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Corporate Jan 10, 2012

Why investors should be suing Mahindra Satyam, auditors

By R Jagannathan

A new legal charade has begun in the Satyam scandal. It's called "let's bury it all in court", only no one will say it.

Tuesday's newspapers announced that Mahindra Satyam will sue the former board of Satyam Computer Services, including promoter B Ramalinga Raju, some key employees, and auditors PriceWaterhouse, the dogs that did not bark when Raju was looting the company.

A civil suit, filed in a Hyderabad city court, seeks unspecified amounts as damages from those accused of "inter alia perpetrating fraud, breach of fiduciary responsibility, obligations and negligence in performance of duties."

A stung PriceWaterhouse, with barely feigned anger, has also sued Satyam, Raju and the usual suspects, claiming it was, in fact, a "victim" of the fraud, and not its aider and abettor. It is seeking Rs 100 crore in damages.

The most obvious questions to ask are these:

Why did the Mahindra Satyam board wake up to the fraud more than two years and nine months after it acquired the firm in April 2009?

On what basis can PriceWaterhouse (PW) claim it is a "victim" of the fraud when it has already settled with the US Securities and Exchange Commission (SEC), paid a huge fine, and accepted debarment for an unspecified period?

The real victims of the scam are the employees (at least, those who were not involved in Raju's scam) and Indian shareholders of Satyam. How come, none of them has sued the company in India?

Mahindra Satyam has settled its cases in the US, paying $125 million to close class action suits, and $70 million to a company called Upaid for alleged forgery in the transfer of certain software properties by Satyam. Another $ 10 million was incurred in settling with the US SEC. Indian shareholders got zilch.

With a US bill of $205 million, Mahindra Satyam Chairman Vineet Nayyar told The Times of India that the company was seeking much more than that in damages from Satyam, the Rajus, the company's past financial officers, and the auditors.

The Times quotes Nayyar as saying: "Though we haven't specified the damages because we don't know the exact magnitude of damages, some are known to us and easily quantifiable...Obviously, we have angst against the previous management and auditors who had a fiduciary responsibility. It is only right and fair that they should compensate the company," Nayyar added.

Nayyar also told CNBC TV-18 that the fraud would not have happened without the "criminal negligence" and "collusion" of the auditors.

We agree, but why didn't this occur to the Mahindras in 2009? Nayyar gave an unconvincing reply that they had to clear existing liabilities and complete some formalities.

Before we come down to analysing what Nayyar said, let's also note why the company is suddenly willing to sue. Last August, the income tax department asked Mahindra Satyam to pay Rs 2,114 crore for the assessment years 2002-03 and 2007-08 when Ramalinga Raju was at the helm.

In his confessional letter dated 7 January 2009, Raju had indicated overstatement of revenues and cash balances and other misstatements that collectively added up to a fraud of over Rs 7,000 crore.

The taxman obviously has come to collect, now that the Mahindras have put Satyam on the road to recovery.

While there is no guarantee which way the tax verdict will go, the Mahindra Satyam decision to sue the former management and auditors could well be a strategic move to say that the fraud happened during their watch - and any dues should, logically, come from them.

Why did the Mahindra Satyam board wake up to the fraud more than two years and nine months after it acquired the firm in April 2009? Reuters

Moreover, by launching a civil suit - in India civil suits seldom yield multi-crore settlements - Mahindra Satyam is seeking to bring the courts in. At the very least, if the tax case gets out of hand, it can bury the matter in courts. The idea probably is to see that the taxman's dues get linked to the previous owners' shenanigans rather than the new management.

However, a more important reason could be the fact that Mahindra Satyam is in ethical - if not legal - breach of the high standards of corporate governance expected of them.

While Nayyar talked about the previous board's and auditors' breach of "fiduciary responsibility," let's ask this: isn't Mahindra Satyam equally guilty of the same when it comes to how it treated the Indian shareholders?

When Satyam settled its class action shareholder suits in the US, it forgot about its own shareholders back home. The Rajus robbed both their domestic and international shareholders, but Mahindra Satyam settled only with the US shareholders. And this was done by dipping into Satyam's money. Indian shareholders thus lost twice over: by not getting a settlement, and then seeing their funds being used to pay US shareholders.

The lack of a strong tort law, and also low awareness among Indian investors, is the main reason for this.

As for the auditors, their attempt to claim they were victims is laughable. PriceWaterhouse failed to do its duty, and for this it has been strongly penalised by the US SEC through a consent order. In India, the action against them has been grossly inadequate.

PW played lambs when confronted by the SEC in the US, but here they are tigers. "PW is outraged that Satyam is attempting to shift responsibility to the auditors for the consequences of a carefully and deliberately concealed fraud that was undertaken at the direction of its own senior management," The Times of India quotes the audit firm as saying.

Great. It's like a watchdog recruited to guard the house suing its owner for letting it sleep on duty.

Let's hear what the US SEC had to say about the auditor's behaviour in the Satyam fraud. In an order dated 5 April 2011, the SEC said Price Waterhouse's audit reports on Satyam "did not conduct Satyam's audits in accordance with PCAOB (the US Public Company Accounting Oversight Board) standards... Specifically, the PW India partners and staff on the Satyam engagement team failed to maintain control of the confirmation process with respect to cash and cash equivalent balances as well as Satyam's accounts receivables. The failure to properly execute third-party confirmation procedures resulted in the fraud at Satyam going undetected until the former chairman's public confession in January 2009."

So let's not agitate too much over Mahindra Satyam's and PW's lawsuits. If anyone has a right to sue, it is the employees and Indian shareholders of Satyam. The former for damaged career prospects, and the latter for being let down by the Mahindra Satyam management.

It's time for Satyam's former and present shareholders to sue the Mahindra Satyam management for unequal treatment of Indian shareholders. It is a case of videshi shareholders being treated better than desi ones. Are Indian shareholders second class investors?

by R Jagannathan

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