ISSN: 2581-8503 · MAJOR RECENT CASE STUDIES (BY BHUVNESH SHARMA) ISSN: 2581-8503 6 INTRODUCTION Corporate Fraud is simpler or laymen name for White Collar Crimes, these are the sort

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VOLUME 1: ISSUE 9

||January 2020 ||

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ABOUT US

WHITE BLACK LEGAL is an open access, peer-reviewed and

refereed journal provide dedicated to express views on topical legal

issues, thereby generating a cross current of ideas on emerging

matters. This platform shall also ignite the initiative and desire of

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response of legal luminaries shall be solicited to enable readers to

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at large, in the event of the ever changing social, economic and

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With this thought, we hereby present to you

WHITE BLACK LEGAL: THE LAW JOURNAL



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CORPORATE FRAUD

WITH REFRENCE TO

MAJOR RECENT CASE

STUDIES

(BY BHUVNESH SHARMA)



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INTRODUCTION

Corporate Fraud is simpler or laymen name for White Collar Crimes, these are the sort of

crimes that are committed by respectable people, holding high positions, either in the society

or any organization private, public or governmental. It is very hard for the agencies to trace

and bring light on such frauds probably because such activities are carried out in secrecy that

it goes un-seen. Such crimes are outlined by the Federal Bureau of Investigation (FBI) as an,

"Illegal acts characterized by deceit, concealment or violation of trust, that aren't dependent

upon the application or threat of physical force or violence". The FBI says that in cases of

white collar crime, "Individuals or organizations commit these acts to get money, property or

services in order to avoid the payment or loss of money or services; or to ensure personal or

business gain".

Today, the main focus of white collar crimes has shifted from the people to the organizations,

where individuals alone or in collaboration with others commit criminal acts. One such

white-collar crime is the Corporate Fraud.

What Is Corporate Fraud?

Corporate fraud refers to activities done by an individual or a corporation in a dishonest or

wrongful manner that are designed to give an advantage or an upper hand to the wrongdoer

whoever it maybe. Corporate fraud schemes surpasses the scope of an employee's stated

position and is identified by its complexity and economic impact on the business, other

employees, and outside parties.

A corporate fraud happens when an individual or an organization by its own accord and

decisions changes and hides sensitive data which then apparently makes the whole thing look

better than it actually is. Companies adopt various ways to commit such frauds, which may

include misstatement in the prospectus, manipulation of accounting records, debt hiding etc.

The aspect of concealing of real financial information includes false accounting entries, false

trades for inflation of profits, disclosure of price sensitive information which comes under the



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scope of insider trading and showing false transactions which result in attracting more

investors and lenders for funding.

In India, the Commission for 'Prevention of Corruption', in one of its reports, said that, “The

advancement of technological and scientific development is contributing to the emergence of

mass society with a large rank in file and a small dominant elite, encouraging the expansion

of monopolies, the increase of a managerial class and intricate institutional mechanisms.

There is a necessity for a strict adherence to high standards of moral behavior for even the

honest functioning of the new social, political and economic processes”. The report of the

Vivian Bose Commission inquiring into the affairs of the Dalmia Jain group of companies in

1963, highlighted as to how the big industries indulge in frauds, falsification of accounts and

record tampering for personal gains and tax evasion etc.

Types of Corporate Fraud

Though it may take place in a variety of ways, corporate fraud mainly done by taking

advantage of highly sensitive or sometimes secret information or access to important assets

and then leveraging those assets for benefits monitory or in kind. The fraud is usually hidden

behind legitimate business practices to disguise the illegal activity.

For example, accounts for a company may be altered to show a picture which gives an idea of

high revenue and profits compared with the actual financial results. These steps might be

taken to hide the flaws such as a net loss, slow revenue, declining sales, or hefty expenses.

The fabricated accounting might be done to make the company more attractive to potential

buyers or investors.

Other forms of corporate fraud are aimed to disguise or misrepresent a service or a product

the company is developing or is already in the market by hiding its shortcomings or defects.

Rather than investing in repairing, refurbishing, or redesigning the product, so that these

problems do not occur those responsible for the product try to deflect or hide these issues.

This might be done if the department or the company does not have the finances to correct

the problem or if revealing the issue might scare away customers and investors.

If a company or an individual claims that it is using some of its funds to put toward

investments or other types of monetary reserves that are intended to gain in value, but in



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reality, those funds have been expended or diverted elsewhere, this is a type of corporate

fraud.

There are many types of frauds like Fraudulent Financial Statements, Employee Fraud,

Vendor Fraud, Customer Fraud, Investment Scams, Bankruptcy frauds and miscellaneous.

