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“Suivez la piste”...of the Fading Fraud at Satyam

Anonymous, August 27, 2010

Raju Ramalinga, courtesy of flickr user World Economic Forum

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 million 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."


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.