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Financial Frauds

1. Punjab National Bank Scam:


About the Scam:
Punjab National Bank Scam is one of the most recent which involving amount of Rs. 116
billion, is one of the major financial fraud happened in one of the well reputed public
sector banks of India. Nirav Modi and his three other partners were the main scammers in
case. The case relates to alleged fraudulent Letter of Undertaking. It was first noticed by
a new employee of the bank. PNB claims their two employees were actually involved in
the scam when the bank’s core banking system was bypassed to rise to overseas branches
of other Indian banks, using SWIFT.
Impact of the Scam:
The statues of the all the complaints shows, that the Letter of undertaking were issued for
the overseas branches of Allahabad Bank and Axis Bank, post which these banks have
given money to the beneficiary entity on behalf of Modi’s firms. As a result, (as per Hong
Kong Monetary Authority norms) PNB will have to settle the LoUs with these branches.
This may result in higher provisioning for the next few quarters in PNB’s books if it is
unable to recover the money. The scam also caused the counter parties means the lenders
itself, by hitting their asset qualities and increase provisions for bad loans. Most of the
bankers revealed that the whole liability will fall on PNB since the letters of
understanding (LoUs) availed by Nirav Modi’s companies were issued on behalf of the
bank’s Mumbai branch. Some of the banks may had the direct exposure to Nirav Modi’s
companies, though they have been considered as standard assets so far.
Action Taken Against:
Mauritius has assured necessary regulatory action against all units found to be linked
with any fraudulent practices. Financial Services Commission (FSC) of Mauritius had
taken cognizance of the media reports about the purported fraud allegations with regards
to Punjab National Bank, Nirav Modi and Mehul Choksi. It was further informed that on
the basis of FIRs registered by the CBI, the enforcement directorate filed two cases under
the provisions of the Prevention of Money Laundering Act and conducted searches at
various locations and seized moveable properties and attached immovable properties.
2. The Harshad Mehta Case:
Harshad Mehta was supposed to be an Indian stockbroker, he was well known for his
wealth and for having been charged with numerous financial crimes that took place in
1992. Of the 27 criminal charges brought against him, he was only convicted of one,
before his death at age 47 in 2001. It was alleged that Mehta engaged in a massive stock
manipulation scheme financed by worthless bank receipts, which his firm brokered in
"ready forward" transactions between banks. Mehta was convicted by the Bombay High
Court and Supreme Court of India for his part in a financial scandal valued at 49.99
billion which took place on the Bombay Stock Exchange (BSE). The scandal exposed the
loopholes in the Bombay Stock Exchange (BSE) transaction system and SEBI further
introduced new rules to cover those loopholes. He was tried for 9 years, until he died in
the late 2001.
Impact of the Scam
Fake BRs were issued, they were passed on to other banks and the banks in turn gave
money to Mehta, assuming that they were lending against government securities when
this was not really the case. This money was used to drive up the prices of stocks in the
stock market. When time came to return the money, the shares were sold for a profit and
the BR was retired. This went on as long as the stock prices kept going up, and no one
had a clue about Mehta's operations. Once the scam was exposed, though, a lot of banks
were left holding BRs which did not have any value the banking system had been
swindled of a whopping 40 billion when the scam was revealed, the Chairman of the
Vijaya Bank committed suicide by jumping from the office roof. He knew that he would
be accused if people came to know about his involvement in issuing checks to Mehta. M
J Pherwani of UTI was also linked to Mehta.
Action Taken Against
He was arrested and banished from the stock market with investigators holding him
responsible for causing a loss to various entities. Mehta and his brothers were arrested by
the CBI on 9 November 1992 for allegedly misappropriating more than 2.8 million
shares.
3. The Ketan Parekh Case:
Ketan Parekh is a former stock broker from Mumbai, India, who was convicted in 2008,
for involvement in the Indian stock market manipulation scam in late 1999-2001.