Some of the common types of frauds that take place more often than other are:

● Financial frauds - Manipulation, falsification, alteration of accounting records,

misrepresentation or intentional omission of amounts, misapplication of accounting

principles, intentionally false, misleading or omitted disclosures.

● Misappropriation of Assets - Theft of tangible assets by internal or external parties,

sale of proprietary information, causing improper payments.

● Corruption - making or receiving improper payments, offering bribes to public or

private officials, receiving bribes, kickbacks or other payments, aiding and abetting

fraud by others.

Major Corporate fraud Cases in India:-

1. Harshad Mehta Scam (1992)

Harshad was Stock broker and a major part business transactions between banks in

the 90s. As an agent between banks he used and forged many fake bank receipts

backed by collateral. These receipts were money that was aggressively invested in the

stock market. The scam was essentially a regulatory failure.

The instrument used in a big way was the Bank Receipt (BR). In a Ready Forward

deal (RF), the borrower, i.e. the seller of securities, gave the buyer of the securities a

BR. The BR confirms the sale of securities. It acts as a receipt for the money received

by the seller and as a promise to the buyer to deliver the securities to him. It also

states that in the meantime, the seller holds the securities on behalf of the buyer.

Having found out that Mehta needed banks, which could issue fake BRs, or BRs that

were not backed by any government securities. Two small and little known banks i.e.

the Bank of Karad (BOK) and the Metropolitan Co-operative Bank (MCB) – were

brought in to help for this purpose.

Once these fake BRs were issued, they were given to other banks and the banks in

turn gave money to Mehta, plainly assuming that they were lending him money

against government securities when this was not really the case. He took the price of



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ACC from Rs. 200 to Rs. 9,000. That was an increase of 4,400%.The stock markets

were overheated and the bulls were on a mad run. Since he had to book profits in the

end, the day he sold was the day when the markets crashed.

Changes: List of Changes by SEBI after the Harshad Mehta Securities Scam-

● Strict and full disclosure norms were introduced. The full disclosure norms

were with respect to material facts, specific risk factors, prudential norms,

etc.

● The Listing Agreement 413 was introduced and adherence to it was made

mandatory by all listed companies.

● A code of advertisement was introduced to ensure that the companies

disclosed all the information in an honest and trusted manner to the

investors at the time of making a public offer for purchase of securities.

● The National Stock Exchange (NSE) introduced online, screen based,

nation-wide electronic trading system, to increase transparency of

operations.

● The Bombay Stock Exchange (BSE) switched over to online, screen based

trading.

● A revised “carry forward” system replaced the old “badla”414 system.

● Guidelines regarding requirements of full disclosure to SEBI were

introduced.

● Requirements to be fulfilled before making public offers for purchase of

securities to the public were also introduced.

2. Subrata Roy, SAHARA FRAUD CASE (2009)

Since 2009, when the Sahara Group’s activities were first time noticed and

questioned by SEBI leading up to the arrest of Sahara India Pariwar founder Subrata

Roy in 2014, both parties have been a part of an aggressive regulatory conflict. SEBI

accused Sahara India Real Estate Corp Ltd (SIRECL) and Sahara Housing Investment

Corp Ltd (SHICL), of issuing Optional Fully Convertible Debentures (OFCD),



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illegally collected investor money. Meanwhile, Sahara simply denied SEBI’s

jurisdiction on this matter.

SEBI went on to order Sahara to provide a full refund to its investors, which was

challenged by Sahara before the Securities Appellate Tribunal (SAT). When the SAT

upheld SEBI’s order, Sahara went and appealed against it in the Supreme Court on

August 2012, which ordered Sahara to refund investors’ money by depositing it with

SEBI. Sahara then declared that most of the US $3.9 billion had already been repaid

to investors, except for US $840 million, which it handed over to SEBI. This was

disputed by SEBI, which claimed that the details of the investors who were refunded

had not been provided to them. When Sahara failed to deposit the remaining money

with SEBI and Subrata Roy skipped his hearing, the Supreme Court of India issued a

non-bailable arrest warrant for the Sahara chief in February 2014.

Amid rumors of black money laundering and the misuse of political connections,

Sahara denied all charges and continued to defy SEBI. The regulator kept on going

eventhough what the Supreme Court referred to as the “ridiculous game of cat and

mouse” and finally managed to convict Sahara chief Subrata Roy in 2014. In this rare

victory, SEBI not only brought Sahara to justice, but also made an excellent case for

why the regulator, and others like it, require greater autonomy and penalizing powers.

