Roughly two years ago, Ramalinga Raju, the CEO of Satyam Computer Services, confessed to his board that the company -- the fourth largest IT outsourcer in India at the time -- was insolvent. Approximately $1 billion in assets, Raju admitted then, did not exist. Satyam, an acclaimed good corporate citizen, collapsed spectacularly, earning itself the moniker “India’s Enron” in a few short weeks.

Defrauded investors filed a series of lawsuits, and criminal charges sent Raju, his PriceWaterhouseCoopers auditors, and other Satyam officers to jail to await trial. There they remain, while the Securities and Exchange Bureau of India untangles the web of false invoices, inflated payrolls, fraudulent accounts, doctored balance sheets and offshore businesses that surround the Satyam debacle.

Background

The company had enjoyed a meteoric rise in the corporate outsourcing business that began with its surprising selection as the principal IT vendor for the World Bank’s internal information technology work. In the late 1990s, Satyam was an obscure, mid-size, family-owned IT company headquartered in Hyderabad, India. There it was discovered by Mohamamed V. Muhsin, Chief Information Officer (CIO) of the World Bank. Muhsin, at the instigation of James Wolfensohn, had assumed the responsibility for establishing the IT architecture of the Bank. For reasons that remain somewhat unclear, he enlisted Satyam in the enterprise, selecting it over larger and better-known companies. In the digital hysteria leading up to following the Y2K scare, Satyam received a flow of ever-larger contracts from the bank, and rumors began to circulate in Muhsin’s department that held a financial interest in the company.

Last week, Senator Lugar sent out this press release, "Lugar Urges International Development Banks to Step Up Corruption Cases." Bless the man for trying to uphold notions of honesty not-currently-in-vogue in most of the rest of the world -- or in government for that matter. Lugar had asked the multilateral development banks about how they addressed criminal violations in their operations, when such crimes came to light. Not surprisingly, the answer he got from World Bank President Robert Zoellick didn't really answer the question. While Zoellick's reply was encouragingly upbeat, it was also irrelevant.

As I read the letter from Zoellick, I began to ponder the nature of corruption in the 21st Century. It must be the season: a time to look back on the year and consider how many real scandals were ignored....

My own humble focus this year has been on the farce also-known-as-criminal-justice in India and the Satyam scandal -- the "biggest fraud in Indian corporate history.” Zoellick's letter to Lugar and my interest in Satyam converge because Satyam was suspected of some serious crimes at the World Bank, as its lead IT outsourcer from 2000 through 2008. These allegations were described in depth and with documents in a series of articles written by Richard Behar and published by Fox News (I know, I know.) Satyam’s criminal malfeasance seemed to range from Chinese espionage to loading illegal spyware on secure computers to irregular invoices from Satyam to the World Bank to shadow employees and corporate shell games.

Sometimes, the Indian press confuses me. Last week, there was the headline: "Satyam Is Back on Track" on SIFY.com. That semi-editorial gives its byline to India's "Business Standard" article entitled: "A Long Way to Recovery," regarding the "release" of Satyam's financials for the last two years -- financials that have yet to be filed officially with the SEC or anybody else.

Now, if I read this correctly, Satyam has lost $1.75 billion (USD) since 2008. However, from 2009 to 2010, it grossed $1.1 billion with a profit of over 8% -- exceeding analysts' expectations.

Didn't Satyam stop paying employees for a short time at the outset of the scandal in January 2009? Then, it started laying off workers while others plain quit. Then, Satyam started hiring new workers like mad because it had so much work to do. If I recall correctly, Satyam said that it had retained all of its major clients; and by July 2009, it also reported that revenues were adequate to maintain its workforce of over 40,000 employees. Now we learn that 17,000 workers left Satyam, reducing the headcount to 27,000 from 44,000 in fiscal ’08-’09.

Then, during the World Cup in South Africa this year, Satyam, as a major corporate sponsor (recall those flashing video billboards along the field during the final match?), announced that it had actually won new contracts as a result of the media exposure.

In fact, Mahindra couldn't buy all of the shares it needed to own Satyam outright because Satyam shares were doing so well in 2009. As of today, it still hasn't bought a controlling interest, though no one in the media seems to have noticed the difference between owning a large part of Satyam's shares and owning a majority stake outright. (I may be quibbling since no one seems to care about details, apparently.)

