Ponzi Schemes: Saradha, Speak Asia, Bernard Madoff

Over the years, India has had more than its fair share of Ponzi and multi-level marketing schemes such as Rose Valley, Saradha, IMA Scam, Stock Guru, and Speak Asia. Thousands of investors have lost their hard-earned money by investing in such schemes.  Ponzi schemes promise high returns or payouts, they keep their word(initially) to trap the first set of victims, then many people join to keep the fund flow ticking. Similar to Ponzi Schemes are Multi-Level Schemes or Pyramid schemes where early subscribers bring in other friends and family members. In this article, we shall look at examples of Ponzi Schemes not only in India but also in other parts of the world such as the US.

What is the Ponzi Scheme and MLM Schemes?

A Ponzi scheme is one that promises high returns to investors, but which does not have a legitimate business backing. Old investors are paid using the money generated from new investors, and the scheme can only last as long as there are more and more investors willing to put in their money. There may or may not be a business of product or service sales involved in the programme. Then when many people join, it is unable to keep the returns. It essentially means taking money from Rahul to pay the duped Pavn till the cover is blown.

An MLM, or pyramid selling scheme, typically requires you to pay upfront charges for either joining the scheme or buying a product or service (like collector’s items or software, training programmes, e-zine etc). Then they ask you to get more investors. As more and more people join the MLM scheme, a member hopes to recover the upfront charges and earn profit.

The name Ponzi scheme came from Charles Ponzi who defrauded hundreds with such a scheme as far back as the 1920s. Ponzi duped thousands of people into investing in postage stamps.

Our article What are Ponzi Schemes, Multi Level Marketing Schemes, Bill, Examples explains the Ponzi Scheme, the difference between MLM Scheme in detail.

What is Ponzi Scheme
What is a Ponzi Scheme

Ponzi Scheme by Charles Ponzi US, 1920

In the 1920s, whenever a person wanted to send a piece of mail overseas, to get the reply he would also buy an international reply coupon. This made it easier for the recipient because postage was paid. Ponzi’s investment idea was to buy reply coupons in a different country where they were cheaper, and then sell them in the United States where they were worth more. The difference was the profit that he could share with his investors. He sucked his investors in by promising 50 per cent returns in 45 to 90 days.

When he tried to carry through on his business idea, it didn’t work out as well in practice as it did in theory. Nevertheless, he kept the bad news to himself.

Every day, new, excited investors who heard about the idea wanted in and handed over their savings. He kept up the ruse by paying off his initial investors with some of the new money that was pouring in and pocketed some for himself. Because his early investors were making money, no one was complaining.

The whole thing fell apart after a few months. People starting wondering how he was buying and selling what must’ve been 160 million reply coupons out of the 27,000 that existed in the world

Sarah Howe and Ladies Deposit Scheme in 1880s

In 1880s Boston, Sarah Howe offered female investors a chance to make money in the Ladies Deposit. She garnered half a million dollars from more than a thousand women, using some of the funds to pay off other investors and pocketing the rest.

William Miller in 1899

Brooklyn bookkeeper William Miller was busted for swindling investors out of their hard-earned cash. In 1899, Miller operated a business called the “Franklin Syndicate,” in which he promised 10% interest on contributions each week. Miller,  who was nicknamed “520 percent” due to the remarkable rate of returns he promised — claimed that he had an inside window into the way that profitable businesses worked, but in the end, he defrauded investors of $1 million — a sum equal to over $25 million in today’s money. Despite the severity of his crime, Miller was sentenced to 10 years in jail for grand larceny and was released in five. Upon his release, Miller steered clear of the financial world, instead opening a grocery store on Long Island.

Popular Ponzi Scams in India

Saradha Scam from 2009-2013 in West Bengal, Assam, Odisha

About 1.7 million to 1.8 million depositors(mostly poor and lower middle class), from West Bengal, Assam, Jharkhand, Odisha and Chhattisgarh lost their money. The investors never knew about where their money was invested. They were lured by the promise of high returns that an army of thousands of agents in a pyramidal structure sold in the market.

