Friday, April 26, 2013

Beware of Ponzi schemes (or All "good" things always come to an end)


When  Sudipta Sen, CMD of Sharada  Investments was arrested on Tuesday, April 23rd along with two of his accomplices from a picturesque resort  in Sonemarg, near Srinagar in Kashmir; he appeared relaxed as if silently echoing his apprehension expressed a few weeks ago that like Jesus Christ , he’s a small guy with a humble background  fighting a system controlled by the rich & the elite and just like him he too will be crucified one day.  Sen is charged of running a Ponzi scheme whereby he uses multi-level-marketing model to rake in deposits from lakhs of small investors across Bengal, Jharkhand, Assam and Orissa. Sharada would promise exceptionally high returns to entice customers initially and then pay them  back using fresh deposits from new customers. The money was not invested in real businesses that earn returns . Instead close to 30-40% were disbursed to agents and the rest was deposited in the bank or siphoned off to support the luxurious lifestyle of Sen and his organization.

In short , Sharada was running a Ponzi scheme  which is characterized mainly by the following  principles.

 In a Ponzi scheme,

1.      Typically exceptionally high returns are promised to the poor  investors. For the latter, wealth by itself is a reward for survival  in an economy marked by high  unemployment and inflation.

2.       Initially high returns to old deposits are paid from the amount deposited by new entrants till the time new depositors stop entering when the scheme collapses as the payout becomes more than the deposits.

3.      Money is not invested in legitimate businesses that earn fair returns since such returns typically are less than that promised by the scheme and also because the promoters don’t have the expertise to run such businesses.

Charles Ponzi, who has given his surname to  such fraudulent schemes, said something similar to Sen . In 1920, when Charles Ponzi was charged with fraud and grand larceny in Boston he said that  all of his troubles came from the fact that the wealthy were trying to punish him for giving the "little guys" the opportunity to make a high rate of return. Chrales Ponzi had enticed investors in Boston in 1919 by promising 100% returns in 90 days through a grand scheme by which he would  use the opportunity of arbitrage in the prices of international postal coupons among several countries.  It was obvious that Charles Ponzi didn’t use the deposits from thousands of small investors ( it is reported he once collected  one million dollar in three hours flat, in 1919) to buy coupons at low value in Spain and sell them  at high rates in USof A;  not because of his ignorance that such actions at a large scale would reduce the price difference but because he’d put the money in the banks that earned only 5% interest to enable him siphon the profit  off for buying property and leading a luxurious life. 

Robert Schiller in his research paper , “From Efficient market theory to Behavioural finance,”( Journal of Economic Persepctives, volume 17, no 1, winter 2003, pp 84-105, published by Cowells foundation of Yale University) argues in favour of  “feedback theory” in  his seminal paper stating that when speculating prices go up creating success for initial investors, word-of-mouth enthusiasm picks up leading to spiraling upward of such prices until the feedback is disrupted. A Ponzi scheme, according to Schiller is one such real-time experiment where positive feedback from initial success is transmitted swiftly through social network of friends and relatives as well as through  communication media to hook new depositors. Schiller even goes further back to 1630s  to demonstrate his feedback theory . In 1630s, in  Netherlands there was a huge speculative bubble in Tulip Flower bulbs , known famously as “Tulipmania” , that  had occurred precisely due to the feedback mechanism in place till the rich started selling Tulip at 100% profit instead of  buying further Tulip bulbs and a negative feedback was created   taking the prices spirally downward and the event finally crashed.

The initial success and subsequent inevitable downfall of Ponzi schemes are  typically characterized by the highly amplified feedback, positive in the first case and negative in the latter.

Numerous Ponzi schemes have dotted the world  since  Charles Ponzi made them famous. Such schemes hide behind  not-for-profit organisations, portfolio managers, innovative farming techniques, stock-trading firms etc.  Among the most scandalous ones are the following .

Bernie Madoff , once the Chairman of NASDAQ, ran a Ponzi scheme that defrauded investors of 18 Billion US dollars (Rs. 99,000 crores) . Madoff ran his “wealth-management” business  for 17 years among the elite and the wealthy (minimum deposit in his scheme was $20 million (Rs. 110 crores) , paying old clients off from new deposits in the Chase Manhattan Bank. Madoff could do this by manipulating the stock-trading software whereby he backdated trades and created false trade receipts after  calculating returns of the clients. Madoff was arrested in December’2008 based on a complaint by his son and is now serving 150 years in prison.

