Corporate Fraud in India: Recent Trends & Remedies
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CORPORATE FRAUD-
Recent Trends &
Remedies
Prepared by:
Ms. MANISHA CHAUDHARY
Advocate
CORPORATE FRAUD-
Introduction
•
Corporate Fraud is not a new phenomena. It is prevalent in existence in may
forms, shapes and sizes.
•
Corporate frauds and Scams in India during the recent years have badly
effected the Indian economy and corporates. According to one of survey
conducted by Economic Intelligence Unit sometime in 2015 and report
published in business today, India has one of the high percentages of
companies where fraud, in particular corruption and bribery, was detected.
The history of corporate frauds and scams in India is not unknown for Indians
as Harshad Mehta scam, Satyam Scam, saradha group financial scandal, 2G
Scam etc. has been widely in news at that time.
CORPORATE FRAUD-
Meaning
•
Till the commencement of the Companies Act, 2013, the term fraud has not been
defines in the Indian laws. Even the Indian Penal Code does not touch upon the
fraud directly.
•
Generally Corporate Fraud means the activities done by an individual or
company in a dishonest or illegal manner. It is an act of deception, an
intentional concealment, omission or prevention of truth to gain unlawful
advantage, induce another to part with some valuable item or surrender a legal
right, or inflict injury in some manner.
•
First time in the Indian Corporate History, the Government of India has
provided the definition of fraud in the Companies Act, 2013.
CORPORATE FRAUD-
Definition
•
Pursuant to Explanation (i) to Section 447 of the Companies Act, 2013, fraud, in
relation to affairs of a company or any body corporate, includes any act,
omission, concealment of any fact or abuse of position, committed by any
person or any other person with the connivance in any manner, with intent to
deceive, to gain undue advantage from, or to injure the interest of, the company
or its shareholders or its creditors or any other person, whether or not there is
wrongful gain or wrongful loss.
•
Further explanation (ii) to the aforesaid section provides that “wrongful gains”
means of property to which the gaining is not legally entitled. Similarly
“wrongful loss” means the loss by an unlawful means of property to which the
person losing is legally entitled.
CORPORATE FRAUD-
Penalties
•
Section 447 of the Companies Act, 2013 provides that without prejudice to any
liability including repayment of any debt under this Act or any other law for the
time being in force, any person who is found to be 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 liable to fine which
shall not be less than amount involved in 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 3 years.
[proviso to S 447]
CORPORATE FRAUD-
Instances of fraud mentioned
in the Act
•
There are various section where certain offence amounts to fraud and hence,
accordingly, person responsible will be liable for actions for fraud. Some such
instances are:
•
Incorporation of company based on false or incorrect information, the first
director, first subscriber and professional who made declaration will be liable
for fraud [S. 7(5) and (6)]
•
For untrue, misleading statement in prospectus or inclusion or omission of any
matter. [S. 34]
•
For fraudulently inducing person to invest money [S. 36]
•
For personation for acquisition of securities. [S. 38]
CORPORATE FRAUD-
Instances of fraud mentioned
in the Act
•
Acceptance of deposits with intent to defraud depositors or for any fraudulent
purpose. [S. 75]
•
Cases where auditor of the Company acts in a fraudulent manner. [S. 147 (5)].
•
Where business of the Company is carried on for a fraudulent or unlawful purpose or
with intent to defraud creditors, members or any other person [S. 213]
•
For making any application for removal of name. [S. 248, not yet enforced].
•
For furnishing any false statement, mutilation, destruction of documents during
inspection, inquiry and investigation. [S. 229]
•
For furnishing any false statements etc. [S. 448]
•
For giving false evidence. [S. 449]
CORPORATE FRAUD-
Recent cases
•
After the commencement of the Companies Act, 2013, no major case on corporate fraud
under section 447 of the Companies Act, 2013 has been witnessed which has been decided
by the judicial authorities in India.
•
However, allegation of frauds under the aforesaid section has been mentioned in various
cases filed before various judicial authorities in India.
•
Some of the instances where provisions for fraud has been invoked after the
commencement of Companies Act, 2013 are in the case of default in payment of deposits, in
cases relating to oppression and mismanagement, in the matters relating to schemes of
compromise and arrangements etc. However, no person or company has been penalized till
date under the provisions of Companies Act, 2013.