Currently he has been debarred from trading in the Indian stock exchanges till 2017. He
was trainee of Harshad Mehta. Formed a network of brokers, Identified and targeted 10
stocks. Though Parekh is currently barred from stock trading, in 2009, the Securities and
Exchange Board of India alleged a variety of companies and other actors were trading on
behalf of Parekh; 26 entities were banned from trading as a result of that investigation. In
March 2014 he was convicted by a special CBI court in Mumbai for cheating and
sentenced to two years rigorous imprisonment.
Impact of the Case:
Investigations done by SEBI and CBI indicate that sheer magnitude of money moved by
Parekh was a staggering 64 billion Ketan Parekh was threatening to sue the Bank of India
for defamation because it complained of bouncing of 1.3 billion pay orders issued to the
broker by Madhavpura Mercantile Cooperative Bank.
Actions Taken Against:
SEBI permitted banks for collateralized lending only through BSE and NSE. RBI started
inspecting accounts and sub-accounts twice a year in spite of once in two year. SEBI
banned naked short sales. SEBI also banned trading by all stock exchange presidents,
vice presidents and treasurers SEBI launched immediate investigation on the scam. It
suspended all the broker member directors of BSE’S governing board.
4. The Satyam Scandal:
About the Scam:
The Satyam Computer Services scandal was a corporate scandal in India which took
place in 2009 where Chairman Ramalinga Raju confessed that the company's accounts
had been falsified. The Global corporate community was shocked and scandalized 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. On 10 January 2009, the Company
Law Board decided to bar the current board of Satyam from functioning and appoint 10
nominal directors. Chartered accountants regulator ICAI issued show-cause notice to
Satyam's auditor Price water house Coopers (PwC) on the accounts fudging. ICAI
President Ved Jain asked PwC to reply within 21 days. 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 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 INR 200 million every month for paying these 13,000 non-
existent employees.
Impact of the Scam:
The Satyam scandal has caused serious damage to India Inc’s reputation as well as the
country’s regulatory authorities outside more specifically huge losses to investors aside,
The Government certainly cannot remain aloof and allow Satyam to die off especially
when it provides occupation to 53,000 odd people and indirectly supports more than a
million Indians The consequences of the Satyam scandal will depend partly on policy
responses. The press is pointing out that many Indian companies could have similar
hidden problems. If investors get suspicious, this could severely damage the corporate
sector and the country’s chances of getting back to 9 percent growth. We personally think
that Satyam itself will not survive. It already has liquidity problems from one side and
has a large number of corporate customers, who are locked in to Satyam in the short run,
but who will each be looking for an alternative: they cannot afford to rely on a firm that
may not survive. The only exit strategy here is probably a buyout, which will allow a
complete replacement of Satyam’s discredited senior management.
Actions Taken Against:
Many people, including a former director, some politicians and stakeholders have come
forward by saying they had suspected 'something was wrong' in Satyam years ago. Some
of them even claim to have written to the authorities, but all this was to no avail. The
government, on its part, was perhaps too busy projecting the stellar show of the Indian IT
sector and did not find it necessary to launch an enquiry into these 'complaints,' so to
speak. Thus by way of negligence the government too is equally guilty in not having
managed to save the shareholders, the employees and some clients of the company from
losing heavily Ramalingam Raju along with two 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 charge sheet even after more than 33 months Raju being arrested.
5. Saradha Group of Financial Scandal
About the Fraud:
The Saradha Group financial scandal, was one of the major financial fraud that was
caused by the collapse of a Ponzi scheme run by Saradha Group, a consortium of over
200 private companies that was believed to be running a wide variety of collective
investment schemes (popularly but incorrectly referred to as chit fund) in Eastern India.
The group leveraged its apparent proximity to political and bureaucratic powers centers
to rapidly build up an image of a successful and trustworthy financial organization among
its investors. The group collected a predictable amount of INR 200–300 billion from over
1.7 million clients and depositors before collapsing in April 2013. Afterward the State
Government of West Bengal, where the Saradha Group and the majority of duped
investors were based, instituted an inquiry commission to explore the collapse and also
set up a fund of INR 5 billion to ensure that low-income investors are not bankrupted.
