SEC Charges Satyam Computer Services With Financial Fraud

The United States Securities and Exchange Commission (SEC) has charged Satyam Computer Services Limited (currently Mahindra Satyam) 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 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.

Without admitting or denying the allegations in the SEC's complaint, Satyam has, in turn, 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. The settlement requires Satyam to pay a $10 million penalty, to hire an independent consultant and to comply with certain undertakings.

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.

Cheryl Scarboro, Chief of the SEC's Foreign Corrupt Practices Act Unit, said, "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." 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."

Both the SEC and Mahindra Satyam are willing to let bygones be, and look ahead, after the settlement by the company. "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, in an issued statement. Vineet Nayyar, Chairman, Mahindra Satyam, said in a media release issued by the company, "We concluded that it is in the best interests of Mahindra Satyam and its shareholders to resolve this matter and put it behind us on the basis announced today."

The SEC's investigation is continuing.

You can read more on the SEC complaints here. To read the Litigation Release No: 21915 and Accounting and Auditing Enforcement Release No. 3258, please click here. Mahindra Satyam is part of the $11.1 billion Mahindra Group.

Related: The SEC sanctioned five India-based affiliates of PricewaterhouseCoopers (PwC) that formerly served as independent auditors of Satyam Computer Services Limited for repeatedly conducting deficient audits of the company's financial statements and enabling a massive accounting fraud to go undetected for several years. Read here for more.