Saradha is the name of Ramakrishna Paramhamsa’s wife and spiritual partner which evokes deep respect among millions in Bengal.  Sudipta Sen named his company Saradha and began to sell secured debentures and preferential bonds to the public. It did not conform to the guidelines of the market regulator SEBI or seek its permission to float the schemes.  Saradha group operated through a network of more than 100 companies and several thousand agents arranged in a pyramidal structure who were encouraged by commissions that ranged from 25-40%.

The group, after a red flag from SEBI in 2009 diversified into a consortium of 239 companies to tap small investors promising them huge returns. The money was collected with a wide network of agents who were paid about 25% commission.

The alarm bells rang in 2013 when the group’s inflow was lower than the outflow. By April 2013, the scheme collapsed as thousands of investors lodged their complaint against the company.

Sudipta Sen was arrested in 2013 in Kashmir for the 2000 crore Saradha Fund Scam. Debjani Mukherjee, the co-accused in the case was also taken into the judicial custody for interrogation.

Rose Valley Scam in West Bengal, Assam and Odisha in 2014

The Rose Valley Group duped investors of about Rs 17,000 crores in states of West Bengal, Assam and Odisha. The group was not running any profitable business and they did not have any operational revenues to pay back the money of investors.

Kajal Kundu started in 1997 with Rose Valley Hotels & Entertainment and set up Rose Valley Real Estate & Construction. He also started Rose Valley Chain Marketing,  which in 2002 became a corporate agent of the LIC.

Kajal Kundu, his wife and son were killed in an accident in 2003 and his younger brother, Gautam Kundu, took over.
Rose Valley floated a holiday membership plan and the investors were given the choice of opting for a holiday package or “a return on the investment with annualised interest”.  SEBI found out that the company collected over Rs 10,000 crore without following due procedures.

The matter gained the limelight in 2014 when an FIR was lodged against the firm’s Chairman, Gautam  In March 2015, the ED arrested group’s chairman Gautam Kundu. In Jan 2016 CBI was handed over the case and investigation of the Rose valley. TMC MP Tapas Pal was arrested on 30th Dec 2016 and Sudip Bandhopadhyay on 3rd January 2017.

EMU Farming Scam in Tamil Nadu from 2006-2012

Susi Emu Farms India Private Limited swindled investors of around Rs. 200 crores(some say 500 crores), mostly from Tamil Nadu.

In 2006, M.S. Guru, hailing from Perundurai in Tamil Naida, founded Susi Emu Farms and introduced a buy-back scheme that promised lucrative returns on investment in contract Emu farming. Emu is an Australian flightless bird. The hen can be productive for 25-30 years and lay 25-30 eggs in a season. Emu meat is low in fat and oil has healing properties. Fat can be used to produce cosmetics and dietary supplements. Emu birds came to India in 1996.

For an initial investment of Rs. 1.5 lakh, M.S. Guru, promised a return of Rs. 3.34 lakhs within two years. Under the scheme, the company provided investors with three pairs of EMU chicks on the payment of Rs. 1.5 lakh as caution deposit. It also provided the infrastructure to rear the birds and offered Rs. 6,000 a month for the maintenance of the birds, besides a yearly bonus of Rs. 20,000. Thus, the investor was offered around Rs. 1.44 lakh. As per the scheme, the company would take back the birds after two years and return the deposit too.

Soon after, the firm introduced a VIP scheme where the investor had to deposit Rs. 1.5 lakh. But unlike the regular scheme, the firms promised to rear the chicks and pay the investors Rs. 7,000 a month and an annual bonus of Rs. 20,000.

Oblivious to the fact that there are no processing facilities for products derived from emus, the investors bought these firms’s claims that they exported emu meat and that everything from an emu was marketable. Many firms reportedly even engaged in trading of birds among themselves instead of marketing the emu meat, oil and skin (for leather).

When word got out that Susi Emu Farms made prompt payments, the investments poured in; in no time the company’s presence spread all over Tamil Nadu. Quick profits lured investors like “I was misled by advertisements. I trusted the firm as it was doing business for seven years,” investors said.