The intrepid, French investigator, Clouseau, was fond of saying "We suspect everyone; we suspect no one." Then, on cue, he'd take a pratfall or bumble on to a significant clue. Have Indian authorities unwittingly left Clouseau a clue in their long, drawn-out investigation of the fraud at Satyam Computer Services?

In January 2009, all hell broke loose when Satyam CEO Raju Ramalinga wrote a letter of resignation to his board in which he admitted to orchestrating what became known, alternately, as "India's Enron" or "the largest corporate fraud in Indian history." Raju, himself, was likened in the press to Bernie Madoff, which is a gross distortion, as Madoff actually went to trial and to jail. To be fair, after being arrested, Raju spent 18 months in jail during which time he's suffered a heart attack and been treated for a long-standing Hepatitis C infection related to his daily insulin injections. In last few months, he's been confined to a hospital for treatments.

The press were surprised this week, however, to see Raju for the first time, appearing before a local magistrate in his home state of Andhra Pradesh after being granted bail. Raju bounded up the stairs to the courtroom, accompanied by his lawyer and his doctor, where he denied all charges; after which, he returned to being bed-ridden at the hospital.

According to Raju, Satyam wasn't a US$4 billion, wonderfully profitable, high tech miracle; it was a smaller, humbler enterprise.

Needless to say, when the fraud broke open, employees were laid off; the markets tumbled; and Indian outsourcers took a hit. Respected Indians associated with Satyam and Raju suffered embarrassment; the government took over the corporation; and investigators (which many in the Indian press referred to as "sleuths" in another nod to Clouseau) uncovered all sorts of documents, shenanigans, and otherwise untoward, un-businesslike behavior at Satyam and its auditors, banks, and partners.

Fast forward a bit, and US courts hearing a civil suit against Raju and Satyam accepted Raju's declaration of "pauper" status. According to Raju, he was penniless.

Meanwhile, as the Indian government was trying to straighten out the Satyam mess, restore India's corporate credibility, and get back to the business of increasing India's high tech market presence, it ordered that Satyam be sold at auction to the highest bidder. The highest bidder among three bids turned out to be from Tech Mahindra, another Andhra company. Though the high bid was hefty (US$579 billion for 31% of the company's shares), the two losing bids (from non-Indian companies) were almost identically low, too (Clue?). A key condition of the sale was that Tech Mahindra would be required to purchase an additional 20% on the open market to complete its acquisition.

And this is where the Indian narrative of corruption-fighting at Satyam starts to fall apart.

According to this report in Bloomberg, "India’s Central Bureau of Investigation, which has charged Raju and eight others including his brother Rama and Vadlamani of faking invoices and falsifying accounts, in January filed fresh charges against Raju and five others. The six men inflated Satyam’s tax liability by 5.26 billion rupees by boosting its revenue through fake sales invoices and non-existent interest income from deposits that were never made, investigators said."

That's about US$113 million.

Fact-check time:

1. Satyam was a US$4 billion enterprise, trading on the Mumbai and New York stock exchanges.
2. Raju said it wasn't really making 18% per annum since the late 1990s; it was making more like 4%. He said he had inflated the numbers upward to US$1 billion.
3. Tech Mahindra won a three-way bid for the right to buy 31% of Satyam for US$579 million -- essentially valuing the company at around US$1.5 billlion, as part of the Indian authorities' plan to sell off and clean up the company, and put the scandal behind it.
4. Tech Mahindra was required to purchase 20% of Satyam on the open market by June 2009 to complete the deal. Currently, as of August 2010, Tech Mahindra only owns 41% of Satyam stock because the stock is so expensive, Mahindra can't afford to buy more.

Oh, by the way, in February 2010, Indian news reported that authorities weren't going to press Tech Mahindra to complete the sale after all, saying "Satyam need not merge with Tech Mahindra."

Huh?

Well, the only hint of Satyam's real worth and income comes from the bids received by the Indian government at the time Satyam was "sold" to Mahindra in 2009; and two of the three bids were almost identically 15% lower than Mahindra's. To date, the reconstituted "Mahindra Satyam" has been doing well with weekly reports of new contracts and new hiring. Even at the height of the breaking scandal, Satyam's biggest clients stayed with the company, kept mum about their financial arrangements with Satyam, and kept their Satyam staff busy with work. For its part, Satyam continued to pay all of its bills and doesn't seem to be in arrears to anyone; there has been no talk of bankruptcy or defaults.

