Sucheta Dalal :Ring of Thieves
Sucheta Dalal

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Ring of Thieves  

May 6, 2009

INVESTIGATION

 

Only a few years ago, some publications were lionising Nirmal Kotecha as a 29-year-old whiz-kid who had made it big through his investment brilliance. In 2006, Business Today even put him on par with long-term value investors such as Prof Shivanand Mankekar and Rakesh Jhunjhunwala. Even at that time, the central intelligence agencies had been tracking Nirmal Kotecha and another player called Manish Marwah; both were later indicted by the Securities and Exchange Board of India (SEBI) for manipulating the price of Atlanta. Kotecha was also indicted in the case of SEL Manufacturing, before the current action on Pyramid Saimira case that has temporarily barred him from the market.

 

 

 

 
That Kotecha dared to turn more brazen and add fraud and forgery to his repertoire of market manipula-tion tricks only underlines SEBI’s ineffectiveness as a market watchdog. Yet, SEBI’s interim order in Pyramid Saimira Theatre Limited (PSTL) case is probably its best in recent years. It is clear and meticulous in recording its finding, following up leads, chasing financial trails and, finally, bringing it all together in a cogent order to justify its action barring a massive 230 entities from accessing the market. SEBI’s investigation exposes a sleazy cabal of traders, journalists (current and former), investment bankers and public relations professionals who help market operators, such as Nirmal Kotecha, to ramp up share prices. Kotecha, and others like him, use a chain of hundreds of tiny investment firms, through which they rapidly move large sums of money (including cash) to obfuscate the financial trail of their price manipulation. The details in SEBI’s order make one wonder why the same diligence has not been used to track scores of similar cases, despite access to a sophisticated online surveillance system. The answer probably lies in the fact that this SEBI investigation was led by Dr Pradyna Sarvade, a former DIG with the Maharashtra Police, with wide experience in the anti-corruption cell as well as with the Central Bureau of Investigation.
 
The Pyramid Saimira story began on 21 December 2008 with news reports about SEBI having penalised the company for violating creeping acquisition norms by asking it to make an open offer to acquire 20% public holding at a minimum of Rs250 per share (which was significantly higher than the ruling market price of around Rs75) within 14 days of its order. The ‘SEBI order’ turned out to be a fake. The group attempted to plant the fake order in several newspapers led by a media cabal that included Rajesh Unnikrishnan (assistant editor of The Economic Times and close buddy of Nirmal Kotecha, a co-promoter of Pyramid Saimira) and Rakesh Sharma, a former journalist with Business Standard, who has turned into a PR professional. (He was sacked by his employer Adfactors PR when the fraud surfaced.) There are two other former journalists involved in the ring of thieves – Ashok Jainani and Dheer Kothari, the latter based in Kolkata. This does not seem to be the first time that such a cabal has planted fake reports about companies. This time, however, Kotecha was master-minding the effort, holding surreptitious meetings in mid-town Mumbai hotels and even propping up an imposter who pretended to be the company secretary and confirmed the fake letter to the more meticulous journalists.
 
Nirmal Kotecha had apparently worked out a nice plot with PS Saminathan, chairman & managing director (CMD) of Pyramid Saimira to ramp up the price before off-loading his shares. On 22 December 2008, when the fake report published in two Mumbai dailies caused the stock price to flare up, Kotecha quickly sold 15 lakh shares. There was a complex maze of trading entities, firms, people, money and transactions that formed the back-end to this operation. Clearly, all this wasn’t set up for dumping Pyramid Saimira shares. The same entities would probably turn out to be conduits for manipulating scores of other scrips as well; but more about that later. 
 
SEBI’s first action was to file a police complaint about the forgery with a local police station at the Bandra-Kurla Complex. The police questioned Rakesh Sharma, the PR executive, who planted the forged letter; he gave them the entire story and was also arrested, but later retracted his statement. It led SEBI and the police to Kotecha and they even seized a computer from the broker’s home. But Kotecha is clearly well-connected and our sources say that the police investigation fizzled out after some senior police officers called the police station. However, SEBI remained on the trail and used police investigation techniques to corroborate Sharma’s original statement. It tracked the phone calls made by Kotecha, Sharma and Unnikrishnan to track them down to a hotel in mid-town Mumbai (Pritam Hotel at Dadar) and thereafter to Kotecha’s home close by (at Matunga). More importantly, Kotecha’s phone was found to be in the name of a dummy investor (so much for Know Your Customer rules) leading SEBI to the financial maze.
SEBI’s investigation also reveals that Saminathan freely and frequently made false and misleading announcements to the stock exchanges as well as in interviews to the media. The order says that Saminathan declared to the media that Pyramid Saimira was grossly undervalued at Rs200 when he was purchasing the shares at Rs45.67.
 