Endorsed by popular film personalities, it expanded the business to Andhra Pradesh, Karnataka and Kerala.  Guru even opened a chain of restaurants in Bangalore, New Delhi, Puducherry and Erode inviting State and Central Ministers and famous personalities for inaugurations.

The success of Guru’s business model led to the mushrooming of emu firms, which advertised heavily in the Tamil media.

The Erode district administration issued repeated warnings asking people not to fall for the tempting offers from these firms

The bubble burst in 2012 when Susi Emu Farms failed to pay the monthly maintenance fee to the investors. After waiting for some time, the investors made a beeline for the firm’s office in Perundurai.

On August 6, 2012, Guru and his entire family disappeared. Others in the business followed suit, abandoning scores of investors and the birds.

Around 147+ people including the mastermind M.S. Guru have been arrested and the case is pending in the court. Movable and Immovable properties of the Emu firm owners had also been seized.

Ponzi Scheme about Emu Farming
Ponzi Scheme about Emu Farming

Speak Asia from 2010 to 2011 North India

Speak Asia scam duped 24 lakh people of Rs 2,276 crore by promising high returns on their investments.

  • You can enrol as a standard panellist by paying a six-month subscription fee of Rs 6000 (US $120). Or as a premium panellist by paying a one-year subscription fee of Rs 11000 (US $220).
  • The subscription fee is meant to gain you access to issues of an e-zine Surveys Today, and to a subscription code that will ensure your eligibility to participate in two online research surveys, which will leave you richer by Rs 1000 every week, 4000 Rs a month, Rs 52,000 a year.
  • Speak Asia promised additional commissions if you enrolled more members. So it became a multi-level scheme

In India, it started in February 2010 and in Half-year 13 lakh people join Speak Asia. They did huge marketing.  They advertised during the Indian Premier League cricket tournament and in various other TV channels and media publications. This massive publicity blitz has led to many people parting with their hard-earned money without even asking the most basic of questions.

In reality, the consumer surveys had no end-user; Speak Asia had no business-linked revenue stream. Speak Asia was registered in Singapore. They only had a website with all Singapore numbers.  It pointed out to some generic documents and circulars of the Reserve Bank and other authorities when asked about the relevant permissions.

Initially, the interest rolled in and so did the investors. After paying a few initial investors, Speak Asia wrapped up its operation in India around mid-2011.

Ponzi Scheme Speak Asia Online
Ponzi Scheme Speak Asia Online

Stock Guru 2010-2011 in North India

Stockguru.India, (SGI) a fraud company operating as a self-styled investment adviser, allegedly duped its investors of around Rs 1,000 crore. It was started by Ulhas Khaire and his wife Raksha Khaire.

SGI promised 20% returns per month. The company describes itself as the country’s ‘Premier Financial Consultancy’, offering trading solutions in equity, derivatives, currency futures, commodities trading, initial public offerings (IPOs), insurance (life/non-life), general insurance, mutual funds, portfolio management services and terminal handling, all under one roof.

The company’s investment plan was very simple.

  • You pay a minimum Rs 10,000 as the investment and Rs 1,000 as registration fees. There is no limit on the maximum amount one can invest.
  • It offered a return of 20% per month for up to six months and the principal amount invested is returned in the next six months.
  • It also gave post-dated cheques of the principal and promissory note as security.

In short, on investment of Rs 11,000, the company offers to pay Rs 12,000 in six months and the rest Rs 10,000 over the next six months, that is a total of Rs 22,000 or a 120% return in a year.

Such huge returns were suspicious, given the volatility in the market, but it did manage to attract a lot of investors.

SGI was not registered with the Securities and Exchange Board of India (SEBI) as an investment adviser but still offers to trade on behalf of clients. It also operated without any trading licence from the Reserve Bank of India and SEBI.

January 2011, Income Tax officials had raided the residential and office premises of Prabhakar and Priyanka, Directors of SGI, and other related firms involved in the activities of multi-level marketing and had seized various documents and cash running into several crores.

Ponzi Scheme Stock Guru
Ponzi Scheme Stock Guru

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