Market regulator Securities and Exchange Board of India (SEBI) has issued a show cause notice to HSBC for allegedly using fraudulent and unfair trade practices with its client, singer and actor Suchitra Krishnamoorthi. This case was first exposed by Moneylife way back in April in 2012

In a strongly-worded notice issued by the market regulator, the Securities and Exchange Board of India (SEBI) on 1^st November has asked Hong Kong and Shanghai Banking Corporation (HSBC) to explain why its acts in handling the portfolio of Suchitra Krishnamoorthi are not in violation of its regulations governing fraudulent and unfair trade practices and violation of the code of conduct governing mutual fund distributors. After an extensive investigation of her complaint, SEBI found out that:

• • There was excessive churning in the portfolio of the complainant as per details of all the mutual fund transaction carried out for the complainant by HSBC. The complainant’s money had been invested in 38 different schemes of mutual funds.
• • A large number of the investments made in Mutual Fund Schemes have been redeemed in short span of time and redemption proceeds have been used to again invest in other Mutual Fund Schemes, some of which appear to be similar to the schemes redeemed.
• • The Mutual Fund Portfolio of the Complaint was churned multiple times and it is alleged that the only plausible reason for this churning of portfolio could be to earn more commissions.
• • The total commissions/charges earned by HSBC against transactions in the name of the complaint was Rs27.93 lakh
• • It is seen from capital gains statement for the account of the complaint as submitted by HSBC that a large number of investments were for relatively shorter periods which are difficult to comprehended considering the risk profile of the complainant.
• • The investments have been made in balanced funds, which was not in line with the risk profile of the complainant.
• • Therefore, it is alleged that you have not acted in the interest of the complainants and the investments made by you on behalf of the complainant’s portfolio.
• • Further, this practise exercised by you is deceitful so as to induce excessive churning in the complainant’s portfolio and the same can be categorised as fraudulent and unfair practice on the complainant who had entrusted HSBC with her money.

SEBI argues that this is in violation of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 and SEBI circular MFD/CIR/06/210/2002 dated 26 June 2002 prescribed under Regulation 77 of the SEBI(Mutual Funds) Regulations, 1996 read with Clauses 1,9 and 13 of the Code of Conduct of Intermediaries of Mutual Funds.

Warning HSBC of a strong action, including but not limited to barring the lender from markets, SEBI called upon the Bank “to show cause as to why suitable directions under sections 11, 11(4) and 11B of the SEBI Act, 1992 read with regulation 11 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 should not be passed against you for the violations specified above, which may include but not limited to disgorgement of the commission earned by you from the complainant while executing transactions in her name, directing all the fund houses not to allow you to act as a mutual fund distributor for their funds, debarring you from accessing the securities market and prohibiting you from buying, selling or otherwise dealing in securities for an appropriate period of time and/or any suitable direction deem fit by the Board in the facts and circumstances of this case under the aforesaid provisions.”

As Moneylife reported in April 2012, Ms Krishnamoorthi, a well-known singer and actor, was taken for a ride by HSBC Bank for over five years by promising an extravagant assured return of 24% from mutual funds as well as insurance.

Whenever she complained about losses in her account, the standard reply from HSBC Bank was that the relationship manager has been fired and that the bank will make up for the losses with judicious investments. Needless to say, the losses were never made good. The one-way road for the customer was downhill. If a well-known celebrity could be cheated with such impunity, it is surely happening routinely with others.

The modus operandi for HSBC in this case had been a combination of toxic churning of the portfolio management system (2% entry load on every purchase made by it on behalf of client), insurance products promising 24% returns, insisting on her taking a loan instead of withdrawing funds without even disclosing that the client was entitled for a smart loan.

The officers of HSBC Bank also informed her that “portfolio management is one of the prime businesses of HSBC Bank other than banking” and assured her “a minimum of 24% pa return” on her investments. However, following her complaint to the officials of the bank, she said that “HSBC Bank now claims that they have not acted as portfolio managers but merely advised me on the management of my wealth.”

Ms Krishnmoorthi refutes this saying, “This is a false claim as they have clearly performed the duties of portfolio managers as stated by law and as per the power of attorney obtained from me in 2004.”

