How Brokers Sidestep SEBI Rules To Rip-off Investors: Now Targeting Super Senior Citizens
The pandemic has been a flourishing time for the brokerage business. India’s investor population nearly doubled, as people from the age of 9 years to 90 years turned into traders after a quick online class. Brokers used this boom during the lock-down to lure and loot people with well-laid traps backed by the façade of technical compliance with the rules. The two stories I will narrate, to caution investors, are chilling enough to jolt even a cynic like me who has reported a variety of scams for over 30 years.
 
Since 2016, the Securities and Exchange Board of India (SEBI) has issued multiple circulars to tighten compliance and reporting requirements for brokers. In 2018, it issued rules to prevent unauthorised trading by stockbrokers and put in place an early warning system. Yet, we have 32 broker failures over 2.5 years at the National Stock Exchange (NSE) and unreported stories like the one I plan to narrate. (Names have been changed to protect the individuals and their families.)
 
No Safe Holdings
The first case is that of 82-year-old Pestonji whose modest portfolio included many dud shares. He was contacted by a smooth-talking broker-employee, Mohandas (relationship manager) who persuaded him to open a trading account so that he could help him clean up his lifetime portfolio—get rid of junk shares and buy good shares. Most super-senior citizens still struggle with physical shares and technology, so Pestonji thought Mohandas was a godsend, little knowing he was the devil incarnate.
 
Pestonji quickly signed blank forms presented by Mohandas to open a trading account. As an afterthought, he did ask to verify the forms but Mohandas smoothly told him they were forwarded to Delhi and he did not have a copy. Pestonji had no reason to suspect foul play.
 
From then on, Mohandas began to tutor Pestonji to place derivatives trades that led to losses and only built up large frothy volumes to earn brokerage fees. So a man, who had never traded more than Rs5 lakh a year, suddenly had derivatives trades of Rs1.32 crore in two months with a mere Rs255 credited to his account as earnings and no explanation. The total trades were over Rs6.25 crore.
 
Mohandas ensured technical compliance with all SEBI regulations with regard to margin and ledger statements, emails and SMS messages. An unsuspecting Pestonji was tutored to place specific orders for transactions he did not understand on calls from the broker. Pretty soon, he was selling his core portfolio to meet debits. 
 
All this happened in 2020 after the lock-down. Pestonji, finally, realised he was badly duped and filed complaints with the cyber-crime division of the police and with NSE’s grievance redress committee (GRC). Expectedly, the broker’s representative was fully prepared to show how Pestonji had full knowledge of derivatives trading and made all the decisions himself. 
 
At the GRC hearing, the brokerage firm produced a letter which said that Pestonji had ‘unconditionally withdrawn’ his police complaint in November 2021. This letter was also signed by two family members. Behind this is a story of brazen coercion. The brokerage firm had frozen the demat accounts of all three family members putting them in an untenable position and creating a situation where they perhaps preferred to take losses of a few lakh rupees rather than have their core investments locked up in expensive and never-ending litigation for years. 
 
A brokerage firm is not even a bank; yet, it has the temerity to arrogate to itself the extraordinary power to illegally freeze the demat accounts of family members and lock up their lifetime investments. The broker had the audacity to do so, because grievance redress in India is poor—almost non-existent—and our courts as well as regulators fail to award exemplary damages to victims. 
 
Fortunately, the GRC saw through the charade. It asked for call recordings. The broker submitted 14 recordings for 100+ trades, of which only 11 related to order placement.  Of these, Mohandas initiated all but three calls. The recordings also indicated that Pestonji was placing orders as tutored by Mohandas. The clincher was that, in most cases, Mohandas did not even bother to ask Pestonji the price at which a particular currency option should be sold—they were simply sold at market price. GRC also accepted Pestonji’s contention that he signed the unconditional withdrawal under duress since family accounts were frozen and ruled in his favour. The amount involved was a mere Rs6.13 lakh, which explains the family’s reluctance to fight.
 
Looting the Family via Mother’s Trade
The next one is a pure horror story and should serve as a warning to those with multiple family accounts with a brokerage firm. In this case, the brokerage is a very large and high-profile listed entity.
 
The victim is an unusual 82-year-old, who we will call Shanta Limaye. She used to trade in equities, including a bit of derivatives trading, for six or seven years. During the COVID lock-down, she racked up losses of nearly Rs8 crore in derivatives against collateral of just Rs2 crore. Naturally, her trading facilities were revoked. By allowing her to trade far in excess of her collateral, the broker had already violated SEBI’s guidelines and began a criminal cover-up to avoid the loss of nearly Rs7 crore that the firm would need to write off.
 
