment of its perpetrators, and the role of regulators like the CBI and the Supreme Court in addressing the fraud. Furthermore, it offers recommendations for preventing future occurrences, emphasizing the importance of thorough research, skepticism towards high-return investments, and mandatory registration for investment advisors. The analysis also touches on the SEC's failures in detecting the Madoff scheme, highlighting the need for improved oversight and scrutiny of financial activities. Desklib offers a wide range of solved assignments and past papers for students.

Running Head: INVESTMENT SCAMS AND PONZI SCHEMES
0
Investment Scams
and
Ponzi Schemes

INVESTMENT SCAMS AND PONZI SCHEMES 1
Table of Contents
Introduction................................................................................................................................1
What happened?.........................................................................................................................1
How did Ponzi scheme Attract Money...................................................................................2
How did the Ponzi scheme operators allay suspicion / provide reassurance to the investors?
................................................................................................................................................3
How was the scam uncovered?...............................................................................................3
Were the perpetrators punished? Did the regulators do a good job in this case?...................3
Recommendations to avoid future events of similar nature:......................................................4
Why didn’t they catch him? What could the SEC do to improve its ability to detect Ponzi
schemes quickly?.......................................................................................................................5
Steps to catch a Ponzi scheme:...................................................................................................5
Bibliography...............................................................................................................................6

INVESTMENT SCAMS AND PONZI SCHEMES 2
Introduction
A Ponzi scheme named after Charles Ponzi is an investment scheme of fraudulent nature
operated by either individuals or a corporation. Under this scheme the operator fabricates the
reports and distributes the income to the new investor’s generated income from the old
investors. The operators offer returns which are short term, either abnormally high or
consistently unusual (Hobson, 2014).
What happened?
Pearls Group is an Indian based company which owns real estate and operates in residential
construction, property development, infrastructure, commercial and civil, spices and liquor,
insurance, tourism, health and education, agriculture, and media. A case was lodged against
two Pearls Group real-estate firms namely Pearls Agrotech Corporation Ltd. and Pearls
Golden Forest Ltd. by The Central Bureau of Investigation (CBI). Altogether they raised Rs
45,000 crore fraudulently via 5.5 crore investors who were duped in a Ponzi scheme through
collective investment schemes for allotment of agricultural land to the investors belonging to
Punjab, Delhi, Haryana and other states (Express, 2016)
How did Ponzi scheme Attract Money
Nirmal Singh Bhangoo the promoter and director of PGFL gave the investors fake guarantees
and bogus agreements of providing the plots of agricultural land. One of his bases is in
Australia. Further he was surrounded by the tank of opportunities in Australia by Austrade
and he began to expand his operation by acquiring the Spa in Gold Coast and Sheraton
Mirage Resort in Queensland.

INVESTMENT SCAMS AND PONZI SCHEMES 3
The promoters of PGF allegedly floated another company under the name and style of PACL
in 1996 and started collecting money again. PACL used the money of the old investors to
repay to the new ones to avoid any kind of legal and criminal prosecution. The investors were
given false promises of on interest rate @ 12.5% on deposits apart from free maturity on
income tax and free accidental insurance (Express, 2016).
PACL followed the pyramid system where they hired unemployed people as agents. The first
agent would likely to earn commission on investments (Lewis, 2016).
The commission so earned was attracted by the second one and so on. The commission went
up to 40%. They lured the investors in for fixed income and incentives. On scrutiny of
accounts it was found that PACL was incurring losses so it eventually raised a loan from
Punjab National Bank worth Rs. 17.40 crore. They also invested in apartments in Brisbane
worth $ 19 million (Times, 2016).
How did the Ponzi scheme operators allay suspicion / provide reassurance to the
investors?
The company always framed the investors with the fact that they lack adequate funds and
resources to develop the land whereas the group earned Rs. 20035.72 crore by disposing a
part of its land bank (Times, 2016).
The investors were constantly given the assurance that the cost of land purchased would
multiply in near future at a robust pace. These tall claims and promises led investors stuck
with the company in rapacity of huge earnings.

