Mumbai: Roughly three weeks before a first information report (FIR) was filed by Citibank NA against Shivraj Puri, a relationship manager at its Gurgaon branch, in the Rs400 crore fraud case he is suspected to have masterminded, the bank smelt a rat.
An employee at the Gurgaon branch received a call from a fellow professional at a competing bank enquiring about a “solid scheme” that Citibank’s wealth management division was selling, offering 2-3% monthly returns. Such returns were too good to be true.
Also See (Graphic)
Puri was suspended immediately and a police complaint was lodged about suspicious transactions, forgery and criminal activities on 5 December. The regulators, both the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi), and the finance ministry were informed about the alleged fraud over the next few days.
Pramit Jhaveri, the 47-year-old head of the US-based bank’s Indian operations, could not afford to sit on the case.
Foreign banks do not enjoy red carpet treatment in India. They are seeking a bigger presence in the world’s second fastest growing major economy, where consumer and corporate demand for credit is increasing as more and more people buy new homes and cars, and companies expand through capacity additions and acquisitions.
The banking regulator has been conservative. RBI had committed to review its policy on foreign banks in 2009, but that was postponed in the wake of the global credit crisis that followed the collapse in September 2008 of US investment bank Lehman Brothers Holdings Inc. RBI is now willing to allow foreign banks to have larger exposure in India, but the proposal has not yet received the government’s nod.
Anything that tarnishes the image of a foreign bank in India—that too of the 108-year-old Citi, the country’s largest foreign bank by assets—will only jeopardize the plan.
Ever since he took over as India head in April 2009 (till then he was heading Citi’s investment banking division) after the departure of Mark T. Robinson, Jhaveri has been grilled by the media on his plan to sell CitiFinancial, the consumer banking arm that suffered losses as bad assets piled up.
Almost overnight, the focus has shifted to the alleged rogue relationship manager Puri, who seems to have single-handedly taken about 30 investors for a ride and channelled around Rs400 crore to the stock market.
Between 5 December, when the first police complaint was filed, and 27 December, when Puri was arrested, the bank tried to ringfence the problem transactions; appointed one of the big four audit firms to conduct a forensic audit of all transactions related to wealth management; hired law firm Amarchand Mangaldas for legal counsel; and even made Puri sign agreements with some clients who had lost money, promising to return their wealth.
A seven-year veteran at the Gurgaon branch that was opened in 2002—one of 12 Citi branches in northern India— Puri, in his early 30s, started his game sometime in the second half of 2009, but the flow of money became bigger and bigger from September 2010 when the Sensex, the benchmark equity index of the Bombay Stock Exchange, started rising. The Sensex rose some 17% since September to record its lifetime closing high of 21,005 on 5 November.
The Premnath scheme
Puri channelled money into the stock market through two ways. First, he enticed customers with a fake circular purported to have been sent by the capital market regulator, offering an attractively high fixed interest scheme, promising 2-3% returns per month.
The forged circular also mentioned a custodian account run by one Premnath that was passed off as an approved channel to route investor funds. Premnath is Puri’s grandfather.
Once the money was deposited in Premnath’s account, it flowed immediately out of it into three other accounts kept with Citibank—in the names of Sheila Premnath, Deeksha Puri and Shivraj Puri himself. Deeksha is Shivraj’s mother and Sheila his grandmother.
In the third leg of the transaction, the funds moved out of these accounts to brokerage accounts Puri kept with firms such as Religare Securities Ltd, Bonanza Portfolio Ltd, India Infoline Ltd and Normans Martin Brokers Pvt. Ltd. The last one is owned by Raghuraj Puri, Shivraj’s father.
All three legs of a transaction would be completed within one working day. The bulk of the money was routed through the Premnath account and not all customers were Citibank customers. Puri also made about half-a-dozen customers of Citibank sign blank cheques and drafts and other financial instruments, and used these to transfer money out of their accounts directly to the brokerages to be invested in the market.
Well-known venture capitalist Sanjeev Aggarwal is one of them. Aggarwal, managing director of venture capital firm Helion Advisors Pvt. Ltd, filed a police complaint and named Citi’s Indian-born chief executive officer Vikram Pandit, chairman William R. Rhodes, chief financial officer John Gerspach, chief operating officer Douglas Peterson, and Jhaveri, claiming the alleged scam was a systemic failure.
Aggarwal claims to have lost Rs33 crore and alleges that it wouldn’t have beeen possible for an employee to commit fraud of this magnitude without the knowledge of the bank.
He has been a Citibank customer since 2002 and a wealth management customer since 2004. He met the press in Delhi last week and claimed that the bank went back on an initial offer of a “settlement” against his Rs33 crore loss.