CORPORATE FRAUD-
Recent cases
•
One of the big and well known case is manipulating the financial
statements case of ‘Satyam Computers’. In ‘Satyam Computers’ case,
where profits were increased, liabilities were hidden and related party
transactions were carried on against the interest of public shareholders.
The Satyam Computer Services scandal was a corporate scandal affecting
India-based company Satyam Computer Services in 2009, in which
chairman Raymalinga Raju confessed that the company's accounts had
been falsified.
CORPORATE FRAUD-
Recent cases
•
The Satyam Computers Case is about corporate governance failure
and fraudulent auditing practices allegedly in connivance with
auditors and chartered accountants. The company misrepresented its
accounts both to its board, stock exchanges, regulators, investors and
all other stakeholders. It is a fraud, which misled the market and
other stakeholders by lying about the company’s financial health.
Even basic facts such as revenues, operating profits, interest
liabilities and cash balances were grossly inflated to show the
company in good health.
CORPORATE FRAUD-
Recent cases
•
The mastermind behind the scam was Satyam Founder- B Ramalinga Raju.
•
He falsified the records of the Company. Raju maintained thorough details of the
Satyam's accounts and minutes of meetings since 2002.
•
Fake invoices and bills were created using software applications such as 'On time' that
was used for calculating hours put in by an employee.
•
A secret programme was allegedly planted in the source code of the official invoice
management system creating a user id 'Super User' with the power to hide or show the
invoices in the system.
•
A web of 356 investment companies was used to allegedly divert funds from Satyam.
CORPORATE FRAUD-
Recent cases
•
These companies had several transactions in the form of inter-corporate investments,
advances and loans within and among them.
•
The cash so raised was used to purchase several thousands of acres of land across Andhra
Pradesh to ride a booming realty market.
•
The role of external third party auditors, who were tasked to ensure that no financial
bungling is undertaken to carry out promoters’ interest or hide facts, have also been
brought to question.
•
Every attempt made to eliminate the gap failed. As Raju put it, "it was like riding a tiger,
not knowing how to get off without being eaten."
CORPORATE FRAUD-
Recent cases
•
Cashing out by selling Maytas Infrastructure and Maytas Properties to Satyam for an
estimated Rs 7,800 crore was the last straw. The attempt failed and Raju made the stunning
confessions three weeks later.
•
On 7 January 2009, the chairman of Satyam, Ramalinga Raju, resigned, confessing that he
had manipulated the accounts by US$1.47-Billion. The global corporate community was
said to be shocked and scandalised.
•
In February 2009, CBI took over the investigation and filed three partial charge sheets
(dated 7 April 2009, 24 November 2009, and 7 January 2010), over the course of the year. All
charges arising from the discovery phase were later merged into a single charge sheet.
CORPORATE FRAUD-
Recent cases
•
Pearls Group Scam of Rs. 45,000 crore is one of the biggest scam
reported in Real Estate Sector in India, recently. According to
news published in various newspapers, Pearls group collected
money from investors through its various agents across India,
who approached people to put their saving into scheme run by
two of Pearls group company namely Pearls Agrotech
Corporation Ltd (PACL) and Pearls Golden Forests Ltd (PGF).
CORPORATE FRAUD-
Recent cases
•
The collective schemes were offered to people for booking a plot which was
decided by PACL. The company then used the money to book properties in
various parts of the country, on which investors were offered 12.5% annual
return as well. In ponzi schemes, returns are given to investors from the money
collected from other depositors in a pyramid-like structure. Recently, CBI
arrested chairman-cum-managing director of PACL and PGF Nirmal Singh
Bhangoo and three other top officials in connection with Rs 45,000-crore pozi
scam case. It is estimated that close to 5.5 crore investors were duped by the
investment scheme.
CORPORATE FRAUD-
Recent cases
•
No list of corporate screw-ups would be complete without a good old-fashioned
accounting scandal. In September, electronics conglomerate Toshiba admitted that it
had overstated its earnings by nearly $2 billion over seven years, more than four
times its initial estimate in April. CEO and President Hisao Tanaka resigned from the
firm, and an independent investigators found that “Toshiba had a corporate culture
in which management decisions could not be challenged” and “Employees were
pressured into inappropriate accounting by postponing loss reports or moving
certain costs into later years.” [As reported by Fortune- The 5 Biggest Corporate
Scandals of 2015]
CORPORATE FRAUD-
Recent cases
•
The other fraud reported by the Fortune was about Valeant, a
famous drug company in USA. In October, short seller Andrew
Left accused drug company Valeant of using a specialty pharmacy
company Philidor to artificially inflate its sales. Valeant denied the
charges. But the fact that Valeant had never discussed its close ties
to Philidor raised questions about Valeant's, and Philidor's, sales
practices. It also shook investors' confidence in the acquisitive drug
company, which had racked up debt as it did deals.