INVESTMENT SCAMS AND PONZI SCHEMES 4
How was the scam uncovered?
The official of CBI started cracking down on schemes and the offices of Pearl’s Group back
in 2002. After which SEBI banned one of the association of Pearl’s Group from dealing in
securities for 10 years. CBI when was instructed by the top court to investigate the matter it
began to raid the offices of Mohali, Chandigarh, Jaipur and Delhi on February 23. What they
did not realised was the fact that the investment scam would turn out to be so grand and of
such a magnitude. Few of the computers were scrutinised and it delivered a result about the
group's companies that amassed over Rs 45,000 crore from nearly 5 crore investors (Express,
2016).
Were the perpetrators punished? Did the regulators do a good job in this case?
The perpetrators included three directors among which one was MD and Promoter Director
(PACL) namely Sukhdev Singh, Executive Director Sukhdev Singh and Subrata
Bhattacharya ED at PACL/PGFL along with the CMD of the company were taken into
judicial custody. They were charged for criminal conspiracy and for money laundering. The
documents of 14348 properties were recovered. The chief justice RM lodha was appointed by
the Supreme Court to sell the assets of Pearls Agrotech Corporation Limited to settle the
claims and refund to the affected investors (Times, 2016).
Victims of the scheme launched a class action suit in July 2016 in the Australian Federal
Court on account of the interest to recover the funds invested by the Pearls. Regulators like
CBI and Supreme Court played an important part in deciphering this investment scam
(Times, 2016).

INVESTMENT SCAMS AND PONZI SCHEMES 5
Recommendations to avoid future events of similar nature:
 Avoid entering into huge investments which have a low maturity period, little or no
risk and claims to give better returns.
 Unusual investment seminars and unsolicited contacts are always prone to red flags.
 Before entering into the investment a complete analysis and research of the broker or
financial advisor is to be done with regards to its license and goodwill and
background.
 Never invest your funds in a policy which hide few of the opportunities and potential
gains.
 File a complaint if you have been victimized on account of any investment which
turns into a Ponzi scheme.
Why didn’t they catch him? What could the SEC do to improve its ability to detect
Ponzi schemes quickly?
Thomas Thanasules investigated all the emails from Renaissance Technologies, also
known as successful hedge fund. The complex funds included black box funds which
used complex programs. Up till now Thanasules was not aware of anything suspicious
until he had gone through the Meritage assets. There he discovered the investments
were not normal like hedge funds rather then it was return of swap with funds of
funds (Sterngold, 2018).
Madoff was cherry picking the trades which itself was a red flag. The mails were
eliminated because SEC had examined Madoff and gave them a clean chit.
Further the case was handed over to John Nee along with two more examiners
Lamore and Ostrow by co-head of SEC.

INVESTMENT SCAMS AND PONZI SCHEMES 6
After collecting all of the documents and financial statements they interviewed
Madoff who managed to fool them. In October 2005, Harry Markopolos reported
Madoff was running Ponzi scheme. SEC launched another investigation and finally
case was entered into their database. Madoff was asked to answer few questions
raised by Markopolos and in a while he began to contradict with his answers in
previous interviews (Ragothaman, 2013).
This led to the investigation by FBI officials of SEC’s failure in detecting the Madoff
fraud. They neglected DTC investigations. The staff failed to take necessary measures
to determine the Ponzi scheme. SEC officials’ collective negligence led Madoff set
free (Howell, 2017).
Steps to catch a Ponzi scheme
 Make custody arrangements to curtail the mismanagement of assets and its
misappropriation (Manning, 2017).
 Registration of each investment advisers shall be made mandatory.
 Reporting of assets at multiple levels.
Bibliography

INVESTMENT SCAMS AND PONZI SCHEMES 7
Express, T.I., 2016. The Indian Express. [Online] Available at:
http://indianexpress.com/article/business/business-others/cbi-arrests-pearls-group-chairman-
in-alleged-rs-45000-cr-ponzi-scam/ [Accessed 11 April 2018].
Hobson, R., 2014. The Book of Scams. New York: Hariman House Limited.
Howell, C., 2017. Tough life lessons from the Bernie Madoff Ponzi scheme. ACFE
Community Manager, pp.42-48.
Lewis, M.K., 2016. Understanding Ponzi Schemes. UK: Cheltenham.
Sterngold, J., 2018. Unraveling the Lies Madoff Told. The wall Street Journal, pp.20-27.
Times, H., 2016. Hindustan times. [Online] Available at:
https://www.hindustantimes.com/india/rs-45-000-cr-pearls-ponzi-scam-cbi-arrests-chairman-
3-others/story-vk02G3bFE9e3t60WKl8vbO.html [Accessed 11 April 2018].