Moneylife reviewed Ms Krishnamoorthi’s mutual fund transactions and found massive malpractices by HSBC

     • Her mutual fund portfolio was continuously churned resulting in high transaction costs in the form of entry loads and exit loads. While several transactions led to huge losses for her, HSBC was the gainer of commissions.

    • Out of the 75 transactions made, nearly 60% of the transactions were in equity schemes kept for a period less than one year. Here investments were made in schemes like HSBC India Opportunity Fund and HSBC Mid-cap Equity Fund, both of which have been underperformers. Apart from these, majority of the investments were made in balanced schemes of HDFC Mutual Fund, ICICI Mutual Fund and Sundaram Mutual Fund.

    • The worst part of the transactions came around the market peak in November 2007 where nearly Rs3 crore was invested across five schemes on a single day which included over Rs1.67 crore invested in three sector schemes—ICICI Prudential Infrastructure Fund, Sundaram CAPEX Opportunities and Reliance Diversified Power Sector. Nearly Rs50 lakh was invested in Sundaram CAPEX Opportunities which has a current corpus Rs200 crore.

    • The investments from all sector schemes were withdrawn between June and August 2010 at a loss of nearly Rs40 lakh, almost half her initial investment. The schemes from ICICI Mutual Fund and Sundaram Mutual Fund went down by nearly 50%. The other schemes were also withdrawn at a value 15%-30% lower resulting in a total loss of Rs86 lakh. These schemes included JP Morgan India Equity Fund (a poorly-performing scheme) and IDFC Premier Equity Fund.

   • Surprisingly, in the whole portfolio there was not a single debt scheme and just one liquid scheme— HSBC Cash Fund. Ironically, commissions paid on debt schemes and liquid schemes are much lower.

    • Ms Krishnamoorthi says an entry load amounting to over Rs29 lakh was deducted from her investments. If the bank had opted to only invest her amount of Rs3.60 crore in performing equity schemes for the long term, without any further buying or selling, the entry load of 2% at that time would have worked out to just Rs7.20 lakh.

The end result after five years was Rs83 lakh—direct loss from investment, about Rs28 lakh in commission to HSBC, Rs8 lakh (50% of investment) lost from an insurance policy, Rs10 lakh (again, 50% of investment) valuation decline in insurance policy still in force, Rs4.5 lakh tax paid on redemption of short-term mutual funds (including Rs1.85 lakh penalty to the Income Tax department due to non-disclosure of gain by HSBC to the client) and Rs58 lakh interest on home loan earned by the bank.

When Ms Krishnamoorthi wished to surrender her insurance policies, HSBC refused to act for her by contending that they no longer had any tie-up with Tata AIG and that it was not their business to get client’s money back that they had recommended in the first place.

“It took my chartered accountant six months to authenticate the figures of losses—as not only was the HSBC team adept at covering its paper trail. They also very conveniently refused/ evaded furnishing me the documents to which I am legally entitled for over a year—giving me one silly excuse after another like mismatch of signature/officers being on leave,” she told Moneylife.

Unfortunately, in several such cases, banks tend to get away scot-free because the consumer is conned into signing a number of documents based on misplaced trust in their bankers. For instance when Ms Krishnamoorthi took her issue up with the Banking Ombudsman, the bank replied stating that she had signed on all the letter of instructions (LoIs) to carry out the transactions in her account. The manner in which bank officials discharge their fiduciary duties was not even taken into account.

On 18 April 2013 Moneylife Foundation had presented a memorandum to RBI Governor  on unchecked mis-selling by bank relationship managers. It says, “Banks’ relationship managers have been particularly brazen in recommending financial products to their customers while completely disregarding their financial situation. It is commonplace to hear of a senior citizen being conned into investing in a mutual fund, unit-linked insurance plan or a hybrid-derivative product on the promise of higher returns. In many cases, private bank executives go over to their homes and persuade them to break secure fixed deposits and invest the money in Unit Linked Insurance Products (ULIPs) with the false assurance that these are as safe as fixed deposits and offer a higher return and security.”

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