The Union Government through the Income Tax Department and Enforcement
Directorate also launched a multi-agency probe to investigate the Saradha scam, as well
as other similar Ponzi schemes. In May 2014, the Supreme Court of India citing inter-
state ramifications, possible international money laundering, serious regulatory failures
and alleged political nexus transferred all investigations in the Saradha Scam and other
Ponzi schemes to Central Bureau of Investigation, the federal investigative agency.
Impact of the Scam
All those companies which were illegally mobilizing deposits they have diverted
considerable funds (estimated to be around INR 240 billion in the last three years) from
small savings funds promoted by state government. The official data show a steady slide
in small-savings deposits and a spurt in withdrawals, which left a thin slice for the state
government to borrow from to make ends meet. This had ripple effect on the overall
macroeconomic situation of the state, as because instead of being used by government for
public purpose the money went into Ponzi schemes which either were siphoned off to
foreign locations or were put to use for private gains. Apart from that majority of the
depositors in Saradha group came from the lowest economic strata, the loss of the
investment would result in a further decrease in social mobility.
Actions Taken Against:
The first step was taken by Central Bureau of Investigation (CBI) On 30 April 2013 it
started its investigation into the scam in Assam at the request of the state government It
had been indicated by Chief Minister of Tripura that Tripura may also order CBI probe
into Saradha chit fund scam. In May 2014, Supreme Court transferred all investigations
into 44 deposit mobilizing companies, including Saradha Group of Companies, suspected
of running variations of Ponzi scams in the states of West Bengal, Odissa, Assam,
Jharkhand and Tripura to CBI. CBI asked several prominent personalities who were
connected with Saradha Group in some capacity or other and arrested a few. Some
significant detainees were: Rajat Majumdar, Trinamool vice president and former
Director General of Police (DGP) in West Bengal, Sadananda Gogoi, a noted Assamese
singer and filmmaker Ashok Mohanty, Odissa's former advocate general Former Assam
DGP Shankar Barua who was under scanner in the Saradha scam and whose house was
searched by CBI committed suicide.
6. Waste Management Scandal:
About the Scam:
Waste Management, Inc. experienced many fraudulent crimes within its company
between the years of 1992 and 1997. Waste Management Company reported $1.7 billion
in fake earnings. The senior officers at Waste Management, Inc., which included Dean
Buntrock (Founder and CEO), Phillip Rooney (Former President), Thomas Hau (CAO),
James Koenig (CFO), Herbert Getz (General Counsel), and Bruce Tobecksen (Vice
President of Finance), began to engage in fraudulent activities involving the company’s
accounting books. One of the fraud activities that occurred was avoiding depreciation
expenses by assigning and inflating salvage values and extending the useful lives of the
garbage trucks that the company owned. Every year, depreciation expense must be
included in a company’s financial statements as the assets owned become used up and do
not have the same value as it originally had. The company allegedly falsely increased the
depreciation time length for their property, plant and equipment on the balance sheets.
Impact of the Fraud:
Defendants could not even comply with the Action Steps agreement, according to the
complaint. Writing off the errors and changing the underlying accounting practices as
prescribed in the agreement would have prevented the company from meeting earnings
targets and defendants from enriching themselves, the complaint says. Defendants'
scheme eventually unraveled. In mid-July 1997, a new CEO ordered a review of the
company's accounting practices. That review ultimately led to the restatement of the
company's financial statements for 1992 through the third quarter of 1997. When the
company filed its restated financial statements in February 1998, the company
acknowledged that it had misstated its pre-tax earnings by approximately $1.7 billion. At
the time, the restatement was the largest in corporate history. As news of the company's
overstatement of earnings became public, Waste Management's shareholders (other than
the defendants who sold company stock and thus avoided losses) lost more than $6
billion in the market value of their investments when the stock price plummeted by more
than 33%.
Action Taken Against:
As a result of the issues, the defendants' improper accounting practices were brought to
corporate headquarters. They were charged with "making false and misleading statements
about the company's accounting practices, financial condition, and future prospects in
filings with the Commission, reports to shareholders, and press releases." They were also
charged for making "accounting manipulations known as "netting" and "geography" to
make reported results appear better than they actually were and avoid public scrutiny."