The broker extended a line of credit to Shanta Limaye at 15.25% interest without looking at her age, repayment capacity and source of income. The risk mitigation was pure fraud. It so happened that Shanta Limaye’s son, Dr Arjun Limaye and his wife Madhuri, had a demat account with the firm in which they had parked valuable shares acquired as ESOPs (employees’ stock options). The couple lives in the US and seldom trades. There was a third joint account, held by Dr Limaye, his sister and mother, which was opened with the firm in 2007. 
 
The mother had no idea of the shares in her son’s account.  The brokerage quietly linked the son’s joint account (with his wife) and the third account with his mother and sister, to their mother’s account, without their consent or authorisation. 
 
The broker employee dared to use the term ‘family account’ to justify this fraudulent action. Based on this, he encouraged the distraught Shanta Limaye to continue trading in order to recoup the losses in her account. The firm was racking up huge brokerage income from these trades. This played out during the hard lock-down between 31 March 2020 and December 2021, when most people, especially elders, were confined at home. 
 
Since trading losses and interest on the line of credit mounted, the broker began to sell Dr Limaye’s shares to cover losses. Arjun Limaye was clueless, since he wasn’t trading and did not check the emails linked to his account. Large sales and debits to his bank account would have alerted Dr Limaye; so the broker covered his tracks by not crediting the money to his listed account. Instead, the sale proceeds were illegally credited to the third joint account opened in 2007 with a different bank account linked to it. The broker also surreptitiously changed Dr Arjun Limaye’s mobile number to that of the mother to ensure he did not receive any text alerts. The mother traded in that account and had also run up a loss of Rs1.74 crore during April 2021 to January 2022.
 
How did the brokerage justify the illegality? It claimed that the family had signed documents to create a ‘family account’ that allowed shares and money to be moved between accounts. But Dr Arjun Limaye’s account with valuable ESOPs was held jointly with his wife. There is no way money/shares held jointly by her could be moved or credited elsewhere without her consent. This was a point that the GRP hearing noted. 
 
More pertinently, SEBI has no concept of ‘family account’; the broker’s action was illegal and nothing short of highway robbery. The broker also had no consent to even use the son’s shares as collateral for the loan to their mother or liquidate them to recoup losses. 
 
To cut a long story short, the brokerage firm, instead of sacking the errant employee defended his action claiming that Dr Arjun Limaye was aware of his mother’s transactions. It must be remembered that SEBI had relaxed the rules to allow work-from-home during the lock-down and complete call recordings were not available. In all, the broker got the 82-year-old mother to execute over 2,000 derivatives trades worth a mind-boggling Rs340 crore between April 2020 and March 2021, leading to a loss of Rs2 crore. 
 
A few call recordings examined by the GRP showed that the mother was referring to 1,000-2,000 trades in her call when the actual number of trades executed on that particular day was in excess of 24,000. The large trades, inconsistent with the mother’s usual trading, smack of inducement or fraud, because they otherwise would have raised an alarm at the firm. 
 
The scary aspect of this story is that the mother was fully under the influence of the brokerage employee and was under the delusion that he was working to help her out of the mess and recover her loss, without any clue that her son’s separate account was being raided. 
 
In all, over Rs4.9 crore worth of shares were first removed from the son’s account to reduce the mother’s liability from nearly Rs8 crore to Rs3 crore. In the hearing, the broker justified illegal credit of the sale proceeds to a third bank account claiming that it was a ‘default account’ since that joint account was opened in 2007. No such concept exists under the rules. The total loss at the time of the hearing was over Rs8.75 crore. 
 
There is another interesting twist. When the mother’s losses were significantly lower, the son had offered to pay off her liability, little knowing that his own nest-egg of ESOP shares had already been looted by the broker. The broker also alleged that the son was fully aware of the brokerage firm’s actions. A bunch of undated authorisation letters were cooked up to claim that the mother had the authority to change the son’s phone number to her own and permit, what they called, ‘Adjustment of Balances in Group Accounts’. Worse, one authorisation letter was claimed to have been signed physically by Dr Limaye and his wife when they were actually abroad. 
 
The story shows that the employee’s actions were fully backed by the organisation which defended fraud, forgery and theft. The GRP has no power or authority to investigate any of this other than to uphold Dr Arjun Limaye’s complaint about the Rs7.6-crore loss in his account, without his knowledge or authorisation. Remember, the extent of the swindle came to light only when the son realised he had been robbed blind. 
 
