Satyam Fake Profits May Have Earned Chairman Raju $600 Million

B. Ramalinga Raju, accused of committing India’s biggest corporate fraud, and associates may have made as much as 30 billion rupees ($605 million) from transactions in shares of Satyam Computer Services Ltd. as the price soared on fake profits, an official at the Ministry of Corporate Affairs said.

Raju, 54, and the others slashed their combined holding in the software company, once India’s fourth-largest, to 1.5 percent last year from 25 percent in 2001, according to the official, who has seen the 14,000-page report on Satyam by the government’s Serious Fraud Investigation Office. The person declined to be identified because the report isn’t yet public.

If prosecutors can prove he forged documents and profited from increased share prices fueled by fraudulent accounting, Raju may face life in prison, the official said. The former Satyam chairman was arrested in January after saying he falsified accounts that went undetected for years. His revelation led to lawsuits from investors in the U.S. and new disclosure rules by Indian regulators.

“Where has the money gone? We need to know the real beneficiaries,” said Prakash Shah, secretary of the Mumbai- based Investor Education and Welfare Association, a not-for- profit organization set up in the wake of a 1992 securities scandal. “The small investors, the innocent persons, have been duped.”

Raju and associates may have gained from stock sales and pledging some equity holdings as collateral, the ministry official said.

Board Dismissed

Satyam shares more than doubled in the 7 1/2 years to Sept. 30, according to data compiled by Bloomberg. They have plunged 75 percent since Raju’s Jan. 7 statement, filed with the Bombay Stock Exchange, that he reported more than $1 billion of cash and assets in Satyam’s accounts that didn’t exist.

Raju is being held in a Hyderabad jail following his arrest on Jan. 9.

After Raju’s disclosures, India’s government dismissed Satyam’s board and appointed new directors to find a buyer for the software exporter, whose clients include Cisco Systems Inc. and Nestle SA. Tech Mahindra Ltd., the Pune, India-based software company partly owned by BT Group Plc, bought a 31 percent stake in Satyam last month.

Other charges Raju faces carry a maximum penalty of seven years in jail under the Indian Penal Code.

Raju hasn’t been given a copy of the SFIO’s findings, S. Bharat Kumar, his lawyer, said in a telephone interview on May 4 from Hyderabad, where Satyam is based and Raju lives.

‘Out of Context’

“They are selectively leaking the information to the press,” he said. “The matter is being quoted out of context, and it’s defamatory.”

Archana Muthappa, a spokeswoman for Satyam, declined to comment on the investigations. K.K. Pant, spokesman for the Ministry of Corporate Affairs, wouldn’t comment on the SFIO report.

The SFIO submitted its findings to the ministry last month. It is one of the government agencies inquiring into Satyam, along with the Central Bureau of Investigation and the Securities and Exchange Board of India, the market regulator. The CBI filed eight charges in a Hyderabad court on April 7 against Raju and eight other people, including his younger brother Rama Raju, 50, and former Chief Financial Officer Srinivas Vadlamani.

R.S. Rahul, the lawyer for Vadlamani, said he couldn’t comment without seeing the SFIO report. K. Ravindra Reddy, the lawyer for Rama Raju, declined to comment.
U.S. Lawsuits

A hearing will be held tomorrow on a CBI petition seeking permission to conduct lie detector tests on Raju and the others who were accused, Kumar said. Lawyers in the U.S. are following the investigations into Satyam, which faces at least a dozen lawsuits from investors who bought American depositary receipts issued by the company on the New York Stock Exchange.

“These investigations are giving everybody a road map as to what avenues to pursue,” said Robert Harwood, a partner at Harwood Feffer LLP in New York, a law firm that filed one of the suits on behalf of Hossein Momenzadeh, who bought Satyam ADRs in July 2007. “It funnels in quite significantly.”

The U.S. lawsuits have been consolidated with U.S. District Judge Barbara Jones in New York, who has scheduled a hearing today on who should lead the litigation, according to a court docket.

Satyam was set up in June 1987 as a closely held company to write software code and run electronic data processing centers. It held an initial public offering in 1992.

Y2K Bug

Satyam’s reported profit grew as it helped companies tackle the so-called Y2K bug, in which computers may have malfunctioned if their internal calendar couldn’t read the year 2000. Later its sales came from writing customized software applications and managing clients’ networks.

The SFIO alleges that Raju and the co-defendants started inflating sales figures sometime in 2001, the official in the Ministry of Corporate Affairs said. That year, Raju spent 290 days overseas wooing customers, he told Bloomberg News in January 2002.

In May 2001, Satyam became the third Indian company to list on the NYSE, raising $161.9 million from the sale of ADRs. About $50 million of that went in Satyam’s bank accounts, and the balance is still to be traced, according to the SFIO investigation, the official said.

India’s Directorate of Enforcement, a division of the Ministry of Finance, will investigate where the remainder of the funds went, the official said.

Fake Invoices

Raju may have started faking invoices because of pressure to compete, the official said. Infosys Technologies Ltd., India’s second-largest computer-services provider, reported profit more than doubled to 6.3 billion rupees in the year ended March 31, 2001. Satyam’s reported profit rose 134 percent to 3.16 billion rupees.

Raju and his co-defendants created password-protected super-user logins to develop 6,603 phony invoices, which added 47.5 billion rupees to Satyam’s books, the CBI said in a statement on April 27. The documents weren’t visible to others in the company, the bureau said.

They also generated forged certificates of deposits with banks to show where the fictitious income was kept, the ministry official said. There were about 33 billion rupees of deposits that didn’t exist, he said.

The company paid tax on declared interest from these deposits, the official said.

Raju and some of his family members got 1.15 billion rupees in dividends between 1994 and 2009, according to the charges filed by the CBI.