India Mints a Madoff-style Scandal

Satyam Computer CEO quits, admits to orchestrating a massive fraud at the outsourcing giant — one that could embroil U.S. firms that use it.
Stephen TaubJanuary 7, 2009

In a revelation suggesting that Madoff-style and Enron-style scandals can exist in India as well, Satyam Computer Services said its chairman and founder resigned after he had admitted orchestrating a massive financial fraud at that country’s fourth-largest software-services provider.

The executive, B. Ramalinga Raju, admitted in a letter to the Bombay Stock Exchange he inflated profits in recent years at the outsourcing giant, conceding the fraud “has attained unmanageable proportions in size.” He compared his own position as CEO of a fraud-infected company as having been “like riding a tiger, not knowing how to get off without being eaten.”

Said the executive in his letter, “The differential in the real profits and [those] reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify higher level of operations — thereby significantly increasing the costs.”

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Shares of Satyam, based in Hyderabad, plunged more than 90 percent on the news.

“We are obviously shocked by the contents of the letter,” said Ram Mynampati, who is interim CEO of Satyam, pending ratification by its board. “The senior leaders of Satyam stand united in their commitment to customers, associates, suppliers and all shareholders,” said Mynampati, a board member chosen by directors to steer the company through the crisis.

The news threatens to raise great concerns — though in ways that still are uncertain — to the many U.S. companies that have outsourced various tasks to Satyam.

In an article being carried by the Wall Street Journal online edition, it was reported that PricewaterhouseCoopers had served as the auditor for Satyam — which is the Sanskrit word for truth. Its article listed Nestle SA, General Electric Co., Caterpillar Inc., Sony Corp., and Nissan Motor Corp. as among the clients of Satyam, which was said to employ 53,000 at its headquarters in the southern Indian city.

Ramalinga Raju, who has been with the company for more than 20 years, said in his letter that no board members had been aware of the scheme. He also insisted that he and the managing director of Satyam — his younger brother Rama Raju — did not sell any shares of stock.

He said in the letter the company’s quickly aborted attempt to buy Maytas Properties and Maytas Infra late last year was “the last attempt to fill the fictitious assets with real ones.”

In late December, Professor Mendu Rammohan Rao and Dr. Mangalam Srinivasan, had resigned as directors .

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