Puri’s police custody has been extended and so far no other employee of the bank has been identified as an accomplice. But there are outsiders who seem to have played a role enticing customers. Sanjay Gupta, associate vice-president, Hero Corporate Service Ltd, is one of them.
According to the police, there is a clear money trail moving from the Premnath account to entities such as G2S Management Consultants and BG Finance, owned by Gupta. He, too, is currently under police custody. The promoters of the Hero Group have lost Rs28.75 crore. The group said it was a victim of the multi-crore fraud and that some of its promoters had been duped by Puri.
According to the Hero Group, the investments were a “part of routine treasury operation in what seemed like perfectly legal investment options”. There is suspicion that Gupta may have influenced the decision to put money in the Premnath scheme.
This is something not unique in India. Two years ago, many small and medium enterprises lost money in exotic structured derivative products and in quite a few cases, the chief financial officers (CFOs) of the firms played a critical role in buying such products as many senior executives did not understand them. Some of the CFOs enjoyed cutbacks from banks that sold the products.
Both RBI and Sebi have been investigating the fraud, and trading data from exchanges have been summoned. Puri, it seems, dabbled in Nifty futures and options aggressively.
According to Religare, Puri opened his account in December 2009, and all regular norms, including “know your customer” (KYC) norms, were followed. The brokerage also says “he traded only in derivatives”. Although the account has been frozen recently, trading had stopped “many months back and as on 15 October 2010 the balance had come to paisa 30 (Rs0.30) in his account”. The brokerage also says that all information on this account “was reported several months bank in compliance of Prevention of Money Laundering Act requirement”.
Brokerages are required to report any suspicious transaction to the Financial Intelligence Unit (FIU)—the national agency responsible for receiving, processing, analysing and disseminating information relating to suspect financial transactions to enforcement agencies and foreign FIUs.
How could Puri carry on his business without being detected for so long? The Premnath scheme was too good to be true, but the gullible and greedy high networth individuals who bought into it chose not to question it. The guaranteed return was so high that they did not mind signing cheques and making electronic fund transfers to an individual account touted as a custodian account.
They also did not question the obvious discrepancy that would have been visible between the original Citibank monthly statement of accounts that they would have received directly from the bank and the fake Excel sheet statements that Puri was sending them.
While police authorities and regulators are getting to the bottom of the fraud, there is no denying the fact that the rogue relationship manager has dealt a blow to the fledgling wealth management industry in India, a nation seeing the highest growth in the number of millionaires over the past few years.
Banks are not allowed to offer portfolio management services; they typically sell financial products of insurance and asset management firms. They do not have any discretion on where to put clients’ money and can only advise them on investment avenues for a fee. Citi, which started its wealth management services in 1997, has possibly the largest such business among banks, selling products of 22 asset management firms.
Typically, a relationship manager of Puri’s experience earns Rs12-15 lakh a year, and a portion of the salary is variable, depending on how much business one generates. This can encourage one to entice investors with complex, structured schemes offering high returns, but Puri’s case has been different—he was not routing the funds through the bank.
He was not looking for a higher variable pay, but was looting investors. Citi insiders are hopeful that a part of the money can be recovered and say the bank will follow “the law of the land” when it comes to compensating investors.
The Indian central bank has a compensation policy for such cases, but the nuances aren’t clear in this case. The extent of losses investors may end up suffering isn’t known. Nor is the extent of Citibank’s liability clear.
Bernard Lawrence Madoff, the former stock broker, investment banker and non-executive chairman of the Nasdaq, who was sentenced to 150 years in prison in June 2009 for a $65 billion (nearly Rs3 trillion today) fraud, operated the world’s largest Ponzi scheme for at least two decades.
Madoff admitted in his March 2009 guilty plea that the essence of his scheme was to deposit client money into a Chase Manhattan account rather than invest it and generate steady returns as clients had believed.
We don’t know how Puri could offer such high returns that he did to his clients.
Was he using a new investor’s money to pay an old investor, or was he actually making enough money from the market? Why did the investors fail to see through fake bank statements and the forged Sebi circular? Was it greed or something else? Why did Citi have to wait for a phone call from another wealth manger to detect the fraud?
Even an insignificant amount of inflow and outflow of money to and from any Citi account triggers a text message on mobile phones and a mail on the Internet. Why was there no such alert when money was credited to Premnath’s account and from there flowed into three other accounts within a day?
Many of these questions will be answered once the investigations are complete. For the moment, Citi is as much as a victim of the fraud its clients, but the big job for Jhaveri now is to regain the confidence of its elite clients and refurbish Citi’s image, which claims to be a bank that never sleeps. It can’t afford to be caught napping.
Graphic by Naveen Saini/Mint; photograph by PTI