On July 16, 2014, India’s securities regulator, the Securities and Exchange Board of India (SEBI), entered an order (here) against the founder and former executives of Satyam Computer Services to disgorge over $306 million in allegedly ill-gotten gains from their role in the scheme to falsify the company’s financial statements, as well as at least $201 million in interest. A July 18, 2014 Law 360 article describing the SEBI order can be found here (subscription required).
As discussed here, Satyam was quickly dubbed the “Indian Enron” in early 2009 after the company’s founder, Ramalinga Raju, sent an extraordinary letter to the company’s board in which he admitted, among other things, that “the company’s financial position had been massively inflated during the company’s expansion from a handful of employees into an outsourcing giant with 53,000 employees and operations in 66 countries.” As much as 53.6 billion rupees (or about $1.04 billion) in cash that the company reported on its immediately prior financial statement was nonexistent. Satyam’s share price dropped 87 percent on the news.
Satyam, whose American Depositary Shares at the time traded on the New York Stock Exchange, was hit with a securities class action lawsuit, which also named certain of its directors and officers as defendants, as well as the company’s outside auditor, PwC. As discussed here, in February 2011, Satyam’s successor agreed to pay $125 million to settle the claims filed against Satyam itself. In May 2011, PwC agreed to pay $25.5 million to settle the claims against the accounting firm. As discussed here, in January 2013, the claims against seven of Satyam’s outside directors were dismissed.
According to the India Real Time blog (here), the 65-page SEBI order in the Satyam case is “one of the first attempts to put all the pieces together” about the Satyam scandal. As discussed in July 16, 2014 Wall Street Journal article (here), the order alleges that Raju and his brother, with the help of the company’s chief financial officer and two others, created fake orders and falsified other company records to make the business appear more profitable, enriching themselves in the process.
SEBI said that Raju was “the chief orchestrator of the fraud” and was responsible for “deliberately conveying a false picture of Satyam Computers finances to the investing public and concerned authorities.” SEBI also said that the former Satyam executives engaged in insider trading when they sold company shares at inflated prices before the scandal broke. The order states that the executives “have committed a sophisticated white collar financial fraud with pre-meditated and well thought of plan and deliberate design for personal gains and to the detriment of the company and investors in its securities.” The order also states that “the fraudulent acts and omissions of [the individuals] in a coordinated manner have shattered the confidence of millions of genuine and unsuspecting investors in securities of Satyam Computers and caused serious prejudice to the integrity of the securities market.”
According to the Journal, SEBI’s order can be appealed to a special securities tribunal and the country’s Supreme Court. Raju, his brother and several others have been charged with criminal offenses in connection with the scandal, in which, according to the India Real Time blog, a verdict is expected later this month.
The size of the penalty against the individuals is clearly meant to make a statement. According to the Journal, SEBI “has faced criticism from investors for a perceived lack of vigor” but “lately has seemed more assertive.” A commentator is quoted in the Journal article as stating that “this order by itself is driving a message that SEBI is going to be aggressive in dealing with fraud in the Indian Capital Markets.” (On the other hand, other commentators have criticized the regulator for dragging its feet and suggested that the order was far too late in coming.)
I find the order and size of the award interesting in a slightly different way. I have traveled around the world quite a bit in the last several years and attended industry conferences at which, inevitably, the aggressiveness of U.S. regulators is bemoaned. These comments usually include a lament about the lottery-sized penalties that U.S. regulators have imposed.
As this SEBI order demonstrates, U.S. regulators are not the only ones primed to impose large fines. Regulators everywhere, under pressure from the recent global financial crisis as well as because of the periodic outbreak of massive scandals like Satyam, increasingly are taking a more aggressive approach and increasingly are seeking to use regulatory tools to enforce their own laws and to impose penalties. These regulatory initiatives, which are emerging in countries around the world, have significant implications for companies, their executives, and their insurers.