Changes: The Sahara case will go down in history as one that brought the light on

investor protection, not because the frauded investors staged a protest, but because

SEBI and The Supreme Court of India issued well-researched, landmark orders on the

violation of its regulatory framework, mandated compliance, and jailed the offenders.

3. Ramalinga Raju, SATYAM COMPUTERS CASE (2009)

B Ramalinga Raju, the founder of Satyam Computers, was convicted after he

admitted of inflating the company revenue, profit and profit margins for every single

quarter over a period of 5 years, from 2003-2008. The amount embezzled by him is

estimated to be around Rs. 7,200 Crore. In April 2015, Ramalinga Raju and his

brothers were sentenced to 7 years in jail, and fined Rs. 5.5 crore.



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This scandal broke out in 2009 when founder-chairman of Satyam Computers

Ramalinga Raju confessed that the company’s accounts were tampered.

This case, which is also known as the Enron of India. Ten years ago, Raju wrote a

letter to the Securities and Exchange Board of India (SEBI) and his company’s

shareholders, admitting that he had manipulated the company’s earnings, and fooled

investors. Nearly $1 billion—or 94% of the cash—on the books were false.

In an immediate reaction to this confession, investors lost as much as Rs 14,000 crore

($2.2 billion) as Satyam’s shares crashed in the market .

Changes: In the years since the Satyam scam broke out, substantial changes have

been made with respect to corporate governance in India. The use of criminal

sanctions by the Parliament to regulate corporate conduct has been on the rise. The

regulators and the investigative bodies are more vigilant. The increased compliance

costs for companies also serves well to protect the interests of all the stakeholders in

the company.

● Committees

In 2009, the Confederation of Indian Industries set up a task force headed by

to suggest reforms. Based on the recommendations of the task force, the

Ministry of Corporate affairs issued a Voluntary Guidelines for Corporate

Governance in same year. The National Association of Software and Services

Companies also established a corporate governance and ethics committee.

This Committee suggested reforms relating to audits, shareholder rights, and

whistle-blower policy.

● The Securities and Exchange Board of India (SEBI)

On April 2014, SEBI amended the Listing Agreement to include provisions

relating to establishment of a vigilance mechanism, role of Audit Committee

in cases of suspected fraud or irregularity, and the role of the Chief Executive

Officer and the Chief Financial Officer pertaining to financial reporting and

disclosure to the Audit Committee. In 2015, SEBI framed the SEBI (Listing



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Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”),

which is applicable to all listed companies, and provided for stringent

guidelines relating to reporting / disclosure of material events and actual and

suspected fraud.

● Companies Act, 2013:

The new and amended Act has made a clear departure from the old Act and

has brought in many new measures that were intended to benefit the

stakeholder community at large, with the resulting increase in compliance

costs for the company. It provides for corporate fraud as a criminal offence. It

clearly states that obligations for reporting of an instances of fraud lie on the

auditors, cost accountants and the company secretaries. It clearly outlines the

responsibility and accountability of auditors and independent directors, who

are expected to play a more active role. The checks and balances that were

introduced to ensure proper governance and management in the company

require the hitherto passive actors to play a vital role, in the interest of the

shareholders, creditors, vendors, customers and other stakeholders in the

company.

● Serious Fraud Investigation Office (SFIO)

The SFIO as per the new Act has a statutory status and has recently also been

given the powers to arrest in case of fraud. The SFIO has been actively

investigating cases relating to corporate fraud.

4. Ram Sumiran Pal, SPEAK ASIA CASE (2011)

Speak Asia’s scheme is by far one of the smartest multi-level marketing scam that has

taken place in India what makes it unique is the it is solely took place online. The

company lured investors promising a return of Rs.52000 over an investment of Rs.

11000 annually. The investor was supposed to buy an e-magazine subscription for

Rs.11000. As a subscriber, they had to fill 2 surveys for any new product or service

every week for which they would be paid Rs.500 each. For completing these,



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members would get more than Rs 4,000 per month. Apart fom that, each member

would get Rs 1,000 as commission for referring others. The company said it had high

profile clients like ICICI, Nestle and Bata which bought it surveys at a premium and

that’s how it gave such returns.

However, all these companies denied having any association with Speak Asia and the

surveys were later found to be fake too. That’s when the authorities which were

already keeping an eye on the company started investigating into the company and

keep a close check on its activities.

The agencies soon found out that the company was not even registered in India but in

Singapore, and not a single payment was made to the company directly, but to the 137

franchisees it had across India. The money was then transferred by franchisees to

sister companies of Speak Asia. “This was done to hedge legal risks. The money can’t

be traced to them and they are anyway selling magazine subscriptions on paper and

not survey” Said the investigating officers.