This is a lesson for families to watch what is happening with senior and super-senior citizens who are in contact with bank and broker representatives. 
 
What happens next? The broker can continue to fight and seek arbitration. Since the amount is large, it will be examined by NSE and escalated to SEBI. On paper, the regulator has the power to search, seize, interrogate, raid and punish the broker. Will it act? So far, in the past 20 years, no SEBI chairman has stirred himself on behalf of investors. 
 
 
Comments
hifiqi.erotob
1 month ago
When financial services are fully automated and can be self managed, there is no need for a relationship manager to manage your savings. You let someone like a relationship manager get in between you and our savings, they are likely to commit fraud and siphon it all away.

Not being a ageist here with this opinion, just like you are forbidden from driving in some countries after a certain age, one should not be allowed to participate in F&O markets after certain age. At 80 plus of age, SEBI should re-consider if someone is fit enough to make financial decisions and manage risk in the F&O trading.
rd_hegde
1 month ago
Thank you ma'am for the shocking eye opener. But it would be much more useful if we have the names of the brokerages. I don't see any confidentiality issues. After all, these are cases being heard or decided and we ought to know where the stitches are, in order not to fall in them!
rd_hegde
Replied to rd_hegde comment 1 month ago
I meant ditches. Sorry for the typo.
prashantrane2000
1 month ago
If someone has 8 crores of portfolio and staying abroad it is all more necessary to check demat statements and brokerage account on regular basis. Little bit of diligence is required to preserve our hard earned money. No one can be trusted in money matters!
vasudevan raghavan
1 month ago
Moneylife us time and again writing articles on the autrocities on retail investors for the last money years. Yet the individual greed overtakes all the caution. F
parthsrini
2 months ago
It is not only senior citizen but many who still invest without taking into account the risk.
fnotrader12124
2 months ago
Sucheta ji....

I want to tell you something...
Once I was trying to exit a futures position (1 lot) and executed a Sell Market Order.
The stock future was trading at around 1900 and there is ENOUGH volume to put a market order.
But my (sell) execution price was shown as 0.
I was shell shocked. How on earth this fellow executed my market order at 0.
By God's grace the mistake was corrected in a minute.
Gave me a panic attack.

That day I learned my lesson. Broker is Broker... not my friend...
sucheta
2 months ago
Those questioning our motives for NOT NAMING the broker or investors may want to read this: https://moneylife.in/article/moneylife-foundation-submits-investor-perspective-on-32-broker-defaults-at-nse-before-sebi-committee/67185.html If you still want to make allegations, go ahead, or make the effort to study a few orders and write your own blog naming names!
m.muralidharan
Replied to sucheta comment 1 month ago
While that link with details to SEBI etc is good, what is the harm in naming the alleged crime partners in each case instead of touching the nose around your neck ?
vaibhavdhoka
2 months ago
Since two decades I shouted horsly that in India regulators, police and judiciary are only on pay roles without any liability.
saharaaj
2 months ago
pl name the brokerage house why diffidence
Rajan Vaswani
2 months ago
Given technology has advanced so much, are brokers really relevant anymore? People should be provided option to trade directly on market without a broker involved.
dr_lakshmipathy
2 months ago
My mother's (now 88 yrs) shares were mortgaged by Karvy, without her knowledge or consent. Luckily, her communication address was my own email ID. So, when I received mail of the unauthorised activity, I immediately followed it up and got the problem rectified. Point is: need for vigilance.

Dr Lakshmipathy
vaibhavdhoka
Replied to dr_lakshmipathy comment 2 months ago
Self vigilance is the only answer to this as you have done.You cannot depend on regulators or any agencies to work for you.
shubodhsingh
2 months ago
Because laws in India are not strict and cases not decided in time like in developed countries, india has become a land of thugs.
suketu
2 months ago
Very insightful.Now fraud brokers targeting senior citizens whose children live abroad,etc.
The day is not far that such fraud brokers are arrested and have a long jail sentence and that list wl be long.Having said that all brokers are not frauds and cheats.
Very good article.
yerramr
2 months ago
Tragedies come in bundles. More for super senior citizens. Deposit rates do not rise corresponding to lending rates. They get negative returns with inflation likely to hit the roof ere long. Brokers take seize of investments like the ones narrated by Mrs. Sucheta Dalal. Such exposures by ML should immediately alert the regulators for a responsible action.
raaykumar
2 months ago
I feel Regulators must frame special rules for senior citizens with respect to derivatives trading by them.
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