StockGuru : The 500 crore scam or "How a sucker is born every minute".

The scam perpetrated by multi-level marketing (MLM) firm Stock Guru India (SGI)  is one more wake up call, for it exposes innumerable holes in our system of checks and balances. - such as it is.

Consider this: The Ulhas-Raksha couple used about five identities, managed to get documents such as PAN cards and driving licences in each name, opened 94 accounts in 20 different banks with 13 different names, bought 12 properties and also owned 12 luxury vehicles, according to media reports.

All these ideally should have gone through elaborate checks by so called regulators. Or are they only for the commoners?

At least, so it seems. Otherwise, how could Ulhas Prabhakar Khaire and Raksha J Urs manage to skirt all the rules and get multiple PAN cards, driving licences and passports?

Other numbers related to the scam are also mindboggling—only in Delhi about 14,000 complaints against the company and more than 2 lakh investors duped with amount ballooning to Rs. 1000 crore.

What is more surprising is the time it took for the authorities to track down the scamsters.

According to media reports, after receiving investor complaints it took more than one year for the authorities to arrest the couple, who reportedly were roaming around with bouncers in Dwarka.

Moreover, they had a highly sophisticated scheme—they conducted conferences, distributed brochures at five-star hotels and even had multiple agents across the country.

All these, under the nose of the highly alert watchdogs like Sebi and others. More surprisingly, there were suspicions raised about the company’s functions and schemes.

A report published in MoneyLife magazine in December 2010 had raised important questions about the functioning of the dubious firm.

How can Stock Guru promise 120 percent return from investing in stocks “even as leading investors like Rakesh Jhunjhunwala found it very hard to earn even 20 percent return”, it had asked.

According to the report, Stock Guru advised investors to buy shares at a low price and sell them at a higher price.

Reportedly, the couple has been arrested and investigation into scam is spreading. The Enforcement Directorate and the Serious Fraud Investigation Office are also likely join the probe. The role of some SEBI officials will also be looked into for ignoring repeated warning. An Economic Offences Wing team from Mumbai will also visit Delhi to gather more information

The company was not registered with either RBI or Sebi, both key regulators that oversee the financial sector. That highlights a bigger malaise in the system.

According to the MoneyLife report there are many MLM companies that operate without even a trading licence from the Sebi and RBI. Another issue that the scam brings into focus is lack of regulation of investment advisory firms in India.

Sebi had in 2007 come out with a draft regulation, which was revised twice later. In effect, the guidelines remain just that—the draft. The regulator has not yet been able to arrive at a consensus to finalise the guidelines.

Investors greed coupled with lack of regulations and even lackadaisical enforcement will keep such scams alive. 

It is almost the same story being repeated over and over. The company promised mouth-watering returns—Rs 22,000 on an investment of Rs 10,000 in one year. It is clear people made a beeline for the company’s schemes blindly. They did not even check the credentials of the claims Stock Guru made. According to the MoneyLife report, while Stock Guru promised a demat account with Sharekhan, the brokerage denied any such deal with it. It is to be presumed that no investor ever tried to check the veracity of this claim because of the lure of making a quick buck. 

Our country has this typical approach of being tough with the common man and if you can make yourself big enough, get the right connections, you are free. Of course we are stating the obvious here. But while it is easy  to blame the 'authorities', we also need to take a look at ourselves and ask considering that all the other scams in the past (some very recent), how different a modus-operandi could this company have offered to perpetrate this scam. Our belief is - not much. As P.T. Burnum said, "A sucker is born every minute".