So where's the money?

To be fair, no one really knows how much money is involved in the Satyam fraud. Starting with Raju himself, the amount of money involved has been reported anywhere from US$1 billion to US$5 billion. However, besides Raju's own admission of inflating Satyam's profits by more than US$1 billion (an assertion that Raju has now recanted officially), the number given by the CBI in its latest charges and reported by Bloomberg last week represents the most recent figure cited by an official investigative agency.

Even Clouseau knew that by following the money, you find the crooks. But, given the amount of time and effort required to produce financial reports for Satyam from 2008 and 2009 (now due sometime in September 2010), the number of people who have been thrown into and released from jail, and given Raju's release this week from custody upon the posting of US$90,000 in bonds and withdrawing his confession, it's pretty clear that this investigation will not be going anywhere anytime soon. And even if it goes somewhere, it won't be going near anybody who matters.

On one hand, under Raju, Satyam's internal accounting teams spent countless hours modifying the financial software, books, invoices, and accounts payable at Satyam (putting in almost as much effort as authorities are putting in to produce "real" financials for the company); Raju and his family set up dozens of fake companies to which Satyam paid fictitous bills; and auditors were co-opted with others into a conspiracy of ignorance. Even a reverse merger with Raju's own Maytas was attempted in order to move non-existent Satyam cash into actual Maytas real estate (to many observers, real estate being the only real "wealth" in Raju's eyes). All of this, in order to hide what?

US$113 million? Why would Raju even make up the US$1 billion figure?

And even if Clouseau and the rest of us know that the money trail always leads to the guilty, it's equally clear that the guilty know that if there's no money trail, they won't be found.

Now, who has the power to make all of that money disappear?

A pratfall would be nice right about now.

The writer is an expert in this field whose identity must remain confidential.

Our thanks to Ramalinga Raju, founder of Satyam and perpetrator of the biggest financial fraud in Indian corporate history. He is turning what seemed like a typically tortuous legal process into true theater.

According to the Times of India, Raju is retracting the now-infamous confession he wrote in January 2009 admitting to what became the Satyam scandal and ensuing financial crisis.

Huh?

According to documents filed with the courts, Raju's letter -- which descriptively characterized his experiences as CEO of India's 4th largest IT outsourcer as "riding on the back of a tiger" -- was merely a resignation letter. His lawyers go on further to state that Raju's actions were mischaracterized by the authorities and the press.

An interesting week in India unfolded as the justice and financial oversight processes continued their ponderous attempts to untangle Ramalinga Raju’s Satyam scam. It has been a year and a half since the founder of India’s fourth largest IT outsourcer and anointed poster child for 21st Century “India Inc.” announced to the world that he had been cooking Satyam’s books for over 10 years of business. Taking the high road, he declared that he had “inflated profits” rather than embezzling the money.

This week, Governancenow.com’s Gitanjali Minhas reports on Satyam’s use of its financial and accounting systems to “paper over” fraudulent accounts payable in the range of $580 million (US), in addition to the $2.1 billion (US) accounting fraud admitted to by Raju in January 2009.

It appears Satyam recruited its own programming teams to assist in the fraud -- going so far as to implement changes to its SAP-supplied ERP to pay false invoices from fictitious companies -- that Raju also created to back-up the authenticity of those invoices -- “out of workflow” (as it is referred to among SAP programmers). More importantly, this effort was not directed towards hiding losses (a common motive among more garden variety crooks like at AIG), it was directed towards hiding profits.

By the way, did we mention that Satyam is really good at implementing SAP financial and accounting systems for its clients? It is so good at it that it has secured a great deal of outsourcing business from Fortune 500 companies world-wide to do just that. For its trouble, Satyam has received recognition from SAP itself. In fact, Satyam’s relationship with the World Bank and former CIO Mohammed Muhsin was based on Satyam’s SAP skills. Just saying.


The writer is an expert in this field whose identity must remain confidential.

New charges filed yesterday by India’s Central Bureau of Investigation (CBI) allege that the accounting fraud at India’s Satyam Computer Services Ltd. took in approximately $1 billion more than Satyam CEO Ramalinga Raju originally admitted. When Raju confessed to India’s largest corporate fraud in January, he admitted that he had invented about $1.5 billion in fake assets. As the scandal has unfolded, however, over the course of the year, it appears that even Raju’s confession is a fabrication.