In 1992, Damara Bertges and Hans Gunther Spachtholz founded the European Kings Club, a "non-profit" association that rallied against big European banks and promised to help the "little guys." They defrauded 94000 Swiss and German investors of $1billion (Rs.5500 crores) after running the scheme for two years. In that scheme, investors bought a club share for 1400 Swiss Francs (Rs. 80,000)  and were assured returns of 200 francs (Rs.11,400)  every month , effectively doubling the investment in 14 months. The positive feedback was so strong here that even during the trial there were loud cheers for the scamsters who finally served 7 years of prison terms.

 Wang Fengyou of Yelishen Tianxi Ltd introduced an ingenious scheme in China in the year 1999 to defraud 1 million investors of $2 billion (Rs.11000 crores) . In this scheme, investors were asked to engage in “ant-farming.” The investors were given a box of ants against $1500 (Rs.82,500) deposit .   To these ants,  every morning as well as in every evening , investors  had to feed sugar & honey and every 3-5 days , they had to feed  egg yolk & cake. But they were prohibited from opening the box. After 10 weeks the workers of Yelishen would take back the ant-boxes for grounding up the ants and converting them into aphrodisiacs to be  sold across 80000 pharmacies across China. For their farming effort, the investors were paid $2000 (Rs. 110,000) after 14 months, a 33% return. Wang’s scheme collapsed in Dec’2007 when he couldn’t pay his depositors and he  was arrested . And , yes the aphrodisiacs worked because they were found to be laced with Sildenafil (the chief ingredient of Viagra).

Sergei Mavrodi, a Russian scamster, in the early ‘90s found a company called MMM, which offered a platform to investors to buy or sell Mavros (unit of currency of MMM with Marvodi’s pictures). Mavrodi would call it a rebellion against the slavery of institutional banks & employers. MMM’s schemes were for helping small people with money. Investors have to join in with a minimum deposit to help others by buying Mavros and their money in real-time would be paid to old investors who needed help and were selling off Mavros. The price of Mavro would be decided twice in a week by Mavrodi himself. MMM defrauded 2 million investors of $1.5 billion ( Rs.8250 crores) before Mavrodi, a member of Duma, the Russian Parliament,   was arrested in 2003 . Mavrodi served prison for5 years and surprise of surprises, he has surfaced in India and running MMM India  as brazenly as Sen.

Closer home in Pakistan, the story of Double Shah had gained prominence. Shah, a science teacher, on his return from Dubai in 2005  promised to double his investors’ money in flat 7 days through some stock-program he said he’d learned in Dubai. Later he extended the period of doubling to 90 days. Double Shah was arrested in 2007 before he had raked in Rs. 4400 crores from 30000 investors. Shah died in prison in Nov’2012 .

In conclusion, Ponzi schemes have never disappeared in the world and they tend to appear   & resurface in areas marked either by unemployment,  lack of regulations or change in socialist regimes. Post the break-up of erstwhile USSR, hundreds of Ponzi scamsters, besides the  Mafia,  had sprung up in Russia to entice gullible  people with a “get-rich-quick” philosophy. Even  Albania, a European country to the north-west of Greece,  after the fall of East-European socialist regime, experienced similar Ponzi schemes. It went to such a disastrous extent that 2 out of 3 Albanians were investors in one of several such fraudulent schemes and the total amount involved was more that 50% of the country’s GDP. When the schemes collapsed in January’1997 there were such huge protests, violence as well as riots that the-then Albanian government  had collapsed. 

Sudipta Sen’s extent of fraud is still not clear. Initial estimates say that he’d have defrauded nearly 4-6  lakh of customers of Rs.1200 crores. Investigations would reveal the actual truth. But the concern is to the wide spread of number of such schemes floated by dubious promoters who public display their closeness to the authorities. Since the business model of all such schemes are the same, it is irrelevant if they have not yet defaulted. Because inevitably they will. If they are not investigated and stopped right now, the schemes will continue to carry forth large number of unsuspecting investors till the schemes collapse under its own weight of heavy redemption. If total number of such schemes are taken, the number may touch, by an estimate,  nearly a crore of investors defrauded by approximately  Rs.20000 crores .   

