11 Jan 11 Caveat Emptor: The Citibank India scam: Beware of fraudulent wealth managers

The unfolding saga of the fraud by Citibank India employee, Shivraj Puri, is, like all such scams, both sordid and unbelievable. All frauds are sordid, so let’s focus on the unbelievable.

As expected, investor ire and media attention are being focused on the “big bad” Citi. “We cannot believe that Citibank could have let this happen!” This “unbelievable” is the gist of much media focus – after all, a rich multinational invariably makes an easy target.

Mr. Sanjeev Aggarwal (one of those who has lost many crores) has filed a suit claiming that Citibank was guilty of a “systemic failure”. In other words, he alleges that they did not have appropriate or adequate processes in place to ensure the safety of their clients’ money.

Maybe they did, or maybe they didn’t – but I will leave that to the courts and RBI to figure out.

My issue is with the second “unbelievable”. How could people invest their money (and significantly huge sums, to boot) without any basic due diligence? It can’t be that they’re hapless, uneducated or financially illiterate people (as could be argued in the case of the IPO scams of the nineties). This scam has pricked the fortunes of ultra-rich, ultra-smart corporate honchos!

How could this happen?

It appears that the alleged fraudster Puri promised fixed returns of 2-3% per month to entice these high net worth (HNI) suckers into parting with their cash. Now, are guaranteed returns of 2-3% at all possible? When banks offer not even 0.5% per month, and the riskiest corporate bonds in the region of 1-1.25% per month, don’t we even question how it’s possible for Citibank to offer 2-3%? Or is it simply blind faith in the multinational brand name? Or is it just greed that blinds logic?

Any investor should (and must) be able to question such claims. After all, even high-risk options like equities (on average) return sub 20% annual returns (approx 1.5% per month). And these were not uneducated (or financially illiterate) customers – they were all crorepatis! The person who filed the case runs a private equity fund that itself manages $350 million. Doesn’t he know how hard it is to generate super-normal returns?

Apart from the returns promised, apparently a faked SEBI circular named a custodian account in the name of “Premnath” (grandfather of the accused). And the investors happily wrote cheques into that account!

Wouldn’t you be suspicious if your wealth manager (assume you’re wealthy enough to have one :)) asked for a cheque that is not in the name of a reputed fund or bond scheme or the bank itself? Didn’t anybody wonder who this Premnath is? And when their normal monthly statements from the bank did not reflect the newly invested funds, why did they not ask? Or is it that rich people don’t have time to read their bank statements?

On top of all this, some investors gave Puri blank cheques! Why would anyone give out blank cheques to the tune of crores? And if you do, then is it right to blame a bank that employs thousands and suffers from the statistical probability that some of its employees are crooked?

I don’t mean to belittle the losses suffered by investors, nor take away blame from Citibank (if they were truly negligent), but as in any such scam, it is the greed of investors that makes fraud possible. [Have you heard of Bernie Madoff?]

Ultimately, every investor, big or small, has to do their own due diligence. We should know by now that the financial system is designed to create wealth for the industry, not for their clients. And that anybody (yes, anybody, even a Citibank) who offers returns far higher than the norm, must be suspect.

But, on the flip side, investment history also tells us that for every investor that gets burnt, there are several more greedy fools who get blinded by the light – like moths.

So are we going to see many more such scams? You bet we are!

Arun Jethmalani

Arun is one of the founders of ValueNotes. Apart from trying to build a high-quality research business, he has spent the last 27 years researching, analyzing, and dissecting companies and industries. He has worked with clients of all shapes and sizes, from all parts of the world – in providing them insights that make a difference to their business.
Prior to ValueNotes, he was an equity analyst/advisor, and wrote extensively on investing – including a column titled “Value for Money” which ran for 10 years in the Sunday edition of the Economic Times. To this day, he remains an avid “value” investor.
He has also been published in several other publications, and is a regular speaker at events related to technology, investing, competitive intelligence, business process management, Internet, etc. See: Valuenotes Events
He has been instrumental in developing a community of research and intelligence professionals in India, and is the founder and current chairman of the SCIP (India) Chapter. Arun holds a B Tech from IIT, Bombay and an MS from Duke University, NC, USA. LinkedIn Profile

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