So what really happed was that the Panelist as Speak Asia called there subscribers

were never paid back any amount on their subscription or for taking the survey. The

company attracted many low income earners in the society as it looked a good way to

make extra money but in the end they were duped and defrauded.

Changes: There is no such major legal change that has happened after this scam came

forward as the investigation for it is still being conducted. But the mastermind in the

multi-crore Speak Asia scandal Ram Niwas Pal (40), has been arrested by the Crime

Branch from Bangalore.

5. Sudipta Sen, SHARDA CHIT FUND CASE (2013)

The Ponzi scheme that was conducted by Saradha Group collected money from

investors by issuing to them redeemable bonds and secured debentures and promising

higher profits on their investments. Local individuals who worked as agents for the

company were hired throughout the state of West Bengal and huge cash amounts were

taken from the investors to expand quickly, eventually forming a group of more than

200 companies and individuals. This scheme was used to launder money and confuse



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the regulating authorities like SEBI. On April 2013, the scheme fell through caused a

loss of approximately US $5 billion and bankrupting many of its low-income

investors.

SEBI first detected something suspicious in the group’s activities in 2009. It looked

into Saradha as the company had not complied with the Indian Companies Act, which

required any company raising money from more than 50 investors to have a formal

prospectus for them, and categorically take permission from SEBI, the market

regulator in India. The Saradha Group sought to evade prosecution by expanding the

number of companies, thus creating a web of interconnected players. This created

many complications for SEBI, which still managed to investigate Saradha in spite of

them. In 2012, Saradha decided to switch it up and went on by coming up with

different fundraising activities, such as collective investment schemes (CIS) that were

disguised as tourism packages, real estate projects, and like wise. Many investors

were convinced into investing in what they thought was a chit fund. This, too, was a

clever attempt by the group to get SEBI off its back, as chit funds fall under the

jurisdiction of the state government, not SEBI. However, SEBI managed to identify

that the group was not, in fact, raising capital through a chit fund scheme and ordered

Saradha to immediately stop its activities until notified by the SEBI. SEBI had

previously warned the state government of West Bengal about Saradha Group’s

wrongful activities in 2011 but to no actions were taken. Both the government as well

as Saradha ignored SEBI until the company finally collapsed in 2013.

After the scandal came into the public’s eye, an inquiry commission was set up to

investigate the group, and a relief fund of approximately US $90 million protected

low-income investors was given. In 2014, the Supreme Court transferred all

investigations on the Saradha case to the Central Bureau of Investigation (CBI) due to

the allegations of political interference in the state-ordered investigation.

Changes: The Ministry of Finance introduced The Chit Funds (Amendment) Bill,

2018 on 20th February, bringing in some big much needed changes to the Chit Funds

Act, 1982.

● Amendment to Section 2(b) and 11(1): Use of the words “Fraternity

Funds”



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● Amendment to Section 16(2) and Section 17: Presence of at least 2

subscribers by way of video conference is allowed

● Amendment to Section 21(b): Foreman’s commission increased from 5%

to 7%

● Amendment to Section 85(b): Removal of ceiling

● Right to Lien given to the Foreman

Recent Corporate fraud Cases

● PMC Bank Case (2019)

● Punjab National Bank Scam(2018)

● Lalit Modi Coruption Case (2015)

● Kingfisher Airlines Fraud Case

INTERNATIONAL CORPORATE FRAUD CASES

● Enron Scandal - The principle figure behind this scandal, Jeffrey Skilling the CEO of

Enron, along with other officials fabricated various means and accounting loopholes to

hide billions of dollars in debt from the stakeholders and the board of directors. After the

company declare bankrupcy, its shareholders lost about $74 billion along with retirement

funds and jobs.

● American Insurance Group (AIG) Scandal - AIG financial scandal emerged in 2005

after US federal and state agencies initiated an investigation, possibly after getting

signaled by a whistle-blower. Once believed to be ‘too big to fail’, this insurance giant

would have end being bankrupt if it were not for the federal assistance. The investigation

uncovered a massive accounting fraud of nearly $4 billion, including instances of bid

rigging.

● WorldCom Scandal - Three of the top most officials in the company, including Ebbers,

Scott Sullivan as CFO, David Myers executed the fraud in mainly two ways. Firstly, the



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company wrote their “line costs” or interconnection expenses as capital expenditures

instead of expenses. And secondly they misrepresented the increase in revenue with false

entries in their accounts.