The uncanny similarity of Sen’s  modus operandi to that of other scamsters suggest the same process of  hobnobbing with government officials of  a state for publicity. Further, Bengal happens to be a state that had just seen an end to 3 decades of communist rule and is marked by large scale unemployment. Maybe the government  should be concerned about its medium-term survival since hundreds of Ponzi schemes are operating in the rural hinterland  with such brazenness and some with  official patronage that in the final analysis, the existing investors should stop further losses, lodge complaints and hope to get some money back from the authorities, if the latter  decide in their wisdom to immediately stop the functioning of similar schemes. New investors  have to necessarily be extra careful about parking their own money in schemes that have the 3 characteristics described earlier.  Am repeating that below.

Any scheme that offers very high Returns, which robs Peter to pay Paul and has no  legitimate business operation should ring alarm bells and should be avoided at all costs. Even a whiff of positive  feedback from friends/agents  bragging about initial successes  should only trigger an alarm but not a day-dream to get rich quick.

Tuesday, April 16, 2013

Shobdo (Sound) : Review of a film by Kaushik Ganguly

Shobdo (meaning sound) is the story of Tarak , a  foley artist (he/she is somebody who recreates sound in a film by producing sound effects )  whose obsession with his craft takes his hearing  to a different sphere of auditory reception whereby he kind of becomes over-sensitive to every sound in his ambient. This obsession  disturb his relationships, whether in work or home. The story of Shobdo is not only about the dramatic journey  of Tarak through clinical observation, diagnosis, rehabilitation and recovery but also a miniature documentary on the art of creation of sound effects. Flapping wings of a flock of pigeons, that's  flying away, is reproduced by fast-flapping a bunch of dried leaves in both hands or  the sound of a closed door being slammed open is re-created by banging two wooden boxes. In the process the viewer's ears are over-sensitised to the sound track of the film itself. And in a clever move, Kaushik Ganguly -the Director of Shobdo- has completely done away with any background  musical score. Suddenly for the first time, one feels the power of audio in a audio-visual presentation. For a while the film empathetically revolves around the way Tarak hears the ambient sound be it the deafening roar of a water-fall or the sharp slice of a plant-scissor or the crunching  of dry food in one's mouth; the viewer is given amplified doses of what Tarak would actually hear.
The duo of Anirban Sengupta/Dipankar Chaki had done a good job in their earlier movie 'Laptop' but they do a superb work here. Sirsha Ray in camera is splendid. Some classic shots like the complete movement of  an old  lift in one frame and then that of two people sleeping in births inside a train compartment are worth remembering. But the best that I liked (audio-visually that is) was the soft-chiming of hanging metals in a moon-lit garden atop a hill.
The performances by actors were relaxed and good; coming as they are from a star-cast. Victor Bannerjee, Srijit Mukherjee, Raima Sen were optimally restrained for the roles they were playing while Ritwik Chatterjee as Tarak was under the skin of the character  right from the start. It would also be a dis-service,  if mention is not made of Churni Ganguly, whose  excellent performance in her trademark-husky voice appeared  to be straight from the heart and fortunately appropriate for Shobdo. Overall. Shobdo is a movie to be enjoyed more with one's ears than eyes specially in a hall with good crispy acoustics. Kaushik Ganguly's   inability to dramatize a story hasn't had a substantial influence on the film  since all other elements appear to have fallen in the right place for Shobdo, which incidentally also won the national award for the best Bengali film in 2012.
JAS Rating: 7  out of 10