CORPORATE FRAUD-
Recent cases
•
Valeant VRX -21.12% could still be on the hook if Philidor broke any laws. Valeant employees appear to have
worked at Philidor under aliases to hide their identities. And Valeant had paid $100 million for an an
undisclosed option to acquire Philidor for no additional dollars whenever it wanted, essentially giving Valeant
ownership of the company.
•
Valeant has appointed a special committee of its board, and an outside investigator, to look into the company's
ties to Philidor, but it has yet to report its findings. Valeant said that Philidor sales never amounted to more than
7% of its total sales. Valeant's shares fell 75% in the wake of these revelations, to just over $70 from a high of
$260.
•
Many well known hedge funders, including Bill Ackman, who has defended the company, suffered big losses
on Valeant stock in the wake of the scandal.
CORPORATE FRAUD-
Recent cases
•
On June 29, 2016, in Newark, New Jersey, John Y. Lee, a/k/a “Yong Kook Lee,” of West
New York, was sentenced to 75 months in prison, three years of supervised release and
ordered to pay restitution to Samsung America Inc. of $1,693,271. Lee previously pleaded
guilty to wire fraud and subscribing to false individual income tax returns. According to
court documents, Lee was involved in an elaborate scheme to embezzle funds from
Samsung America, a Ridgefield Park-based global trading and investment company and
American subsidiary of the Korean conglomerate Samsung Corp.
CORPORATE FRAUD-
Recent cases
•
In September 2000, Lee created a fictitious entity that he called the Engelhard Supple (sic)
Co. to make it appear as though that entity was actually Engelhard Corp., a provider of
metal refining services. Lee created numerous false financial documents to make it appear
that Samsung Corning Precision Glass Ltd., a joint venture involving the Samsung
Corporation and Corning Inc., had ordered services from Engelhard when in fact, no real
services had been ordered or provided. Lee induced Samsung America to wire money
directly into a bank account Lee controlled. The loss to the company was between $1
million and $2.5 million. Lee also signed and filed a 2006 Individual Income Tax Return that
failed to include $339,138 he had embezzled from Samsung America in 2006.
CORPORATE FRAUD-
Recent cases
•
On April 19, 2016, in Charlotte, North Carolina, Jerry Wayne Overcash, of Charlotte, and John
Bernard Thigpen, of Rock Hill, South Carolina, were sentenced to 46 months and 21 months in
prison, respectively. Each were also sentenced to two years of supervised release and ordered to
pay $1.3 million in restitution. Both previously pleaded guilty to wire fraud charges. According to
court documents, Thigpen, a certified public accountant, was the CFO, and Overcash was a co-
founder of CenterCede Services Inc. (CenterCede), a payroll services company. Contrary to their
representations to clients, Overcash and Thigpen did not pay the clients’ federal taxes in
appropriate amounts and by the applicable deadlines. Instead, they diverted the funds to pay their
own exorbitant salaries and to cover growing liabilities, including the tax liabilities of other
CenterCede clients. Thigpen, Overcash and another individual defrauded CenterCede’s payroll
clients of more than $2 million dollars.
CORPORATE FRAUD-
Recent cases
•
On April 6, 2016, in Oklahoma City, Oklahoma, Helen Rose Dewey was sentenced to 37
months in prison, three years of supervised release and ordered to pay $974,034 in
restitution to the public works authority and $233,674 in restitution to the IRS. Dewey
pleaded guilty on Nov. 12, 2015, to wire fraud and tax fraud. According to court
documents, in 2010, Dewey became the executive assistant to the director of a waste water
treatment plant which was owned and operated by a public works authority. As part of her
duties, Dewey was authorized to use the public works authority credit cards to make
purchases for the wastewater treatment plant. Beginning in January 2008 and continuing to
August 2013, Dewey embezzled from the authority by using the credit cards to make
unauthorized purchases. In addition, during 2012 and 2013, Dewey embezzled money from
the petty cash fund. To conceal her activity, Dewey altered purchase orders and blocked
out itemized purchases listed on receipts and falsified claims for approval and payment by
the authority. Dewey also falsified her federal tax return for 2012 by grossly under-
reporting her income.
