Does Satyam Say it All?

Citigroup (C) announced that it had frozen 30 operating accounts in the name of Satyam Computer Services (SAY). But Indian securities regulators are asking if anybody at Citi’s Indian unit questioned why Satyam needed so many accounts, whether Pricewaterhouse Coopers (Satyam’s auditor) conducted any spot inspections on those accounts and whether members of Satyam’s management and their families maintained accounts which were used to trade in Satyam shares. Major Indian banks, including ICICI (IBN) and HDFC (HDB) are insisting that their exposure to Satyam is “minimal”. But a spokesperson at the Institute of Chartered Accounts of India, the second-largest accounting association in the world, reiterated yesterday that “minimal or otherwise, we will thoroughly investigate the role financial institutions played in the Satyam fraud.”

As the results of preliminary investigations are showing, Satyam’s disgraced founder Ramalinga Raju had the assistance, tacit or otherwise, of banks, brokers, lawyers and accountants. While the size of the alleged fraud, $1.5 billion, may be miniscule by today’s standards, the scope, nature and methodology of Mr. Raju’s scheme may well be telling us more about the crisis on Wall Street than what Washington’s lawmakers and regulators have disclosed thus far.

In a “confession letter” to Satyam board members, Ramalinga Raju insisted that neither he nor members of his family had sold Satyam shares “except for a small proportion sold and declared for philanthropic purposes.” Yesterday, inspectors from the Securities and Exchange Board of India told reporters that they had already uncovered more than two dozen “benami” (nominee) brokerage accounts through which relatives and friends of Mr. Raji placed regular buy and sell orders for Satyam shares. In fact, NDTV, a prominent television news channel, revealed that a tax investigation of Satyam in 2002 noted that banks and stock brokers had opened accounts for Satyam, and for Mr. Raju’s associates, without access to proper documentation and in the full knowledge that the majority of such accounts were recorded in surrogate names.

Now enter the politicians. It appears that the government in Andhra Pradesh, Satyam’s home state, at that time decided to simply close the tax investigation file. Ramalinga Raju’s political clout has been a matter of public knowledge for many years. No doubt encouraged by the massive investor outcry today, the Indian income-tax department is planning to raid about 20 software and business outsourcing companies this week.

The Institute of Chartered Accountants, in the meanwhile, has adopted a two-pronged strategy to protect the reputation of its 145,000-odd members. On the one hand, it has sent specialists to determine why line items constituting “cash in hand and bank balances” in the September-end 2008 financial statements were not supported by certificates from Satyam’s bankers. On the other hand, it has asked police officials to check on those debtors from whom PwC received letters confirming amounts owing; it appears that $100 million worth of such letters were fake or forged.

Not to be left out of the Satyam equation are senior operatives at the Securities and Exchange Board who, without exception, are denying oversight responsibility. “If auditors and managements are certifying balance sheets and disclosure statements, what do you expect us to do?” a veteran board member asked an anchor with IBN, CNN’s India affiliate over the weekend. “We have asked the Bombay Stock Exchange and the US SEC for information and cooperation in this matter.”

Finally, Ramalinga Raju has hired a team of 25 lawyers. If, as latest reports suggest, the Satyam probe extends to another 80 persons, including Satyam staff members, politicians at the state and national level, PwC-appointed accountants, bankers and brokers, at least another 250-plus lawyers will be working on a round-the-clock basis to thwart both the investigation and the flow of information into the public domain.

Missing in the whole puzzle is Seymour Crim, Bernie Madoff’s senior counsel, who had the audacity to “redefine a Ponzi scheme as an investment approach that is necessary under extreme market conditions and that it will no longer be considered theft.” Given the usual length of legal proceedings under Indian law, Ramalinga Raju’s best immediate bet is to find a judge who will grant him bail and a lawyer (Mr. Crim, perhaps) who will be bold enough to ask for bail.

Disclosure: Author holds a short position in C

Comments

[Larry House:]

Well, you have detailed the facts, but you are quite short on the "what this means for Wall Street part." Nice tease--no satisfaction.