LAWS IN PLACE TO PREVENT CORPRATE FRAUDS IN INDA

● PUNISHMENT FOR FRAUD (S.447)

Any person who is found guilty of fraud shall be punishable with imprisonment for a

term which shall not be less than six months but which may extend to ten years and

shall also be held liable to fine which shall not be less than the amount involved in the

fraud, but which may extend to three times the amount involved in the fraud. Where

the fraud in question involves public interest, the term of imprisonment shall not be

less than three years.

● PUNISHMENT FOR FALSE STATEMENT (S.448)

If in any return, report, certificate, financial statement, prospectus, statement or other

document required by, or for the purposes of any of the provisions of this Act or the

rules made thereunder, any person makes a statement —

▪ which is false in any material particulars, knowing it to be false; OR

▪ which omits any material fact, knowing it to be material

● PUNISHMENT FOR FALSE EVIDENCE (SECTION 449)

If any person intentionally gives false evidence –

● Upon any examination on oath or solemn affirmation; or

● In any affidavit, deposition or solemn affirmation in or about winding up of any

company under this Act, or otherwise in or about any matter arising under this

Act,

● He shall be punishable with imprisonment for a term which shall not be less than

three (03) years but which may extend to seven years (07) and with fine which

may extend to ten lakh rupees (Rs. 10 Lac.

● PUNISHMENT WHERE NO SPECIFIC PENALTY OR PUNISHMENT IS

PROVIDED (SECTION 450)



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If a company or any officer of a company or any other person contravenes any of the

provisions of this Act, or the rules made thereunder and for which no penalty or

punishment is provided elsewhere in the Act, they shall be punishable with fine which

may extend to ten thousand rupees (Rs. 10,000) and where the contravention is

continuing one, with a further fine which may extend to one thousand rupees (Rs.

1,000) for every day after the first during which the contravention continues.

● PUNISHMENT IN CASE OF REPEATED DEFAULT (SECTION 451)

If a company or an officer of a company commits an offence punishable either with

fine or with imprisonment and where the same offence is committed for the second or

subsequent occasions within a period of three years, then, that company and every

officer thereof who is in default shall be punishable with twice the amount of fine for

such offence in addition to any imprisonment provided for that offence. This section

is not applicable to the offence repeated after a period of three years from the

commitment of first offence.

● ADJUDICATION OF PENALTIES (SECTION 454)

The Central Government, may by an order published in the official gazette appoint

adjudicating officers for adjudicating penalty under this Act. The Central Government

shall also specify their jurisdiction. The adjudicating officer may, by an order, impose

penalties on the company and the officer who is in default, stating any non –

compliance of default under the relevant provision of the Act. Any person aggrieved

by an order made by the adjudicating officer may prefer an appeal to the regional

director having jurisdiction in the matter.

● Section 211 empowers the Central Government to establish an office called Serious

Fraud Investigation Office (SFIO) to investigate frauds relating to companies.

Recent Actions by Government

● Demonetization

● Indian Bankruptcy Code 2015 (IBC)

● Banning of Unregulated Deposits Scheme 2019 (BUDS)

● Closing of shell companies by the government

● Stiff Capital Market Regulation



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Conclusion

In the end we can say that as the economy of the country develops the size of these corporate

frauds increases as well. But these cases have helped in giving a new meaning to corporate

fraud, where at one point a corporate fraud was only limited to the organization it happened

now it has gone global and has developed new way to happen may it be crypto currency,

online or whatever. The laws of the country have also been vigilant to fight such crimes and

ensure that what happens once does not happen again with regular review and development.

The government has been and will be taking more steps to ensure the irradiation of such

crime. But at the end of the day it all comes down to the ethics and desires of an individual or

an organizations.

BIBLIOGRAPHY

Online Sources

● http://www.mondaq.com/india/x/696380/White+Collar+Crime+Fraud/Corporate+Fra

uds+An+Analysis

● http://economictimes.indiatimes.com/opinion/et-commentary/sahara-a-landmark-case-

that-brought-focus-on-investor-protection/articleshow/31658922.cms

● http://vinodkothari.com/2018/02/ministry-of-finance-approves-amendment-in-chit-

funds-law/

● https://qz.com/india/379877/the-satyam-scandal-how-indias-biggest-corporate-fraud-

unfolded/

● https://sevenpillarsinstitute.org/corporate-fraud-india-case-studies-sahara-saradha/

● https://fraudspeakasia.wordpress.com/2011/07/30/speak-asia-news-revealed/

● https://www.rankred.com/biggest-financial-frauds/


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