CORPORATE FRAUD-
Recent cases
•
On March 29, 2016, in Greensboro, North Carolina, Kenneth Dale Stainback, of Burlington,
and Stephen Ray Smith, of Mebane, were sentenced to 14 months and six months in prison,
respectively. Both defendants were also sentenced to three years of supervised release and
ordered to pay $158,530 in restitution to the IRS for the corporate tax loss and $8,000 in
fines. Both were also ordered to pay restitution to the IRS for their individual tax loss.
According to court documents, Stainback, the secretary of McClure Funeral Service
(McClure), and his business partner, Smith, president of McClure and former president of
the North Carolina Board of Funeral Service, conspired to defraud the United States by
filing false corporate tax returns for McClure. Stainback, Smith and another co-conspirator
bought McClure in 2004 and began diverting gross receipts from the business and omitting
that income from the corporation’s tax returns. The co-conspirators opened checking
accounts to divert funds from McClure, pocketed cash payments and deleted and altered
invoices in the business’s accounting system. During the 2009 through 2012 fiscal years,
Stainback, Smith and the other co-conspirator diverted more than $419,000 from McClure.
CORPORATE FRAUD-
Recent cases
•
On Jan. 21, 2016, in Sacramento, California, Brent Lee Newbold, of Granite Bay, was
sentenced to 51 months in prison and ordered to pay more than $2.9 million in restitution.
On Sept. 3, 2015, Newbold pleaded guilty to a scheme to defraud investors that ran from
October 2007 to January 2010. Newbold was the chief executive officer of Holy Cow, a
business that produced a “green” cleaning product. According to court documents,
Newbold made a variety of misrepresentations to investors about the financial health of the
company, including the company’s debt levels and how invested funds would be used.
Between July 2008 and January 2010, Newbold solicited 13 individual investors and falsely
claimed that he was authorized to act on behalf of Holy Cow; that he owned Holy Cow;
that he owned the majority of Holy Cow stock; and that Holy Cow was financially sound,
stable and profitable. In some cases, Newbold provided his individual investors with false
Holy Cow stock certificates, false Holy Cow purchase order reports, and corporate
promissory notes. In fact, Holy Cow bore a significant amount of debt, and Newbold
continued to take additional debt related to Holy Cow. Newbold used investor funds for
nonbusiness purposes, diverting it to himself and his wife, paying his mortgage, and
paying previous investors. By December 2009, Spence Enterprises put Holy Cow into
bankruptcy as a result of the unauthorized and undisclosed debt. The loss amount was over
$2.9 million.
CORPORATE FRAUD-
Remedies
•
It is well said that prevention is better than cure. Accordingly, before entering into any
transaction with any company, the stakeholders should make full enquiry into the affairs of
the company. They should take adequate advise from professionals for the same. They
should go through full documents of the scheme in question before entering into that.
•
The corporate should have adequate number of independent directors on its board that
have expertise in the filed of finance, corporate, securities laws etc. Further there should be
adequate Whistle Blower Machanism, vigil mechanism. Compliance of all laws can be
ensured through appointment of team of compliance officer which includes professionals
having knowledge of different laws applicable on the company.
CORPORATE FRAUD-
Remedies
•
Further in case of Fraud happen in any corporate under Companies
Act, 2013, the victim may approach the appropriate judicial authorities
under the Companies Act, 2013.
•
According to section 435 (1) of the Companies Act, 2013, Special Courts
may try an offence punishable under this Act with imprisonment of 2
years or more. Any other offence shall be tried, as the case may be, by a
Metropolitan Magistrate or a Judicial Magistrate of First Class having
jurisdiction to try any offence under this Act or under any previous
company law.
CORPORATE FRAUD-
Remedies
•
Further pursuant to Section 206(1) of the Companies Act, 2013, any person may
file an application to ROC for investigation of affairs of the company. Upon
receiving of such information, ROC, if thinks fit, may order for inspection and
investigation of the affairs of the company. If during such investigation and
inspection, it is found that business of the Company has been or is been
conducted for a fraudulent purpose, then suitable actions under section 447 of
the Companies Act, 2013 may be taken [S. 206(5)].
Further pursuant to section
212 (1) of the Companies Act, 2013, If the Central Government forms the
opinion that investigation into the affairs of the company shall be conducted by
Serious Fraud Investigation Officer (SFIO), then investigation may be assigned
to SFIO.
