The inside pages still have very important stories, especially when it comes to local journalism. While going through the inside pages recently I came across a very important story on a Mumbai-based chartered accountant, Amber Rameshchandra Dalal, who is accused of defrauding more than 2,000 investors of ₹1,100 crore.
Dalal had promised investors a return of 18-22% per year by investing in a whole host of commodities, everything from gold and silver to crude oil and natural gas. But he was basically running a Ponzi scheme—paying off older investors by using money being brought in by the newer.
A report in The Indian Express points out that there were 2,009 investors in this Ponzi scheme, who were duped of ₹1,100 crore, implying an average investment of around ₹55 lakh, meaning that those investing in this scheme were largely high networth individuals (HNIs). As The Indian Express reported: “Among those who were duped… were artists working in Bollywood, businessmen, lawyers and even chartered accountants.”
Now, the Ponzi scheme gets its name from Charles Ponzi, who, in 1919, in the American city of Boston, ran a fraudulent investment scheme promising to double investment in 90 days.
As Dan Davies writes in Lying for Money: “The single feature that unites all subsequent frauds bearing the name of Charles Ponzi is the attempt to defeat the runaway nature of fraud by raising new money faster than you pay out old.” While the scheme gets its name from Ponzi, similar frauds occurred before 1919 as well.
So, why do so many people still become victims of Ponzi schemes in particular and investment fraud and misselling in general? The simplistic reason offered is human greed, but there is more to it.
As Robert Z Aliber and Charles Kindleberger write in Manias, Panics and Crashes: “There is nothing as disturbing to one’s well being and judgment as to see a friend get rich. Unless it is to see a non-friend get richer.” So, more than greed, it’s envy which nudges people to invest in schemes promising a very high rate of return, without adequate due-diligence.
Typically, a new investor ends up investing in a Ponzi scheme, only after they have heard about it from a friend, a relative or an acquaintance, someone who has already made good money from the scheme. In the age of social media, the good news of the possibility of high-returns travels fast, egging investors to invest.
The lack of proper checking also stems from the fact that in the last few years, investors have made a lot of money quickly by investing in stocks, real estate and other asset classes. Hence, when someone promises 18-22% to returns in an era where annual double digit returns have become commonplace, it comes across as believable. There is a prevailing zeitgeist—the spirit of the times—that big money can be made quickly.
Of course, Dalal is not the only individual who has cashed in on this. Financial scamsters promising high returns are dime a dozen on social media. Further, people in the business of managing other people’s money are indulging in rampant mis-selling these days. Indeed, misselling is not the same as duping, but at the heart of it is the phenomenon of taking investors for a ride.
Investors taken in by the zeitgeist are willing to take more risk. Like recently, I came across two investment propositions, where the pitch started with the idea that equity mutual funds (MFs) are akin to the fixed deposits of our parents’ times, implying that one could only earn limited returns by investing in equity MFs, and hence, one should bet on financial derivatives.
Of course, all this has happened before. So, why do investors keep making the same mistakes? As John Galbraith writes in A Short History of Financial Euphoria: “Financial disaster is quickly forgotten. In further consequence, when the same or closely similar circumstances occur again, sometimes in only a few years, they are hailed by a new, often youthful, and always supremely self-confident generation as a brilliantly innovative discovery in the financial and larger economic world.”
So, investors have made big money in the last few years. And they think a new era—where they will continue to mint money—is upon us, and that explains the ease with which they are happy to invest their money in anything and everything that promises quick returns. Just look at the number of people who are happy investing in under construction property these days, forgetting what happened in the late 2000s and early to mid 2010s, when residential real-estate projects were delayed and quite a few builders just took the money and disappeared. But then that was the 2010s. We are in the 2020s now. So, this time it’s different, is the story being sold all over again.
Vivek Kaul is the author of Bad Money.