Cont'd Knowing how this had been going on for over 5 years, when the new CEO had
ordered for a review of the company's accounting practices, the review had initially led to
the company's financial statements during 1992 through the third quarter of 1997. After
restating the financial statements, it came to the company's attention that the financial
statements had misstated its pre-tax earnings by approximately $1.7 billion. This was the
largest restatement in corporate history and because of this fraud, the company had lost
over $6 billion in the market value of their investments. This also led to a major drop in
stock price. So in the end, the defendants go charged and the company was left with the
largest restatement of $6 billion.
7. Tyco Scandal
About the Scandal
In 2002, the New Jersey based security company, Tyco International came into the
spotlight after company’s former CEO Dennis Kozlowski and CFO Mark H. Swartz were
accused of committing fraud by stealing $150 million and manipulating balance sheet in
the process. This case of Tyco’s corporate scandal of 2002 normally focuses on the
problem of unethical business practice and related issues. Tyco was a large organization
that grew through numerous acquisitions. Tyco’s case shows that the problem was the
unethical business practices of a number of its top ranking officers, especially CEO
Kozlowski. Kozlowski was involved in numerous financial transactions that were not
included in the financial reports of the company. Kozlowski was also involved in
unethical transactions with other Tyco officers and lower ranking employees to cover up
for Kozlowski’s illegal financial transactions. Kozlowski even got outsiders involved in
the problem when his second wife received money diverted from the firm. Court
proceedings proved that Kozlowski stole millions of dollars from Tyco, and that his
illegal financial transactions were extensive. Kozlowski and other officers from Tyco
were imprisoned. Tyco declined as investors lost confidence in the company.
Impact of the Scandal:
Tyco has been able to regain much in lost ground under its new leadership. Because the
acts of securities fraud committed by former Tyco executives were concealed and, for the
most part, disguised, the majority of the Tyco's employees committed no acts of fraud
knowingly. As a precautionary act, however, Edward Breen, who replaced Kozlowski,
removed nine members of Tyco's original board. At the height of the scandal Kozlowski
threw a $2 million birthday party for his wife on a Mediterranean island, complete with a
Jimmy Buffet performance.
Action Taken Against:
An Investigation led by SEC and District Attorney’s office unraveled several
questionable accounting practices. The authorities also uncovered significantly large
amounts of loan money that were made in favor of Kozlowski by the company, which
were eventually forgiven. Kozlowski and Swartz were sentenced to 8-25 years in prison.
A class-action lawsuit forced Tyco to pay $2.92 billion to investors.
8. Lehman Brothers Scandal:
About the Scandal:
Lehman Brothers was one of the oldest and prestigious investment banks in the United
States. In 1997, the company entered into the risky business of mortgage origination,
where in 10 years their total assets rose to an astonishing $680 billion out of which only
$22.5 billion were in the form of firm capital. Allegedly sold toxic assets to Cayman
Island banks with the understanding that they would be bought back eventually. Created
the impression Lehman had $50 billion more cash and $50 billion less in toxic assets than
it really did.
Impact of the Scam:
In 2007, when the subprime mortgage crisis hit some of the major world markets, which
largely contributed the financial crisis of 2008, made things worse for the firm. During
that time, the firm reported an extraordinary amount of loss which lead its stocks to lose
about 73% of its value. Since this was a biggest banking failure in history sent shock
waves not just through the US financial markets, but also caused a meltdown in global
share markets.
Action Taken Against:
Two years after Lehman Brothers insolvency, an investigation initiated by a court official
revealed that Lehman’s top executives used several falsified accounting stunts to
constantly cover up their huge losses at the end of each financial quarter. The
investigation pointed out that the firm sold their toxic assets temporarily to a bank for $50
billion cash, which was supposed to be purchased back (repurchase agreement) before
writing their balance sheets.