CORPORATE FRAUD-
Remedies
•
Similarly, NCLT may try the offence during the course of winding up of the company
under Section 337 (Penalty for frauds by officers), Section 338 (Liability where proper
books accounts not kept), Section 339 (Liability for fraudulent conduct of business) and
340 (Power of the tribunal to assess damages against delinquent directors, etc.)
•
It is pertinent to be noted that provisions of Section 337 to 341 shall apply mutatis
mutandis, in relation to an application made to NCLT under section 241 (oppression and
mismanagement) and section 245 (Class Action Suit).
THANK YOU
Corporate fraud in India has had a significant impact on the economy and businesses in recent years. This article explores the meaning, definition, and penalties associated with corporate fraud under the Companies Act, 2013. It discusses various fraud cases in India and the consequences for those found guilty of fraudulent activities.
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Presentation Transcript
CORPORATE FRAUD- Recent Trends & Remedies Prepared by: Ms. MANISHA CHAUDHARY Advocate www.ukca.in
CORPORATE FRAUD-Introduction Corporate Fraud is not a new phenomena. It is prevalent in existence in may forms, shapes and sizes. Corporate frauds and Scams in India during the recent years have badly effected the Indian economy and corporates. According to one of survey conducted by Economic Intelligence Unit sometime in 2015 and report published in business today, India has one of the high percentages of companies where fraud, in particular corruption and bribery, was detected. The history of corporate frauds and scams in India is not unknown for Indians as Harshad Mehta scam, Satyam Scam, saradha group financial scandal, 2G Scam etc. has been widely in news at that time.
CORPORATE FRAUD-Meaning Till the commencement of the Companies Act, 2013, the term fraud has not been defines in the Indian laws. Even the Indian Penal Code does not touch upon the fraud directly. Generally Corporate Fraud means the activities done by an individual or company in a dishonest or illegal manner. It is an act of deception, an intentional concealment, omission or prevention of truth to gain unlawful advantage, induce another to part with some valuable item or surrender a legal right, or inflict injury in some manner. First time in the Indian Corporate History, the Government of India has provided the definition of fraud in the Companies Act, 2013.
CORPORATE FRAUD-Definition Pursuant to Explanation (i) to Section 447 of the Companies Act, 2013, fraud, in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position, committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interest of, the company or its shareholders or its creditors or any other person, whether or not there is wrongful gain or wrongful loss. Further explanation (ii) to the aforesaid section provides that wrongfulgains means of property to which the gaining is not legally entitled. Similarly wrongfulloss means the loss by an unlawful means of property to which the person losing is legally entitled.
CORPORATE FRAUD-Penalties Section 447 of the Companies Act, 2013 provides that without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be 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 liable to fine which shall not be less than amount involved in 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 3 years. [proviso to S 447]
CORPORATE FRAUD- Instances of fraud mentioned in the Act There are various section where certain offence amounts to fraud and hence, accordingly, person responsible will be liable for actions for fraud. Some such instances are: Incorporation of company based on false or incorrect information, the first director, first subscriber and professional who made declaration will be liable for fraud [S. 7(5) and (6)] For untrue, misleading statement in prospectus or inclusion or omission of any matter. [S. 34] For fraudulently inducing person to invest money [S. 36] For personation for acquisition of securities. [S. 38]
CORPORATE FRAUD- Instances of fraud mentioned in the Act Acceptance of deposits with intent to defraud depositors or for any fraudulent purpose. [S. 75] Cases where auditor of the Company acts in a fraudulent manner. [S. 147 (5)]. Where business of the Company is carried on for a fraudulent or unlawful purpose or with intent to defraud creditors, members or any other person [S. 213] For making any application for removal of name. [S. 248, not yet enforced]. For furnishing any false statement, mutilation, destruction of documents during inspection, inquiry and investigation. [S. 229] For furnishing any false statements etc. [S. 448] For giving false evidence. [S. 449]
CORPORATE FRAUD-Recent cases After the commencement of the Companies Act, 2013, no major case on corporate fraud under section 447 of the Companies Act, 2013 has been witnessed which has been decided by the judicial authorities in India. However, allegation of frauds under the aforesaid section has been mentioned in various cases filed before various judicial authorities in India. Some of the instances where provisions for fraud has been invoked after the commencement of Companies Act, 2013 are in the case of default in payment of deposits, in cases relating to oppression and mismanagement, in the matters relating to schemes of compromise and arrangements etc. However, no person or company has been penalized till date under the provisions of Companies Act, 2013.