Jan 13 10:27 AM

[Larry House:]

I see the title has been changed from the original post. That is better, but what is "all"?

Jan 13 11:35 AM

[Peacelover:]

You are right. But how about your deals with Bangkok Bank of Commerce in Thailand and being a fugitive in Canada (form the Thai authorities). Do you recommend Raju to do the same as you did, Mr Saxena? Come to Canada. Raju does not need a lawyer. He may need only your advice.

Jan 13 12:49 PM

[Moon Kil Woong:]

It is interesting that you cite the multiple accounts Satyam has. Hon Hai had over 200 accounts in just one bank a few years ago and an investment bank issued a note saying not to issue any more accounts and subsidiary entities due to account irregularities.

In fact, many companies employ very strange financial methodologies. Usually they are big and can not be tracked or managed by any singular regulatory agency. Thus the markets are right to be scared investing in many companies. A run on many of these companies could bankrupt them very quickly even if they are not doing a ponzi scheme.

The market is revealing the underlying fragility of our entire market. BTW I don't recommend anyone holding Hon Hai and hold no long or short positions in it.

Jan 13 01:18 PM

[Rakesh Saxena:]

Noted Peacelover. But have you ever heard of the presumption of innocence? Many thanks - Rakesh


On Jan 13 12:49 PM Peacelover wrote:

> You are right. But how about your deals with Bangkok Bank of Commerce
> in Thailand and being a fugitive in Canada (form the Thai authorities).
> Do you recommend Raju to do the same as you did, Mr Saxena? Come
> to Canada. Raju does not need a lawyer. He may need only your advice.

Jan 13 04:17 PM

[PROXIMO:]

This is hardly the forum to air unproven allegations against the author. Last time I checked, under the US Constitution a person is innocent until proven guilty. You know nothing about the author's alleged deals with the Bangkok Bank of Commerce in Thailand and neither do I. Something you would know , if you got your information from legitimate sources instead of the partition stalls of men's rooms, is that corruption is rampant in that part of the world and the violent overthrow of government (coups) is a way of life. Those facts alone speak volumes to the integrity of the allegations against the author. The Thai government is neither a model of integrity nor stability. Keep that in mind before drawing any conclusions about any of their allegations.


On Jan 13 12:49 PM Peacelover wrote:

> You are right. But how about your deals with Bangkok Bank of Commerce
> in Thailand and being a fugitive in Canada (form the Thai authorities).
> Do you recommend Raju to do the same as you did, Mr Saxena? Come
> to Canada. Raju does not need a lawyer. He may need only your advice.

Jan 13 09:21 PM

[PROXIMO:]

Rakesh---Thanks for the article. Occasionally people will respond to your articles with a negative personal comment or attack regarding your past. I am KEENLY AWARE that innocent people in every society of the world every day are accused of crimes they did not commit. In the absense of all the facts regarding your past, which are understandably confidential, I think the negative personal comments directed at you are unwarranted. Please continue to post your insightful and informative articles.

Jan 13 10:37 PM

[Rakesh Saxena:]

Thanks Proximo: Postings will continue. I am not too concerned about people who misuse this forum--this happens. They should be restricting their comments to the contents of articles posted in this forum, and find other forums if they have anything else to say. But thanks all the same. - Rakesh


On Jan 13 10:37 PM PROXIMO wrote:

> Rakesh---Thanks for the article. Occasionally people will respond
> to your articles with a negative personal comment or attack regarding
> your past. I am KEENLY AWARE that innocent people in every society
> of the world every day are accused of crimes they did not commit.
> In the absense of all the facts regarding your past, which are understandably
> confidential, I think the negative personal comments directed at
> you are unwarranted. Please continue to post your insightful and
> informative articles.

Jan 14 12:51 AM

[notsosmart:]

its all ponzi.if you see a murderer commiting a murder,he too,is innocent until proven guilty.mr.made-off is innocent yet the govt & victims want him in jail.the honest hard working folks who play by the rules will always be screwed.thats why i call them sheeples.im one of them.the fleecing continues.