Monday, April 15, 2013

Gora (গোরা) by Shaibal Mitra- A book review

Having been initiated to history fairly late in my life, I was aware that the renaissance, that 19th century Bengal under colonial rule is said to have experienced, is not the only one of its kind to happen to Bengal. In the 16th century when Bengal was under sustained Afghan/Abyssinian/ Muslim /Arab rule; two  centuries since the time Lokkhon Sen of the great Sen dynasty escaped un-heroically under an Afghan attack to Srihotto, a spiritual movement (Bhakti Movement of the Bharati cult of the Vaishnavas) under the leadership of Sri Chaitanya spread its scope across modern day Bengal, Jharkhand, Orissa, Bangladesh. Its prime tenet was love and Krishna was the prime deity to be loved. The love for Krishna knew no caste, community, prosperity or creed. It was omnipresent among everybody and the message of love was transmitted through Songkirton (choir singing or chanting of slokas or songs) and Khol, Mridanga, Kortal (all percussion instruments). Bhakti movement spoke of a casteless society and attempted to create one by planning for a dharmya-rajyo ( a religio-theocratic state) to replace the rule of Sultan Hussein Shah, arguably the more-liberated among Muslim rulers of Bengal. The Brahminical rituals of varnasram (caste system) had alienated the majority population for a long time to the extent that education in vedas under the Brahmins was regarded by many as useless and large numbers of the lower caste Hindus were getting converted to Islam either under coercion or choice. Bhakti movement had stopped this religious migration and elevated the ethereal experience of love for Krishna among love for all human beings as the primary goal of mankind.

In the process, Sri Chaitanya spread a culture of politeness, humility, courtesy among his followers. This culture become more pronounced and hence reinforced when Sri Chaitanya became a hermit at the age of 24 and left Nabadwip for travel to further south. The cry for his return spread across the length and breadth of the kingdom (almost akin to the cry that we have heard even in the seventies about Subhas Chandra Bose , the revolutionary nationalist leader of India's first national army) and the people of all castes attempted to set in process the teachings of Bhakti movement of courtesy and love, politeness and humility as a means of remembering Sri Chaitanya. It is this culture and substitution of sanskrit slokas by Bengali lyrics, for easy-adaptation, that led to the creation of the Bengali identity right then in the 16th century.

Partha Chatterjee, sociologist and historian of international repute, indicated the same while writing the introduction of Gora by Shaibal Mitra . According to him, the author has cleverly used the technique of magical realism while writing this biography of Gora (Sri Chaitanya's nick name) where history exists symbiotically with mythology, legends, facts & imagination. But Partha Chatterjee feels that cleverer has been the author's style of narration, which written in the form of a script of a television mega-serial , caters to the entertainment needs of modern popular culture but is careful to deliver the main message, the role of Sri Chaitanya in creating a national identity for Bengalis.

The narration is so effortless that I managed to finish this 623 pages book in two main bursts of reading frenzy. The life of Gora right from his mysterious birth to his sparklingly fair ("gora" in Bengali means one who has fair skin) physical appearance and his education, marriages, renunciations, political mediations and overall his  perpetual-yearning for Krishna are intricately woven into a historical drama of epic proportions, in my humble opinion.

What intrigued me most, when I spontaneously picked this book of Mitra in the Kolkata Book fair held recently, was how a man known for his revolutionary, naxalite past and a strong proponent of hard realism could balance his judgment weaving, as Partha Chatterjee said, "magical realism" into a historical docu-dram of a spiritual movement that was held five hundred years back.

Mitra, who died a month after finishing Gora in Nov'11 at the age of 68, was also my Bengali teacher in Maulana Azad Collge during my plus-two stage. While teaching Debi Choudhurani by Bankim Chattopadhyay as part of the rapid-reader class, Mitra would often break into serious criticism of the medieval domestic rituals that were practiced among the landed gentry of the 18th-19th century. So how could he go further back into history and eagerly write on something as unreal as spiritualism?

But as I delved into the book and got lost among the meandering branches of the novel, I realised that more than a revolutionary or a teacher , Mitra was a great narrator and a scholar who had spent countless hours in digging out stories around Sri Chaitanya from all possible kind of sources.

I only hope that the modern-day sociologists would take note of Mitra's book and find historical verification of the liberation of Brahminical varnasram in Bengal as far back as in the 16th century. For the lay reader, this is a serious rapid-reader material of immense value from a holistic perspective of history of Bengal's first renaissance and for those , spiritually inclined, it reinforces the story of love and its various levels reaching the highest level of yearning for  Krishna's love.