CORPORATE FRAUD-Recent cases One of the big and well known case is manipulating the financial statements case of SatyamComputers . In SatyamComputers case, where profits were increased, liabilities were hidden and related party transactions were carried on against the interest of public shareholders. The Satyam Computer Services scandal was a corporate scandal affecting India-based company Satyam Computer Services in 2009, in which chairman Raymalinga Raju confessed that the company's accounts had been falsified.
CORPORATE FRAUD-Recent cases The Satyam Computers Case is about corporate governance failure and fraudulent auditing practices allegedly in connivance with auditors and chartered accountants. The company misrepresented its accounts both to its board, stock exchanges, regulators, investors and all other stakeholders. It is a fraud, which misled the market and other stakeholders by lying about the company s financial health. Even basic facts such as revenues, operating profits, interest liabilities and cash balances were grossly inflated to show the company in good health.
CORPORATE FRAUD-Recent cases The mastermind behind the scam was Satyam Founder- B Ramalinga Raju. He falsified the records of the Company. Raju maintained thorough details of the Satyam's accounts and minutes of meetings since 2002. Fake invoices and bills were created using software applications such as 'On time' that was used for calculating hours put in by an employee. A secret programme was allegedly planted in the source code of the official invoice management system creating a user id 'Super User' with the power to hide or show the invoices in the system. A web of 356 investment companies was used to allegedly divert funds from Satyam.
CORPORATE FRAUD-Recent cases These companies had several transactions in the form of inter-corporate investments, advances and loans within and among them. The cash so raised was used to purchase several thousands of acres of land across Andhra Pradesh to ride a booming realty market. The role of external third party auditors, who were tasked to ensure that no financial bungling is undertaken to carry out promoters interest or hide facts, have also been brought to question. Every attempt made to eliminate the gap failed. As Raju put it, "it was like riding a tiger, not knowing how to get off without being eaten."
CORPORATE FRAUD-Recent cases Cashing out by selling Maytas Infrastructure and Maytas Properties to Satyam for an estimated Rs 7,800 crore was the last straw. The attempt failed and Raju made the stunning confessions three weeks later. On 7 January 2009, the chairman of Satyam, Ramalinga Raju, resigned, confessing that he had manipulated the accounts by US$1.47-Billion. The global corporate community was said to be shocked and scandalised. In February 2009, CBI took over the investigation and filed three partial charge sheets (dated 7 April 2009, 24 November 2009, and 7 January 2010), over the course of the year. All charges arising from the discovery phase were later merged into a single charge sheet.
CORPORATE FRAUD-Recent cases Pearls Group Scam of Rs. 45,000 crore is one of the biggest scam reported in Real Estate Sector in India, recently. According to news published in various newspapers, Pearls group collected money from investors through its various agents across India, who approached people to put their saving into scheme run by two of Pearls group company namely Pearls Agrotech Corporation Ltd (PACL) and Pearls Golden Forests Ltd (PGF).
CORPORATE FRAUD-Recent cases The collective schemes were offered to people for booking a plot which was decided by PACL. The company then used the money to book properties in various parts of the country, on which investors were offered 12.5% annual return as well. In ponzi schemes, returns are given to investors from the money collected from other depositors in a pyramid-like structure. Recently, CBI arrested chairman-cum-managing director of PACL and PGF Nirmal Singh Bhangoo and three other top officials in connection with Rs 45,000-crore pozi scam case. It is estimated that close to 5.5 crore investors were duped by the investment scheme.
CORPORATE FRAUD-Recent cases No list of corporate screw-ups would be complete without a good old-fashioned accounting scandal. In September, electronics conglomerate Toshiba admitted that it had overstated its earnings by nearly $2 billion over seven years, more than four times its initial estimate in April. CEO and President Hisao Tanaka resigned from the firm, and an independent investigators found that Toshiba had a corporate culture in which management decisions could not be challenged and Employees were pressured into inappropriate accounting by postponing loss reports or moving certain costs into later years. [As reported by Fortune- The 5 Biggest Corporate Scandals of 2015]
CORPORATE FRAUD-Recent cases The other fraud reported by the Fortune was about Valeant, a famous drug company in USA. In October, short seller Andrew Left accused drug company Valeant of using a specialty pharmacy company Philidor to artificially inflate its sales. Valeant denied the charges. But the fact that Valeant had never discussed its close ties to Philidor raised questions about Valeant's, and Philidor's, sales practices. It also shook investors' confidence in the acquisitive drug company, which had racked up debt as it did deals.
