SEC Charges Satyam Computer Services With Financial Fraud
FOR IMMEDIATE RELEASE
Washington, D.C., April 5, 2011 – The Securities and Exchange Commission today charged India-based Satyam Computer Services Limited with fraudulently overstating the company’s revenue, income and cash balances by more than $1 billion over five years.
The SEC’s complaint, filed in U.S. District Court in Washington, D.C., alleges that former senior officials at Satyam – an information technology services company based in Hyderabad, India – used false invoices and forged bank statements to inflate the company’s cash balances and make it appear far more profitable to investors. Although Satyam’s shares primarily traded on the Indian markets, its American depository shares traded on the New York Stock Exchange.
According to the SEC’s complaint, shortly after the fraud came to light in January 2009, the India government seized control of the company by dissolving Satyam’s board of directors and appointing new government-nominated directors; removed former top managers of the company; and oversaw a bidding process to select a new controlling shareholder in Satyam. In addition, India authorities filed criminal charges against several former officials.
In addition to the actions taken by the India authorities, Satyam, whose new leadership cooperated with the SEC’s investigation, has agreed to pay a $10 million penalty to settle the SEC’s charges, require specific training of officers and employees concerning securities laws and accounting principles, and improve its internal audit functions. Satyam also agreed to hire an independent consultant to evaluate the internal controls the company is putting in place.
In a related settlement, the SEC sanctioned Satyam’s former independent auditors for violations of federal securities laws and improper professional conduct while auditing the company’s financial statements from 2005 through January 2009.
“The actions of Indian and U.S. authorities have transformed Satyam into a new company with new management, directors and investors and state-of-the art controls, resulted in criminal charges against seven former executives and given harmed shareholders the chance to recoup losses,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “This comprehensive and thoughtful response underscores the ability of regulators across the globe to respond to cross-border misconduct in a coordinated manner.”
Cheryl Scarboro, Chief of the SEC’s Foreign Corrupt Practices Act Unit, added, “The fact that Satyam’s former top officers were able to maintain a fraud of this scale represents a company-wide failure of extreme proportions that cut across a wide array of functions from customer invoicing to cash management.”
According to the SEC’s complaint, Satyam’s former senior managers engineered a scheme that created more than 6,000 phony invoices to be used in Satyam’s general ledger and financial statements. Satyam employees created bogus bank statements to reflect payment of the sham invoices. This resulted in more than $1 billion in fictitious cash and cash-related balances, representing half the company’s total assets.
The SEC alleges that when the fraud was finally revealed, Satyam’s then-Chairman, B. Ramalinga Raju, declared that maintaining Satyam’s inflated revenues and profits “was like riding a tiger, not knowing how to get off without being eaten.”
Raju and other former senior and mid-level Satyam executives, as well as two lead engagement partners from Satyam’s former external audit firm, are defendants in a criminal trial now underway in India.
Without admitting or denying the allegations in the SEC’s complaint, Satyam agreed to a permanent injunction against future violations of the periodic reporting provisions of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20 13a-1 and 13a-16. As previously mentioned, the settlement also requires Satyam to pay a $10 million penalty, to hire an independent consultant and to comply with certain undertakings. In bringing this settled enforcement action, the SEC balanced the scope and severity of Satyam’s misconduct and harm to holders of Satyam’s American Depository Shares against the unique and significant remediation efforts made after the fraud became public in 2009.
The SEC’s investigation is continuing.
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For more information about this enforcement action, contact:
Cheryl J. Scarboro
Chief, FCPA Unit of the SEC Division of Enforcement