9. HealthSouth Corporation Scandal
About the Scandal:
The HealthSouth fraud occurred during an interesting period of economic growth and
lackadaisical regulations, which made committing accounting fraud much easier. The
1990s saw investors and lenders who were less focused on profitability and more so on
revenue.4 When looking for capital as a company, growth was key. This pressured CEOs,
like Scrushy, to continue growing their companies and meeting analyst expectations
quarter after quarter. Combined with this increased pressure of growth was an
environment of strange legalism. The Alabama based HealthSouth became a huge player
in the U.S health care sector after a series of high class mergers and acquisitions
throughout the 1990s under their CEO Richard M. Scrushy. In the 21st century, things
were going smooth until problems with company’s accounts started to appear after an
SEC investigation in late 2002. It turns out that in 1996, Scrushy allegedly instructed
company’s top officials to forge the balance sheets to show increased earnings in order to
meet their certain business goals. The investigation revealed that the company inflated
their earnings by $1.4 billion and in some fiscal years the reported income was as high as
4700%.
Impact of the Scam:
Mr. Richard Scrushy, the founder and former CEO of HealthSouth Corp. Scrushy was
indicted on 85 criminal counts alleging that he was the mastermind of an enormous
corporate fraud involving money laundering, conspiracy, and securities fraud, that
allowed him to pocket more than a quarter-billion dollars. The government wants him to
fork over $279 million worth of his own personal assets, including a 92-foot yacht; a
Rolls Royce Corniche and a Lamborghini; a nearly 22-carat diamond and platinum ring;
aircraft; and paintings by Picasso, Chagall, Renoir and Miro. The company’s destruction,
resulting from profit mongering, has led HealthSouth to lay off many thousands of
workers whose lives and families have been thrown into disarray, and perhaps into
hopelessness. Millions of families have had their health care disrupted or threatened as a
result of the corruption at HealthSouth and the company’s subsequent “downsizing.”
Action Taken Against:
The company came under the SEC radar after Scrushy sold $75 million worth of stocks
just few days before the company reported a huge loss. Following the suspicion from
SEC, HealthSouth appointed a legal firm to investigate Scrushy’s stock sale. However the
U.S regulatory board was not satisfied. Scrushy was acquitted of all 36 counts of
accounting fraud, but convicted of bribing the governor of Alabama, leading to a 7-year
prison sentence.
10. American Insurance Group (AIG) Scandal
About the Scandal:
AIG intentionally misled investors, regulators and policyholders about the company’s
financial condition and operations. For at least 5 years, AIG created faulty financial
statements in an attempt to conceal losses and deceive analysts and investors into
thinking that the company had exceptional financial results.
Impact of the Scandal:
The company had to settle with the SEC and pension funds of two different states for
more than $2 billion. AIG played a pivotal role in financial crisis of 2008 in the United
States than affected almost the entire western Europe and parts of Asia.
Action Taken Against:
In the fall of 2004, the Attorney General’s office and the Insurance Department began
investigating AIG for bid-rigging (Bid rigging is a form of fraud in which a commercial
contract is promised to one party even though for the sake of appearance several other
parties also present a bid) as part of an ongoing probe of misconduct in the insurance
industry. AIG financial scandal emerged in 2005 after US federal and state agencies
initiated an investigation, possibly after getting signaled by a whistle-blower. Once
believed to be ‘too big to fail’, this insurance giant would end in bankruptcy if it were not
for federal assistance. The investigation uncovered a massive accounting fraud of nearly
$4 billion, including instances of bid rigging.
11. LIBOR Scandal:
About the Scandal:
The Libor financial scandal was series of fraudulent schemes and actions related to the
London Interbank Offered Rate or LIBOR, which took place in various parts of the world
over a considerable amount of time. The LIBOR is basically an average of international
interest rate, which is calculated after major banks all around the world submit the
interest rate at which they are willing to lend capital to each other (bank to bank). The
LIBOR scandal was discovered for the first time after a controversial article was
published in WSJ. The article suggested that some of the biggest banks might have
understated their borrowing rates during the 2008 financial crisis, which led other
institutions to misjudge the actual financial status of these banks.