CORPORATE FRAUD-Recent cases Valeant VRX -21.12% could still be on the hook if Philidor broke any laws. Valeant employees appear to have worked at Philidor under aliases to hide their identities. And Valeant had paid $100 million for an an undisclosed option to acquire Philidor for no additional dollars whenever it wanted, essentially giving Valeant ownership of the company. Valeant has appointed a special committee of its board, and an outside investigator, to look into the company's ties to Philidor, but it has yet to report its findings. Valeant said that Philidor sales never amounted to more than 7% of its total sales. Valeant's shares fell 75% in the wake of these revelations, to just over $70 from a high of $260. Many well known hedge funders, including Bill Ackman, who has defended the company, suffered big losses on Valeant stock in the wake of the scandal.
CORPORATE FRAUD-Recent cases On June 29, 2016, in Newark, New Jersey, John Y. Lee, a/k/a Yong Kook Lee, of West New York, was sentenced to 75 months in prison, three years of supervised release and ordered to pay restitution to Samsung America Inc. of $1,693,271. Lee previously pleaded guilty to wire fraud and subscribing to false individual income tax returns. According to court documents, Lee was involved in an elaborate scheme to embezzle funds from Samsung America, a Ridgefield Park-based global trading and investment company and American subsidiary of the Korean conglomerate Samsung Corp.
CORPORATE FRAUD-Recent cases In September 2000, Lee created a fictitious entity that he called the Engelhard Supple (sic) Co. to make it appear as though that entity was actually Engelhard Corp., a provider of metal refining services. Lee created numerous false financial documents to make it appear that Samsung Corning Precision Glass Ltd., a joint venture involving the Samsung Corporation and Corning Inc., had ordered services from Engelhard when in fact, no real services had been ordered or provided. Lee induced Samsung America to wire money directly into a bank account Lee controlled. The loss to the company was between $1 million and $2.5 million. Lee also signed and filed a 2006 Individual Income Tax Return that failed to include $339,138 he had embezzled from Samsung America in 2006.
CORPORATE FRAUD-Recent cases On April 19, 2016, in Charlotte, North Carolina, Jerry Wayne Overcash, of Charlotte, and John Bernard Thigpen, of Rock Hill, South Carolina, were sentenced to 46 months and 21 months in prison, respectively. Each were also sentenced to two years of supervised release and ordered to pay $1.3 million in restitution. Both previously pleaded guilty to wire fraud charges. According to court documents, Thigpen, a certified public accountant, was the CFO, and Overcash was a co- founder of CenterCede Services Inc. (CenterCede), a payroll services company. Contrary to their representations to clients, Overcash and Thigpen did not pay the clients federal taxes in appropriate amounts and by the applicable deadlines. Instead, they diverted the funds to pay their own exorbitant salaries and to cover growing liabilities, including the tax liabilities of other CenterCede clients. Thigpen, Overcash and another individual defrauded CenterCede s payroll clients of more than $2 million dollars.
CORPORATE FRAUD-Recent cases On April 6, 2016, in Oklahoma City, Oklahoma, Helen Rose Dewey was sentenced to 37 months in prison, three years of supervised release and ordered to pay $974,034 in restitution to the public works authority and $233,674 in restitution to the IRS. Dewey pleaded guilty on Nov. 12, 2015, to wire fraud and tax fraud. According to court documents, in 2010, Dewey became the executive assistant to the director of a waste water treatment plant which was owned and operated by a public works authority. As part of her duties, Dewey was authorized to use the public works authority credit cards to make purchases for the wastewater treatment plant. Beginning in January 2008 and continuing to August 2013, Dewey embezzled from the authority by using the credit cards to make unauthorized purchases. In addition, during 2012 and 2013, Dewey embezzled money from the petty cash fund. To conceal her activity, Dewey altered purchase orders and blocked out itemized purchases listed on receipts and falsified claims for approval and payment by the authority. Dewey also falsified her federal tax return for 2012 by grossly under- reporting her income.
