corporate fraud
Monday, 19. October 2009, 09:57:18
The history of corporate fraud is banal
Recent history is replete with examples of corporate fraud, with little to tell them apart. Each instance has a new set of victims – who else, but the investors.
Here’s a look at some of the corporate fraud that stole headlines in the past decade.
Comverse Technology
In 2006, Comverse's founder and former Chairman and CEO, Jacob "Kobi" Alexander and two other former executives, former chief financial officer David Kreinberg and lawyer William Sorin reported manipulated stock options for their personal gain and operated slush funds. As part of the scheme, the former executives misguided investors about New York-based Comverse's stock option grants. The result, Comverse, a maker of software, systems and related services for multimedia communication and information processing applications overstated its net income and earnings per share between 1991 and at least 2002.
The three former executives allegedly earned millions of dollars and face multiple charges of conspiracy, securities fraud, wire fraud, mail fraud, money laundering and making false filings to the Securities and Exchange Commission (SEC). Back dating of stock options is reported to have victimised Comverse shareholders and prospective investors.
Alexander, an Israeli citizen, was arrested in Namibia in September 2006. He is free on bail while the US awaits his extradition to try him on account of 35 criminal counts related to securities fraud, including stock-option backdating. Alexander reportedly plans to plead “not guilty'' to these charges. He recently won a Namibian court bid to postpone an extradition hearing until March 4, 2009.
Siemens
In 2006, Reinhard Siekaczek, a former senior manager of the German group Siemens received a two-year suspended prison sentence and was fined $128,349 for creating slush funds and companies to acquire contracts abroad.
Siemens accepted that the scandal involved nearly $1.8 billion described as unclear payments. Siekaczek admitted to his crime and told the court that although he tried to stop the organised bribery, top managers did not take action. The judge said it was not clear whether those executives were also involved or had received the payments.
Heinrich von Pierer, the former chairman, and Klaus Kleinfeld, who took office as chief executive, lost their jobs following the scandal, which surfaced in November 2006. However, they denied any involvement and were not charged with any misappropriation.
Computer Associates
In 2004, Sanjay Kumar, former CEO of Computer Associates was found guilty of being part of a $2.2 billion accounting scandal. He was tried for charges including conspiracy, securities fraud and hindering justice.
Kumar was accused of developing a company practice called the "35-day month", in which the sales people were asked to complete the deals after the quarter and take out the timestamp from papers. This was done with the intention of inflating the company's software sales figures to meet analyst expectations. According to charges against Kumar, he also encouraged the company’s employees to misinform the prosecutors and the SEC lawyers when the government began the investigations in 2002.
Kumar was sentenced to 12 years and was fined $8 million for false reporting software licence revenues and for lying to investors. Five other former executives of the company also pleaded guilty to charges of fraud. Computer Associates entered into a deal between Computer Associates and government investigators to protect the company against prosecution.
WorldCom
The former CEO of WorldCom, Bernard Ebbers, was found guilty of the $11 billion scam that led to the fall of the company in 2002. This is considered the biggest corporate fraud and bankruptcy in the history of the US.
Ebbers was blamed for being over-enthusiastic about maintaining the company’s share price high. According to the US government, Ebbers instructed chief financial officer Scott Sullivan to conceal billions of dollars in unmanageable expenses and recognize illegal revenue from 2000 to mid-2002.
Ebbers faces charges of securities fraud, conspiracy and charges of making false filings to the SEC, which can bring imprisonment of up to 85 years.
According to a KPMG survey, India Fraud Survey 2008, the trend of corporate fraud and misconduct is likely to continue.
The respondents of the survey believed that the maximum potential of committing fraud existed within the organizations including the senior management and the employees. According to the survey, the inherent responsibilities and trust associated with senior positions, ability to override internal controls, internal knowledge and access to confidential company information that came with managerial position created a risk that of fraud. The survey found that the most prevalent form of theft would be IP or frauds related to e-commerce and IT.
These events in history show a deceitful tendency spurred by excessive pressure to meet "analyst expectations". The question is whether the Satyam episode will make other executives focus on productivity rather than resorting to such malpractices, or whether stringent regulations are required to protect investors. all
Recently satyam Fraud
Here is the letter written by Mr. Raaju
Following is the text of the letter Raju wrote to the Satyam board:
"It is with deep regret and tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice:
1. The Balance Sheet carries as of September 30, 2008,
a) Inflated (non-existent) cash and bank balances of Rs 5,040 crore (as against Rs 5,361 crore reflected in the books);
b) An accrued interest of Rs 376 crore, which is non-existent
c) An understated liability of Rs 1,230 crore on account of funds arranged by me;
d) An overstated debtors' position of Rs 490 crore (as against Rs 2,651 reflected in the books);
2. For the September quarter(Q2) we reported a revenue of Rs 2,700 crore and an operating margin of Rs 649 crore(24 per cent of revenue) as against the actual revenues of Rs 2,112 crore and an actual operating margin of Rs 61 crore (3 per cent of revenues). This has resulted in artificial cash and bank balances going up by Rs 588 crore in Q2 alone.
The gap in the balance sheet has arisen purely on account of inflated profits over several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance).
What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years.
It has attained unmanageable proportions as the size of the company operations grew significantly (annualised revenue run rate of Rs 11,276 crore in the September quarter, 2008, and official reserves of Rs 8,392 crore).
The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify a higher level of operations thereby significantly increasing the costs.
Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in the takeover, thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten.
The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. Maytas' investors were convinced that this is a good divestment opportunity and a strategic fit.
One Satyam's problem was solved, it was hoped that Maytas' payments can be delayed. But that was not to be. What followed in the last several days...