Jan 14 12:55 PM

[hroni:]

I´ve read several articles by the author and I find them quite interesting. As for the personal allegations indeed everyone is innocent until...However, the relative anonimity of the www as a medium makes it an ideal forum for crooks of all trades. Wouldn´t the author be best served by taking on the allegations face on in the most civilized Canadian judicial system? The nature of the alleged crime is not of personal rather of professional nature, indeed of the same profession the author chooses to dispense opinion and advise and as such he offers himself up for scrutiny. Anyone up for some innocent until proven guilty Madoff advise?

Jan 15 12:33 AM

[Rakesh Saxena:]

Dear hroni: FYI, scrutiny is not a problem. Where the "innocent until proven guitly" maxim applies is in relation to the facts of the allegations. For example, in the subject instance, there is not even a formal charge (let alone a crime), the Thai legal request is for only ONE loan transaction, the transaction took place in 1995, senior Thai politicians were also cited in the "complaint", Thailand does not formally allege that I was a bank officer or in a position of trust, and I was living in Switzerland at that time. Besides, an extradition request is not similar to an indictment. And, finally, I think you cannot confuse the state of the Thai legal system (18 coups and 18 constitutions since 1932) with the US or Canada. To repeat, scrutiny is indeed unavoidable--but the facts should not be compromised, and web postings should not be construed as the truth. Also, drawing vague comparisons with Madoff are entirely misplaced, thought the courts did apply the "guilty until..." maxim when granting him bail. There is one final distinction: between allegations relating to persons entrusted with funds on one hand and allegations about deal-making, and deals going sour on the other. Many thanks for your comments. - Rakesh


On Jan 15 12:33 AM hroni wrote:

> I´ve read several articles by the author and I find them quite interesting.
> As for the personal allegations indeed everyone is innocent until...However,
> the relative anonimity of the www as a medium makes it an ideal forum
> for crooks of all trades. Wouldn´t the author be best served by taking
> on the allegations face on in the most civilized Canadian judicial
> system? The nature of the alleged crime is not of personal rather
> of professional nature, indeed of the same profession the author
> chooses to dispense opinion and advise and as such he offers himself
> up for scrutiny. Anyone up for some innocent until proven guilty
> Madoff advise?

Jan 15 02:59 AM

[hroni:]

I agree fully and I apologize for the Madoff line especially since while it was meant for illustration purposes alone, it clearly was greatly misproportionate and almost irrelevant. Please, keep your previous reply to me ready for other poster´s possible inquiries, since it shows that it´s not entirely possible or even worthwhile to defend oneself against everything thrown at you. I sincerely hope I will continue to enjoy the benefit of your articles for a long time to come.


On Jan 15 02:59 AM Rakesh Saxena wrote:

> Dear hroni: FYI, scrutiny is not a problem. Where the "innocent until
> proven guitly" maxim applies is in relation to the facts of the allegations.
> For example, in the subject instance, there is not even a formal
> charge (let alone a crime), the Thai legal request is for only ONE
> loan transaction, the transaction took place in 1995, senior Thai
> politicians were also cited in the "complaint", Thailand does not
> formally allege that I was a bank officer or in a position of trust,
> and I was living in Switzerland at that time. Besides, an extradition
> request is not similar to an indictment. And, finally, I think you
> cannot confuse the state of the Thai legal system (18 coups and 18
> constitutions since 1932) with the US or Canada. To repeat, scrutiny
> is indeed unavoidable--but the facts should not be compromised, and
> web postings should not be construed as the truth. Also, drawing
> vague comparisons with Madoff are entirely misplaced, thought the
> courts did apply the "guilty until..." maxim when granting him bail.
> There is one final distinction: between allegations relating to persons
> entrusted with funds on one hand and allegations about deal-making,
> and deals going sour on the other. Many thanks for your comments.
> - Rakesh

Jan 15 02:07 PM