An Insight to Securities Fraud

Introduction:

We live in a fast-paced developing country. Thus, there is always a cutthroat competition going on between people; we are always craving for more and more revenue so that our families can have happier and better lives. That’s how companies, brokers, or investment banks try to take advantage of our plight and manipulate us into investing highly risky opportunities and we inadvertently fall into their traps.

That’s why we should know more about these malpractices done by the companies and how to take legal action against these so-called white-collar criminals. But first we should know about these types of securities and then only we would be able to understand the former.

Types of Securities

Securities are financial instruments that have monetary value and can be traded between parties. They are generally of 3 types

Equity– These are the most preferred securities. Having equity securities means investing in a company in the form of capital. Equity holders are then a part of the ownership of the company. If the company makes a profit, the price of your investment will also increase. Example- Common stocks

Debt– When a business is in need of money, they go to the capital markets and issue debts securities. We lend the money to the company by investing in those securities. What you will get in return would be interested in the money the company owes you. For example- Bonds, Debentures

Derivative– A derivative is a contract between parties whose worth rests on an agreed-upon underlying financial asset or set of assets. For example- Interest rates, market indexes.

Securities Fraud

Securities fraud, also called investment fraud is a malpractice in the securities market. Companies or brokers tempt and manipulate people to invest in their securities which results in the loss for those investors. Some examples of Securities Fraud are-:

Insider Trading

Insider Trading is defined as when a practice of trading of a company’s securities is done by people who have access to information regarding the securities which is non-public/private.

This information is very important to make decisions regarding investments in the company. This is done when insiders of the company who have access to the non-public information of the company and for their private gains uses this information for trading in the company’s securities. It is wrong and unfair for the common investor and is illegal.

Misrepresentation of Facts

All correct facts must be provided to the investor so that he/she can make a fair and right investment decision. When a broker gives you limited information or incorrect information about the security you are investing in, that will result in you not making an educated decision and will violate your right of making the right decision.

Pump and Dump/ Internet Fraud

False information of companies is spread online on social media platforms or blogs so that because of the dramatic flair of the rumor, the price of the small securities gets increased and when the increase reaches the maximum, the person sells the stocks and gains profits. Because of this being false information, the price of the securities decreases again and results into loss for the common investors

Ponzi Schemes

A person who runs a Ponzi scheme offers low risk and high return investments to investors and take their investments to pay other investors and vice-versa, and continuously pocket their cuts while this exchange of investments. When the so-called Ponzi schemer, finds it difficult to find new investors, they keep the money of the investors and vanish. They usually target common people who are down in the dumps.

Legal Action

If you have been a victim of such securities frauds you can always file a complaint to SEBI which is the Securities and Exchange Board of India or the National Stock Exchange

To complain against your broker, trading worker, any listed company, Depository participants any Stock Exchange or mutual fund agency, one can always file a complaint to Securities and Exchange Board of India, and to file a complaint, one can simply submit his complaint on http://scores.gov.in

To Complain against your broker or trading worker only, one should file a complaint in National Stock Exchange, and to file a complaint, one can submit it on www.nse-investorhelpline.com/NICEPLUS/

Cases of Security Fraud

Harshad Mehta Case

Harshad Mehta was called the father of all scams. He was the mastermind of one of the biggest scams in India. Harshad Mehta, in 1992, took funds from banks and then illegally used that money to invest in the Sensex. By doing this the Sensex rose higher artificially and attracted a lot of new investments. The Sensex reached 4500 points in no time.

Harshad Mehta did this for 1 whole year, from April 1991 to May 1992, and transferred 5000 crore rupees from the Indian banks to the Stock Exchange.

Harshad Mehta was arrested on 5^th June 1992 and sentenced to jail for 9 years and he was permanently banned to do any trading activity. He, however, died in a civil hospital in 2001

Later it was revealed by Sucheta Dalal, a highly known journalist on 23^rd April 2003 that he took funding by banks by issuing fake Bank Receipts by some small banks.

Ketan Parekh

Ketan Parekh, a chartered Accountant also known as Bombay Bull took inspiration from Harshad Mehta’s scam and did a scam of his own. Ketan Parekh took funds not only from banks but from two stock exchanges as well. Those were Allahabad Stock Exchange and Calcutta Stock Exchange.

He used the same modus operandi which Harshad Mehta used. The funds he took from banks, he invested in K-10 Stocks so the stock prices increase. He bought shares by the names of poor people living in Mumbai. He also bought them at a low price, when the prices of the stocks rose, he put them into collateral to banks so that he can get funds off those banks. He not only invested in K-10 stocks; he was paid by companies so that he invests in their companies as well.

He was arrested on 2^nd December, 2001 in Kolkata when the BSE Sensex was crashing, so after some investigation done by the governmental authorities, he was known to be the cause. 

Both cases led to several suicides by Investors and hundreds of investors were driven to Bankruptcy.

Sentences and Penalties

Anyone who commits any kind of offense related to securities fraud might be charged with the laws mentioned below:

1. Section 15HA of The Securities and Exchange Board of India Act states that anyone who commits fraudulent and unfair trade practices would be liable to a penalty not less than 5 lakh rupees which may extend to 25 crore rupees or 3-times the profits made out of these practices.
2. Section 15G of The Securities and Exchange Board of India Act talks about the penalty of Insider trading and states that if a person commits the offense of Insider Trading would be liable to a penalty not less than 10 lakh rupees which may extend to 25 crore rupees or three times the amount of the illegal profits of insider trading.
3. Section 447 of the Companies Act which is for the punishment of any kind of fraud done by any person would be arrested for not less than six months, can be extended to 10 years.

Conclusion

In Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, Chapter II, Section 3 and 4 of the Act, it is clearly stated that no person should be involved in fraudulent trading or that person would be charged. There are currently many laws that are related to this. There are also courts made specifically for this called as Special Courts. Because of the increasing cases of Securities Fraud, there are many new laws also that have been prevailing. To make sure that the markets are growing, the markets should be free of fraud. SEBI is also taking steps so that new types of frauds can be taken care of, cyber laws are to be made strict and other laws related to that as well are needed.