Great frauds in history: Byrraju Ramalinga Raju and Satyam
Byrraju Ramalinga Raju boosted the share price of his company by inflating profits, cash flows and assets, creating false bank statements, customer invoices and even fake salary accounts.
Byrraju Ramalinga Raju was born in Bhimavaramin southeast India and received a degree in commerce before going on to do an MBA at Ohio University. He then went back to India and started various industrial, real-estate and construction firms, with mixed results. In 1987 he set up Satyam Computer Services, one of India's first outsourcing firms, taking it public in 1992. By the start of 2009 Satyam was India's fourth-largest IT firm and was providing IT and accounting services for more than 600 large companies, including international conglomerates General Electric, Nestl, and BP.
What was the scam?
From 2001, in order to boost Satyam's share price, Raju began working with key executives, including those within the company's internal audit team, to systematically inflate profits, cash flows and assets. Raju and his team did this by creating false bank statements, customer invoices and even fake salary accounts. The company also used forged board resolutions to obtain loans that were never declared on the balance sheet, using the money to keep the scam going. By September 2008, reported sales were 25% higher than actual sales, while assets were overstated by $1.47bn.
What happened next?
In December 2008 the company announced it was buying an infrastructure company owned by Raju's sons. The deal was approved by the board, but it generated a massive backlash from shareholders, along with the resignation of all the independent directors. Raju was forced to confess publicly that he had been systematically defrauding investors, prompting the company's share price to collapse. Raju was arrested along with two other company executives. He was convicted of fraud in 2015 and sentenced to seven years in prison, but he remains out on bail.
Lessons for investors
Due to Satyam's economic importance, the Indian government stepped in and organised a takeover by Tech Mahindra, but shareholders who had bought just before Raju's fraud came to light would lose two-thirds of their investment. Between 2001 and 2008, Raju gradually dumped shares onto the market, reducing his stake from 25% to only 3.6%. Selling on such a scale by close insiders, especially the chief executive, can be a sign that things are going wrong, or that they lack confidence in their firm's future.