Moneylife has often highlighted the fact that stock exchanges publish corporate statements without any attempt at verification. Now that SEBI has established how easily a chairman can lie in official communication, will it ensure stringent penalty for deliberately misleading investors? SEBI’s interim order says that Kotecha, Saminathan and PSTL’s company secretary (S Ganeshan) were constantly in touch around the time the forged SEBI letter surfaced; it also mentions some unexplained money transfers by Ganeshan alluding to his complicity in helping Kotecha perpetrate the fraud. Keynote Corporate Services, lead manager to PSTL’s initial public offering, emerges as another abettor to the fraud by publishing ‘misleading and unsubstantiated research recommendations’ as a build-up to Kotecha’s game.
 
Finding Gullible Fall Guys
 
SEBI found that the mobile phone used by Kotecha was registered in the name of Amol Kokane, an engineering student who was related to his former accountant. There were trading accounts in Kokane’s name that were used for major trading activity and movement of substantial funds. Kokane was either unbelievably gullible or was suitably rewarded to lend his name to this activity. He happily signed the papers, documents and depository slips at the request of his brother-in-law, the Kotecha employee who has since expired in an accident. Kokane’s account was not registered with Kotecha’s firm but another brokerage house called Indian Capital Markets. The account was also used to trade the shares of Usher Agro, SEL Manufacturing, Suzlon Energy, Akruti City, Reliance, REL and Unitech through the broker Indian Capital Markets. Kotecha also had an account with Indian Capital Markets. He has also been previously indicted for manipulating shares of SEL and Atlanta. How many Kokanes, who merely lend their name and trading account to market operators, are counted among India’s 19 million retail investors? We suspect the number is large and it explains why retail investors are rarely agitated at misgovernance and corporate scams. It is a shame that a fully automated, paperless trading environment and a regulator armed with an expensive online surveillance system have not unearthed this maze of operators earlier.
 
The SEBI order says that Rakesh Sharma retracted his statement to the police. In Kokane’s case, even while SEBI officials were questioning him at his home, Nirmal Kotecha personally landed up at Kokane’s home and kept instructing him to remain silent and refuse to answer SEBI officials. Yet, SEBI managed to track the funds moving in and out of Kokane’s bank account to an array of nearly 228 entities that abetted the fraud and disguised the trail of manipulative transactions – they include brokerage firms, traders, exporters, travel agencies, companies dealing in diamonds, steel, jewellery and finance.
SEBI’s investigation revealed that “these funds have been received from various entities/persons who appear to be connected to each other, and in whose bank accounts funds appear to have been circulated through a large network of their connected accounts, in a complex pattern and without any ostensible and bona fide business purpose. The investigation has also revealed frequent high value cash withdrawals and cash deposits, by limiting individual cash withdrawals and deposits to below Rs10 lakhs, in these accounts.” (The value was kept below Rs10 lakh to avoid triggering provisions of the Money Laundering Act.)
 
SEBI says that Kokane lent his name to help Nirmal Kotecha “carry out his fraudulent, abusive, manipulative and illegal activities, detrimental to the interests of investors and to the integrity of the securities market.” Kokane says he knows nothing about stock trading, but he surely cannot escape liability for lending his name for fraudulent activities.
 
The Trail Goes On
 
Interestingly, SEBI officials found that many transactions in Kotecha’s account have the exact counter-party transaction in the books of one or the other connected entity, indicating an elaborate and carefully orchestrated maze of stock market transactions that could possibly be tracked only with sophisticated software. SEBI is also looking at investigating a large brokerage firm which has apparently found it necessary to have an account that was entirely operated by Kotecha in a third firm. It is also investigating the role of the media house, Bennett, Coleman & Co, which had a ‘private treaty’ deal with PSTL, whereby it invested Rs4 crore in the company for a 1.7% stake and the money was immediately repatriated as payment for discounted advertisements. The media house has been very open about its private treaty deals with companies. Moneylife had also revealed an internal communication that showed how that media house works at ensuring a flow of positive reports to puff up its private treaty clients. Isn’t it accountable when these clients use this clout and access to commit fraud or manipulate the market? So far, SEBI has studiously avoided examining this issue. It has merely tossed it to the Ministry of Information and Broadcasting. Well, the investigation this time has been excellent and different; will the follow-up also be as good? Moneylife will track the issue.

 

-Sucheta Dalal


-- Sucheta Dalal



 



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