In the last six months two interesting scams / frauds have emerged in India where (innocent?) investors have been the losers. Around April this year, it was the Saradha Chit Fund scam that rocked the nation. And six months later the country witnessed the National Spot Exchange fraud. Both are financial frauds where the losers were investors who were looking for more than the market rate of return.
In Saradha, the perpetrator had his task cut out. Look for innocent and illiterate people mainly inhabiting the villages. Lure them with deposit schemes that have abnormal rates of return – collect money – enjoy the money – have no game plan for returning the money - and so one fine day do a Ramalinga Raju, that is, admit you were committing a fraud. The investors lost an abnormal amount of money.
NSEL is a more sophisticated fraud. A commodity exchange was set up which supposedly complied with all the laws of the land. Regular trades of buying and selling of commodities (which in reality never existed) used to happen at the exchange. However, in the dark shadows of the commodity exchange, the powers that be were carrying on a clandestine operation of money lending which was nowhere permitted by law. The people who borrowed the money through a web of transactions at NSEL failed to return and the entire bubble burst. End result: investors lost more than Rs 5,500 crore.
In the latter, the investors were all rich people who were playing the sophisticated game of commodity markets and were generally considered a notch above the normal investor in terms of the knowledge of the financial markets. They were extremely comfortable with terms like “due diligence”, “internal controls”, “checks & balances” etc. Obviously an informed class of investors who should have known where they are investing their money.
However one common thread which runs across both the class of investors is “GREED”. And it is this trait that the perpetrators have exploited. Greed clouds rationality and defeats reason. This is well known to the perpetrator and he takes advantage of this. He sets up the fraud mechanism and its sophistication is directly proportionate to the knowledge levels of the people he wants to defraud. Everybody is gullible; the only necessary trait required is greed. The two examples cited above are at two extremes of sophistication, but both succeeded and now we know why.
But we cannot banish greed. Greed is often considered to be one of the corner stones of Capitalism. Adam Smith, the father of modern capitalism famously wrote, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” Greed is nothing but that self interest.
So we conclude that as long as greed remains, fraud mechanisms would continue to evolve and the gullible people would continue to bear the brunt.
A little girl who was reading while I was writing remarked innocently at the end – is it not the work of the government to detect and prevent frauds and if a fraud at all happens, help investors recover the money?
The little girl was really innocent. I quickly brought her chocolate finished my blog and mailed it.
In Saradha, the perpetrator had his task cut out. Look for innocent and illiterate people mainly inhabiting the villages. Lure them with deposit schemes that have abnormal rates of return – collect money – enjoy the money – have no game plan for returning the money - and so one fine day do a Ramalinga Raju, that is, admit you were committing a fraud. The investors lost an abnormal amount of money.
NSEL is a more sophisticated fraud. A commodity exchange was set up which supposedly complied with all the laws of the land. Regular trades of buying and selling of commodities (which in reality never existed) used to happen at the exchange. However, in the dark shadows of the commodity exchange, the powers that be were carrying on a clandestine operation of money lending which was nowhere permitted by law. The people who borrowed the money through a web of transactions at NSEL failed to return and the entire bubble burst. End result: investors lost more than Rs 5,500 crore.
Also Read
In both the cases, investors lost money. But the interesting part is the composition of the investors. In the first case, it was the innocent and the illiterate. Mainly people from the villages who had no exposure to the financial markets and so were an easy prey. Their level of financial knowledge was very weak and hence they were easily hoodwinked into believing the story of the high-return deposits.
In the latter, the investors were all rich people who were playing the sophisticated game of commodity markets and were generally considered a notch above the normal investor in terms of the knowledge of the financial markets. They were extremely comfortable with terms like “due diligence”, “internal controls”, “checks & balances” etc. Obviously an informed class of investors who should have known where they are investing their money.
However one common thread which runs across both the class of investors is “GREED”. And it is this trait that the perpetrators have exploited. Greed clouds rationality and defeats reason. This is well known to the perpetrator and he takes advantage of this. He sets up the fraud mechanism and its sophistication is directly proportionate to the knowledge levels of the people he wants to defraud. Everybody is gullible; the only necessary trait required is greed. The two examples cited above are at two extremes of sophistication, but both succeeded and now we know why.
But we cannot banish greed. Greed is often considered to be one of the corner stones of Capitalism. Adam Smith, the father of modern capitalism famously wrote, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” Greed is nothing but that self interest.
So we conclude that as long as greed remains, fraud mechanisms would continue to evolve and the gullible people would continue to bear the brunt.
A little girl who was reading while I was writing remarked innocently at the end – is it not the work of the government to detect and prevent frauds and if a fraud at all happens, help investors recover the money?
The little girl was really innocent. I quickly brought her chocolate finished my blog and mailed it.