Recent history is replete with examples of corporate fraud, with little to tell them apart. Each instance has a new set of victims – who else, but the investors.
Here’s a look at some of the corporate fraud that stole headlines in the past decade.
Comverse Technology
In 2006, Comverse's founder and former Chairman and CEO, Jacob "Kobi" Alexander and two other former executives, former chief financial officer David Kreinberg and lawyer William Sorin reported manipulated stock options for their personal gain and operated slush funds. As part of the scheme, the former executives misguided investors about New York-based Comverse's stock option grants. The result, Comverse, a maker of software, systems and related services for multimedia communication and information processing applications overstated its net income and earnings per share between 1991 and at least 2002.
The three former executives allegedly earned millions of dollars and face multiple charges of conspiracy, securities fraud, wire fraud, mail fraud, money laundering and making false filings to the Securities and Exchange Commission (SEC). Back dating of stock options is reported to have victimised Comverse shareholders and prospective investors.
Alexander, an Israeli citizen, was arrested in Namibia in September 2006. He is free on bail while the US awaits his extradition to try him on account of 35 criminal counts related to securities fraud, including stock-option backdating. Alexander reportedly plans to plead “not guilty'' to these charges. He recently won a Namibian court bid to postpone an extradition hearing until March 4, 2009.
Siemens
In 2006, Reinhard Siekaczek, a former senior manager of the German group Siemens received a two-year suspended prison sentence and was fined $128,349 for creating slush funds and companies to acquire contracts abroad.
Siemens accepted that the scandal involved nearly $1.8 billion described as unclear payments. Siekaczek admitted to his crime and told the court that although he tried to stop the organised bribery, top managers did not take action. The judge said it was not clear whether those executives were also involved or had received the payments.
Heinrich von Pierer, the former chairman, and Klaus Kleinfeld, who took office as chief executive, lost their jobs following the scandal, which surfaced in November 2006. However, they denied any involvement and were not charged with any misappropriation.
Computer Associates
In 2004, Sanjay Kumar, former CEO of Computer Associates was found guilty of being part of a $2.2 billion accounting scandal. He was tried for charges including conspiracy, securities fraud and hindering justice.
Kumar was accused of developing a company practice called the "35-day month", in which the sales people were asked to complete the deals after the quarter and take out the timestamp from papers. This was done with the intention of inflating the company's software sales figures to meet analyst expectations. According to charges against Kumar, he also encouraged the company’s employees to misinform the prosecutors and the SEC lawyers when the government began the investigations in 2002.
Kumar was sentenced to 12 years and was fined $8 million for false reporting software licence revenues and for lying to investors. Five other former executives of the company also pleaded guilty to charges of fraud. Computer Associates entered into a deal between Computer Associates and government investigators to protect the company against prosecution.
WorldCom
The former CEO of WorldCom, Bernard Ebbers, was found guilty of the $11 billion scam that led to the fall of the company in 2002. This is considered the biggest corporate fraud and bankruptcy in the history of the US.
Ebbers was blamed for being over-enthusiastic about maintaining the company’s share price high. According to the US government, Ebbers instructed chief financial officer Scott Sullivan to conceal billions of dollars in unmanageable expenses and recognize illegal revenue from 2000 to mid-2002.
Ebbers faces charges of securities fraud, conspiracy and charges of making false filings to the SEC, which can bring imprisonment of up to 85 years.
According to a KPMG survey, India Fraud Survey 2008, the trend of corporate fraud and misconduct is likely to continue.
The respondents of the survey believed that the maximum potential of committing fraud existed within the organizations including the senior management and the employees. According to the survey, the inherent responsibilities and trust associated with senior positions, ability to override internal controls, internal knowledge and access to confidential company information that came with managerial position created a risk that of fraud. The survey found that the most prevalent form of theft would be IP or frauds related to e-commerce and IT.
These events in history show a deceitful tendency spurred by excessive pressure to meet "analyst expectations". The question is whether the Satyam episode will make other executives focus on productivity rather than resorting to such malpractices, or whether stringent regulations are required to protect investors. all
Recently satyam Fraud
Here is the letter written by Mr. Raaju
Following is the text of the letter Raju wrote to the Satyam board:
"It is with deep regret and tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice:
1. The Balance Sheet carries as of September 30, 2008,
a) Inflated (non-existent) cash and bank balances of Rs 5,040 crore (as against Rs 5,361 crore reflected in the books);
b) An accrued interest of Rs 376 crore, which is non-existent
c) An understated liability of Rs 1,230 crore on account of funds arranged by me;
d) An overstated debtors' position of Rs 490 crore (as against Rs 2,651 reflected in the books);
2. For the September quarter(Q2) we reported a revenue of Rs 2,700 crore and an operating margin of Rs 649 crore(24 per cent of revenue) as against the actual revenues of Rs 2,112 crore and an actual operating margin of Rs 61 crore (3 per cent of revenues). This has resulted in artificial cash and bank balances going up by Rs 588 crore in Q2 alone.
The gap in the balance sheet has arisen purely on account of inflated profits over several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance).
What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years.
It has attained unmanageable proportions as the size of the company operations grew significantly (annualised revenue run rate of Rs 11,276 crore in the September quarter, 2008, and official reserves of Rs 8,392 crore).
The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify a higher level of operations thereby significantly increasing the costs.
Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in the takeover, thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten.
The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. Maytas' investors were convinced that this is a good divestment opportunity and a strategic fit.
One Satyam's problem was solved, it was hoped that Maytas' payments can be delayed. But that was not to be. What followed in the last several days...
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