Impact of the Scandal:
It is likely that fines imposed by regulators will be manageable in the context of most
banks' earnings power. The bigger risk exposure is from litigation costs from parties
believed to have been impaired by the Libor manipulation - a legal process which could
drag out over many years. It could however be difficult to prove damages. In order to do
so, litigants may essentially have to prove what the 'correct' Libor rate should have been.
The Libor scandal involves charges that banks rigged interest rates in two ways: first to
gain more profits for their trading desks and second to appear more financially stable,
especially during the financial crisis. Both charges would hurt retirees and future retirees
relying on pensions for income. If banks kept rates artificially low, pension funds would
see the value of their mortgage-backed securities fall and the interest they earned from
those securities reduced.
Action Taken Against:
The fraud finally became public in 2012, when the UK’s SFO launched an investigation
on British and International banks to investigate the alleged manipulation of international
interest rate benchmark. Over 20 banks around the world were addressed during court
investigations.
12. Bernie Madoff Scandal:
About the Scandal:
Bernie Madoff was undoubtedly the modern king of Ponzi schemes. For more than 20
years until he was arrested in 2008, Bernie Madoff successfully defrauded thousands of
investors of billions of dollars with his investment strategy called “split-strike
conversion.” In his scheme, Madoff offered his clients of high and steady return, which
he actually managed by pooling all the funds in one bank account. He used some of that
money to refund his clients who wanted to cash out. Madoff would then fill the deficit by
attracting new investors. This went on for years, a continuous cycle. But his scheme
failed during the financial crisis of 2008, as he was unable to attract more clients because
of the minimum liquidity in the markets. Federal investigations uncovered $64.8 billion
of fraud.
Impact of the Scam:
The research have shown that people who knew victims of Madoff's fraud or lived in
areas where they were concentrated pulled $363 billion from investment funds. Madoff,
79, was sentenced in 2009 to 150 years in prison for an elaborate scheme that involved
falsifying his firm's returns and clients' account statements. He is incarcerated in Butner,
North Carolina. The withdrawals boiled down to trust, and whether clients were
suspicious that their investment advisors were also fraudulent. The study found that firms
with clients in areas most affected by Madoff's scheme were 40% more likely to close
shop than those in a control group.
Action Taken Against:
Securities and Exchange Commission (SEC) began taking steps to combat similar
scandals and protect future investors. One of the first initiatives put into place post-
Madoff was the Dodd-Frank Act, also known as the Wall Street Reform and Consumer
Protection Act In addition to registration requirements and new rules for exemptions,
Dodd-Frank also prompted hedge funds and investment firms to adhere to new reporting
requirements and gave the SEC authority to monitor financial firms with the potential to
pose systemic risk. Madoff told his sons about his scheme and they reported him to the
SEC. He was arrested the next day. There was 150 years in prison for Madoff plus $170
billion restitution. Prison time for Friehling and DiPascalli.
13. Enron Scandal (2000):
Shareholders lost $74 billion, thousands of employees and investors lost their retirement
accounts, and many employees lost their jobs. Enron participated by creating Enron
Online (EOL) in October 1999, an electronic trading website that focused on
commodities. Enron was the counterparty to every transaction on EOL; it was either the
buyer or the seller. To entice participants and trading partners, Enron offered up its
reputation, credit, and expertise in the energy sector. Enron was praised for its expansions
and ambitious projects, and named "America's Most Innovative Company" by Fortune for
six consecutive years between 1996 and 2001.
Impact of the Scam:
Losses on the financial market amounted to the worst stock value loss in peaceful times.
Banks were suspected of collusion. The auditing firm Arthur Anderson lost its
accreditation. The rules for company financial reporting were drastically sharpened:
Sarbanes-Oxley Act (2002). The close ties of the company's founder, Kenneth Lay, to US
President George W. Bush – Lay was an important financial supporter of Bush – came
under sharp criticism.
Action taken Against:
Turned in by internal whistleblower Sherron Watkins; high stock prices fueled external
suspicions. Lay died before serving time; Skilling got 24 years in prison. The company
filed for bankruptcy. Arthur Andersen was found guilty of fudging Enron's accounts