Corporate Scams and Common Man's Fate- How to Avoid the Tears

My heart begins to pound as I sit back and see the companies fall apart and the stock markets tumbling every now and then as we hear the news that some famous broking company is bankrupt. The number is on the raise and is worrying for any one who does some financial planning in life. There are only so many affordable stocks for a common man and it is unlikely that he would without a scratch when some as big as EH Hutton or Goldman Sachs goes down and stretches a begging arm to the government.

How should we interpret the Scams?

The big question is there a big wave of immorality, lack of ethics and integrity sweeping the globe that we hear a cry scams from all around as the common man looks stunned at the falling stocks helplessly? Is the common man under crunch, ready to be crushed under the pile of the falling corporate bricks as the bundles roll off into the Swiss banks? Who will save us, you and me the little men that struggle to maintain our dignity? Is the Government on our side? Is the judiciary on our side? If so, how come all these Corporate executives seem to emerge without a scar. Who is going to voice the woes of common man and the problems that afflict the governance in the corporate world?

Is there a stench in the corridors of the corporate world and the halls of judiciary that is determined to extinct the common man and his capital market participation?

The sad part is that the bad always travels faster than good, but the media never accept the blame for it and we can’t blame them for that because if they do they too will be lost for good.

Immorality and lack of integrity seems to percolate down faster than the water falling in the Niagara Falls.

Now we see small chit fund and finance companies too playing the same game, promise a luring interest rate, send the luring wordy unqualified salesmen door to door collect the funds and pack off after sometime The poor investors, innocent and greedy, wanting to celebrate the daughters marriage (in India) or buy a house is left high and dry. Who cares? No one knows what happens after the police arrest them.

Ask any one, the answer is same “you should not have been so greedy, a profound advice supported by the benefit of the hind sight. In all fairness, there is a truth in the statement as one sees the same thing happen again and again despite all the media coverage. No one knows if it is because the new victims were unaware of the previous scams or they just think that their luck and fate are far superior to the other unfortunate ones. The final answer is there is no sympathy going your way.

Going down the History of Scams-What happened to Scammers and The Companies?

Go back in history there is no dearth of the scams. Though not based on strong research and subject to correction perhaps there are there more scams in the democratic world where the judiciary is more sympathetic and fair. In the rest of the world if you are not a part of the government chances are the hands or legs may be cut off.

Some examples given below may help

In 1980 EF Hutton issued checks for more than the balance they had in hand and used chaining and check kiting to get money without any interest from 400 banks. They were able to borrow $250 million per day without any interest A few more events followed till the stock market crash in 1987 and the merger of EH Hutton. Hutton pleaded guilty on 2000 counts for felony, paid $ 2 million fine plus $ 750 the cost of investigation. Securities and Exchange Commission allowed EF Hutton to stay in business

In 2001 Enron Scam resulted in bankruptcy and also dissolution of Arthur Anderson.

Enron was formed in 1985 by Kenneth Lay and the share was quoting $90 per share in 2000. When the share fell to less than $1.00 the share holder lost close $11 billion.

Enron had non transparent financial statement, complex business model. Enron was reporting cash flow and asset values inflated and kept significant liabilities off the books.

Unlike Goldman Sach and Merryl Lynch who reported only brokerage as revenue, Enron reported the entire value of each of its trade as revenue. This resulted in very inflated revenues. Billions were lost in pension funds and stock prices. Many executives were sentenced to prison. The share holders recovered negligible amounts in law suits. The sentences were overturned by Supreme courts. Enron share holders lost huge sums.

It was argued that Enron was not an agent but a merchant and merchants assume risk in buying and trading. Later some other companies followed Enron method of reporting.

Tyco International in2002 three top executives have taken huge loans from the company without share holder’s approval. Many of them were offset as bonuses. Some stock was also sold without informing the share holders. Formal charges were made subsequently one of the executives was freed on 100 million bond, 50 million bond and 1 million bond along with some security in assets.

Bernard Med off former stock broker and chairman NASDAQ operated the largest Ponzi scheme. After arrest by FBI, Bernard was released on $ 10 billion bail with only two cosigners instead of the usual four, and the judge ordered confinement to his Apartment. Revoking bail was requested by prosecution as some jewelry was moving out of Bernard place but Judge merely ordered inventory of Bernard’s personals and searching his mail.

He pleaded guilty on all counts and was incarcerated at Federal Correction complex in North Carolina.

Harshad Mehta exploited the loop holes in the banking system and diverted Rs.4000 crores (Rs 40 billion) from banks to stock brokers. He was an employee in Insurance employee. He was charged with 72 criminal offences and eventually died in 2002.

Share holders lost huge sums of money

Ramalinga Raju of the Satyam Computers created fictitious assets to real ones, involving Rs 80 billion, carried inflated cash and bank balances which were non-existing. He is jail along with his brother and an accountant. Stock went down steeply .Government of India appointed a special board who subsequently handed over the company to another Corporation

Imagine you owning stock in any of the above companies. You have left the stock for a few years saw the stock moving up fast and waited because you did not want to lose out on the gains it might have and suddenly you find this happening. This was the fate of many investors, not milliners, but just ordinary men like you and me

At the altar it seems like the company law and powers of the board of Directors, the appointment of board of directors and the powers of the Chairman and board of Directors seem to be begging for some alterations.

The mere inclusion of external directors suggested by Sarbanes- Oxley act 2002 does not seem to be enough as they are possible suggested by the Chief Executive, Managing Director or similar others who may be able to persuade collusion in voting.

Equally appalling are the loopholes in the judiciary and also the dependence of the politicians on corporate donations for political candidacy

Can We Escape the Wrath of the Scams?

There is no guarantee. We are greedy humans who can be easily lured by high returns.

When high returns are converted into figures all reasoning seems to disappear.

One major factor that is contributing to the ease with which such scams can be enacted is the lethargic investor who does not read the annual report and does not understand the annual report.

1. Get basic finance knowledge .Read the annual report

2. Listen to what is happening to the companies in business coverage channels.

3. Read the magazines that cover special news about companies.

4. Look at the debt position of the company

5. Look at the increase in unusual increases and transfers of assets and funds.

6. Get hold of an annual report of another company which is in similar business.

7. Compare if possible or discuss with some one knowledgeable persons about the anomalies.

8. Develop some friends in the company and get periodic first hand information on how the company is doing.

9. See the ratings given by the financial evaluators to the companies

10. Attend the annual general body meets and also read the quarterly half yearly reports and the resolutions. If required ask what they are about.

11. Question yourself when placing your money in fixed deposits with high interest.

12. Mere payment of quarterly or half yearly interest for a year or two does not mean you are safe, because the game is about to begin yet.

13. Colorful brochures and pamphlets do not give you the security.

14. Using big names also may be fraudulent as the finance companies may be independent and the assets of the other companies cannot be attached so easily.

15. Familiar Directors on Boards also may mean little. Directors reputed with very high integrity levels make an exit as soon as they find something is not right.

16. Many directors are rewarded sumptuously to observe silence.