In this week’s newsletter, we talk about how a Chartered Accountant allegedly defrauded thousands of investors across the world, why companies are AI washing, an exciting challenge for you and more.
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Did Amber Dalal run a Ponzi scheme?
Sometime in the middle of March, 55 investors marched into a police station in Mumbai. They had a common complaint — a man named Amber Dalal had duped them out of crores of rupees.
Now 55 people all saying the same thing was a massive accusation. So the Economic Offences Wing (EOW) decided to take matters into its own hands. And pretty soon, the numbers shocked everyone — Dalal seemed to have taken at least 675 investors for a ride and pocketed a gargantuan sum of ₹400 crores!
It was crazy!
So, the EOW went after Dalal. And on 26th March, Dalal was picked up by the authorities in Uttarakhand.
But how did Dalal cheat all these investors, you ask?
It’s still early days, so we tried to piece together bits from various media reports. And the allegations are that it’s a classic pyramid scheme or a Ponzi scheme. And there are 5 steps to this charade.
Step 1: Promise an insanely high return that would get anyone drooling. In the case of Dalal, it seemed that he told investors that he would pay out 1.5% as interest every month. So if you invested ₹10 lakhs, you’d get ₹15,000 into your bank account without fail.
Step 2: Cook up a story of your prowess. Because if investors question how you’re doing this, you need to seem smart. For instance, when Charles Ponzi (after whom these pyramid schemes are named) devised his nefarious plan in the 1920s, he told everyone that he would make money through arbitrage by buying postal stamps from abroad and selling them at a profit in the US. In the same way, maybe Dalal told people that he would do some “commodity futures” trading. It had to seem smart and believable at the same time.
Step 3: Once you get the first investor to give you ₹10 lakhs, you can take their own money and start returning bits of it to them. Once they see that ₹15,000 hit their account the first few times, they’ll tell their friends about this fantastic investment opportunity. Make everything as genuine as possible with the promises listed out on an “official” stamp paper, humans can’t help but boast a bit and pat themselves on the back. So the key to a good Ponzi scheme is to make them feel like they’ve hit the jackpot, and they can’t wait to tell everyone — friends, relatives — how smart they are.
Step 4: Let word of mouth do its job for you. There’s nothing like a good reference to build trust. If a friend recommends their good experience, you’ll be more likely to be a little lax when doing your own due diligence. But, pick out folks who don’t have much financial awareness or ones who don’t have the time and patience to figure out how to invest their own money. You don’t want people asking questions. And as each new investor comes, the fresh money will be used to repay the old investors — both interest and an exit when they want it. No one will be the wiser.
Step 5: Don’t do anything stupid that’ll draw attention to yourself. Don’t lead a flashy life that’ll make the regulator train its eyes on you. Stay under the radar of journalists who’ll poke their noses into your affairs. And let Step 4 work its evil magic for you.
This, folks, seems to be how Dalal ran his Ponzi scheme too for around 14 years under the garb of “Ritz Consultancy Services Company”.
But not every investor is convinced that this is a scam yet. Here’s a bit from the Indian Express.
A Pune investor said Dalal did not use the Ponzi scheme to do so. “People didn’t invest in Ponzi schemes. They invested money with Dalal with full faith in his investment management ability. After all, for over 20 years he has been in the business. He dealt in arbitrage commodities offering a 22 per cent interest, which went down to 18% after the Ukraine war. Unlike Ponzi schemes which generally last a maximum of 4 to 5 years, Dalal was making regular payouts to investors for years until February 2024 when first-time payouts to some investors were delayed,” the investor said.
A maximum of 5 years?
Maybe the investors hadn’t heard of Bernie Madoff who ran a Ponzi scheme for over 40 years (Madoff says it was closer to 20)! All that Madoff did was talk a big game about an investment strategy, but, in reality, he was depositing investors’ funds in a Chase bank account and paying off old customers with funds from new customers. But that Ponzi scheme meant he kept generating consistent returns and pulled the wool over the eye of Hollywood personalities, Nobel Prize winners, and regular folks for years and years.
So yeah, Dalal being able to do it for 14 years is a very real possibility.
And what’s next for investors?
Well, the entire fiasco is still unravelling so we’ll have to wait and watch. The EOW is also asking SEBI how on earth was this missed for so long. Because for starters, Dalal already had a run in with the regulator earlier. A decade ago, the regulator had found that Dalal’s coterie was involved in rigging the price of a stock called G-TECH Info-Training. So why didn’t the regulator keep on eye on Dalal’s various exploits?
