Citigroup (NYSE: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 (NYSE:IBN) and HDFC (NYSE: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