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.

B. Ramalinga Raju © NOAH SEELAM/AFP/Getty Images

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.

Recommended

Cash rich and bored? Be careful what you do with your money
Investment strategy

Cash rich and bored? Be careful what you do with your money

As the pandemic has left many people with more time on their hands but little opportunity to spend, they have been speculating in the markets. But don…
19 Oct 2020
Jonathan Ruffer: tech stocks have become “long-duration assets”
Tech stocks

Jonathan Ruffer: tech stocks have become “long-duration assets”

As with bonds, tech stocks are now held not because of that they are, but because of what investors fear if they don't hold them, says Jonathan Ruffer…
16 Oct 2020
Investors should give European stockmarkets a second look
European stockmarkets

Investors should give European stockmarkets a second look

Investors tend to think that European stockmarkets are full of stale “old economy” firms while the US is full of fast-growing tech stocks. But Europea…
16 Oct 2020
Lessons for investors from Big Tech's previous golden era
Tech stocks

Lessons for investors from Big Tech's previous golden era

The forerunners of today's tech stock titans dominated the 1960s and 1970s. Former Xerox senior manager Dr Mike Tubbs was there and explains what inve…
16 Oct 2020

Most Popular

The Bank of England should create a "Bitpound" digital currency and take the world by storm
Bitcoin

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020
What would negative interest rates mean for your money?
UK Economy

What would negative interest rates mean for your money?

There has been much talk of the Bank of England introducing negative interest rates. John Stepek explains why they might do that, and what it would me…
15 Oct 2020
Negative interest rates and the end of free bank accounts
Bank accounts

Negative interest rates and the end of free bank accounts

Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK bankin…
19 Oct 2020