We don’t know. But for now, investors will be hoping that they’ll be able to get at least some part of their hard-earned money. Apparently, the authorities have already invoked the Maharashtra Protection of Interest of Depositors (MPID) Act. And that could mean that his properties will be taken over and auctioned to pay back the investors.
Until then…investors will be keeping their fingers crossed.
What the heck is AI Washing?
Hindenburg Research published a scathing new report about accounting manipulation at a company. Yup, we’re talking about the same Hindenburg that clashed with Adani.
Its latest target?
An American multinational company called Equinix that claims to be a global leader in the data centre market. This means that it has a significant market share in the business of leasing out space to its clients so that they can house servers or network hardware.
And in the past year, its valuation has seen a 30% increase to $80 billion.
But guess why investors are hyped up?
Well, it’s because Equinix has been telling people, “Hey, AI and machine learning will require more power at data centres. And we’re going to sell them the power for their needs. So our revenues are definitely going up.”
And Hindenburg isn’t quite buying that AI hype. The research firm believes that Equinix does not have enough power capacity to power any of this AI demand. So Hindenburg thinks Equinix is simply trying to ride the AI bandwagon by making false claims.
That folks, could be a classic example of AI washing!
It’s a new con in town where companies create false hype about their AI capabilities to attract investors and drive their valuations higher.
And the phenomenon is picking up pace globally. A couple of weeks ago, the US Securities and Exchange Commission (SEC) slapped a $400,000 penalty on two investment advisory companies Delphia (USA) Inc. and Global Predictions Inc. for AI washing.
While Delphia claimed to use AI to predict which companies and trends were about to make it big so that it could invest in them before everyone else, Global Predictions boasted of being the first AI-regulated financial advisor.
But here’s what the SEC Chair Gary Gensler said when the SEC uncovered the truth
We find that Delphia and Global Predictions marketed to their clients and prospective clients that they were using AI in certain ways when, in fact, they were not,
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We’ve seen time and again that when new technologies come along, they can create buzz from investors as well as false claims by those purporting to use those new technologies. Investment advisers should not mislead the public by saying they are using an AI model when they are not. Such AI washing hurts investors.
So why are companies AI washing and how did it even come to this, you ask?
Well, if you remember, 2023 was the year of AI hype. And chipmaker Nvidia was a big winner in the AI gold rush. That year its stock price soared 239% because everyone wanted Nvidia’s powerful graphics processing units (GPUs) to run advanced AI models.
Besides, the ChatGPT-driven generative AI buzz that kicked off in 2022 pushed investors to pump in $29 billion into nearly 700 generative AI deals. That’s a massive 260% increase in value from the previous year! And everyone wants to get on the AI bandwagon. Big Tech and VCs (venture capitalists) don’t want to miss out on the returns from what AI can do in the future.
And that means companies will be tempted to talk up their AI capabilities to drive up their revenues and attract funding from investors too.
In a way, it’s quite reminiscent of instances in the past.
For instance, the most recent one being the metaverse mania. Everyone predicted it would be the future of the internet. Facebook even renamed the parent entity to Meta in October 2021 to signal its ambitions. And by March 2022, the word was mentioned 552 times by 170 companies. It was double the mentions of the previous year and you can bet that many of them may not have harboured serious metaverse ambitions. They might have just wanted to show that they were getting with the times too.
Then you had the dot com craze of the late 1990s where companies randomly added “.com” to their name to attract investors.
Yup, finance professors from Purdue University published a study of 95 companies that added “.com”, “.net” or “Internet” to their names during the dot com craze. And interestingly, they found that on average, the stock prices of such companies increased 74% five days after their name change announcement, as compared to five days before.
And even after the dot com bubble burst, researchers found that the gains that these companies had made with the name change remained. It was permanent! And the researchers called this phenomenon ‘striking’.
If you rewind even further to the 1920s, you’ll find something similar. Airplanes were the shiny new thing back then. And investors got quite manic about it. They all wanted a piece of a company called Seaboard Airlines. Only later did they realise that the company was in the railroad business.
So yeah, AI washing could be history repeating itself. And investors better be careful or they’ll get their fingers burnt in the rush to catch the AI bus.
And that’s all for today folks! If you learned something new, make sure to subscribe to Finshots for more such insights 🙂
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