CORPORATE FRAUD-Recent cases On March 29, 2016, in Greensboro, North Carolina, Kenneth Dale Stainback, of Burlington, and Stephen Ray Smith, of Mebane, were sentenced to 14 months and six months in prison, respectively. Both defendants were also sentenced to three years of supervised release and ordered to pay $158,530 in restitution to the IRS for the corporate tax loss and $8,000 in fines. Both were also ordered to pay restitution to the IRS for their individual tax loss. According to court documents, Stainback, the secretary of McClure Funeral Service (McClure), and his business partner, Smith, president of McClure and former president of the North Carolina Board of Funeral Service, conspired to defraud the United States by filing false corporate tax returns for McClure. Stainback, Smith and another co-conspirator bought McClure in 2004 and began diverting gross receipts from the business and omitting that income from the corporation s tax returns. The co-conspirators opened checking accounts to divert funds from McClure, pocketed cash payments and deleted and altered invoices in the business s accounting system. During the 2009 through 2012 fiscal years, Stainback, Smith and the other co-conspirator diverted more than $419,000 from McClure.
CORPORATE FRAUD-Recent cases On Jan. 21, 2016, in Sacramento, California, Brent Lee Newbold, of Granite Bay, was sentenced to 51 months in prison and ordered to pay more than $2.9 million in restitution. On Sept. 3, 2015, Newbold pleaded guilty to a scheme to defraud investors that ran from October 2007 to January 2010. Newbold was the chief executive officer of Holy Cow, a business that produced a green cleaning product. According to court documents, Newbold made a variety of misrepresentations to investors about the financial health of the company, including the company s debt levels and how invested funds would be used. Between July 2008 and January 2010, Newbold solicited 13 individual investors and falsely claimed that he was authorized to act on behalf of Holy Cow; that he owned Holy Cow; that he owned the majority of Holy Cow stock; and that Holy Cow was financially sound, stable and profitable. In some cases, Newbold provided his individual investors with false Holy Cow stock certificates, false Holy Cow purchase order reports, and corporate promissory notes. In fact, Holy Cow bore a significant amount of debt, and Newbold continued to take additional debt related to Holy Cow. Newbold used investor funds for nonbusiness purposes, diverting it to himself and his wife, paying his mortgage, and paying previous investors. By December 2009, Spence Enterprises put Holy Cow into bankruptcy as a result of the unauthorized and undisclosed debt. The loss amount was over $2.9 million.
CORPORATE FRAUD-Remedies It is well said that prevention is better than cure. Accordingly, before entering into any transaction with any company, the stakeholders should make full enquiry into the affairs of the company. They should take adequate advise from professionals for the same. They should go through full documents of the scheme in question before entering into that. The corporate should have adequate number of independent directors on its board that have expertise in the filed of finance, corporate, securities laws etc. Further there should be adequate Whistle Blower Machanism, vigil mechanism. Compliance of all laws can be ensured through appointment of team of compliance officer which includes professionals having knowledge of different laws applicable on the company.
CORPORATE FRAUD-Remedies Further in case of Fraud happen in any corporate under Companies Act, 2013, the victim may approach the appropriate judicial authorities under the Companies Act, 2013. According to section 435 (1) of the Companies Act, 2013, Special Courts may try an offence punishable under this Act with imprisonment of 2 years or more. Any other offence shall be tried, as the case may be, by a Metropolitan Magistrate or a Judicial Magistrate of First Class having jurisdiction to try any offence under this Act or under any previous company law.
CORPORATE FRAUD-Remedies Further pursuant to Section 206(1) of the Companies Act, 2013, any person may file an application to ROC for investigation of affairs of the company. Upon receiving of such information, ROC, if thinks fit, may order for inspection and investigation of the affairs of the company. If during such investigation and inspection, it is found that business of the Company has been or is been conducted for a fraudulent purpose, then suitable actions under section 447 of the Companies Act, 2013 may be taken [S. 206(5)]. Further pursuant to section 212 (1) of the Companies Act, 2013, If the Central Government forms the opinion that investigation into the affairs of the company shall be conducted by Serious Fraud Investigation Officer (SFIO), then investigation may be assigned to SFIO.
CORPORATE FRAUD-Remedies Similarly, NCLT may try the offence during the course of winding up of the company under Section 337 (Penalty for frauds by officers), Section 338 (Liability where proper books accounts not kept), Section 339 (Liability for fraudulent conduct of business) and 340 (Power of the tribunal to assess damages against delinquent directors, etc.) It is pertinent to be noted that provisions of Section 337 to 341 shall apply mutatis mutandis, in relation to an application made to NCLT under section 241 (oppression and mismanagement) and section 245 (Class Action Suit).
