Examining the Prospect of the SEC Taking Action Against Infosys

Don Tennant

The Securities and Exchange Commission for years has been very aggressive in bringing lawsuits against companies that don't play by the rules. It's time for the SEC to direct that aggressiveness towards Infosys.

 

I don't know whether the SEC is looking at Infosys, but I do know that if it's not, it should be. Jay Palmer's civil lawsuit alleging that Infosys has engaged in visa and tax fraud, and the U.S. government's criminal investigation of the company's visa-related activity, are likely to change Infosys forever. No one should be surprised if criminal indictments are on the horizon. But the U.S. government still needs to be all over this case on the civil side, as well. And the SEC is just the body to do it.

 

By submitting a report to the SEC, a company affirms that the contents of the report are truthful and accurate. If the SEC were to find that not to be the case, one might expect that it would take some very hard-nosed action. In its 2010-2011 Annual Report (Form 20-F) submitted to the SEC, Infosys made this declaration:

Our Audit Committee has also adopted a Whistleblower Policy wherein it has established procedures for receiving, retaining and treating complaints received, and procedures for the confidential, anonymous submission by employees of complaints regarding questionable accounting or auditing matters, conduct which results in a violation of law by Infosys or in a substantial mismanagement of company resources. Under this policy, our employees are encouraged to report questionable accounting matters, any reporting of fraudulent financial information to our shareholders, the government or the financial markets any conduct that results in a violation of law by Infosys to our management (on an anonymous basis, if employees so desire). Under this policy, we have prohibited discrimination, retaliation or harassment of any kind against any employee who, based on the employee's reasonable belief that such conduct or practices have occurred or are occurring, reports that information or participates in an investigation.

Uh-oh. It's going to be very, very difficult to argue that Palmer, who followed the Whistleblower Policy in good faith, has not been subjected to any kind of discrimination, retaliation or harassment. Since Palmer filed the lawsuit, Infosys has kept him on the bench, and won't assign him to a project. As a result, he has lost tens of thousands of dollars in compensation, and he's watching his skills atrophy while Infosys has gone on a hiring spree in the United States. Throw in the verbal abuse he has endured from Infosys managers, along with the fact that he has been isolated from the normal company engagement that all employees have a right to expect, and the pattern of retaliation and harassment is glaring. I wouldn't be surprised if the SEC doesn't take too kindly to that.

 

Infosys made a similar declaration, meanwhile, in its 2010-2011 Annual Report to shareholders:

We have established a mechanism for employees to report concerns about unethical behavior, actual or suspected fraud, or violation of our code of conduct or ethics policy. It also provides for adequate safeguards against victimization of employees who avail of the mechanism, and also allows direct access to the Chairperson of the audit committee in exceptional cases. We further affirm that no employee has been denied access to the audit committee.

The CEO and CFO certification, which is signed by CEO S. Gopalakrishnan and CFO V. Balakrishnan, and is contained in the Annual Report to shareholders, includes this statement:

We affirm that we have not denied any personnel access to the audit committee of the Company (in respect of matters involving alleged misconduct) and we have provided protection to whistleblowers from unfair termination and other unfair or prejudicial employment practices.

If Infosys is found to have subjected Palmer to unfair employment practices, it's hard to imagine that the company's shareholders won't feel betrayed. All I know is that if I were an Infosys shareholder under those circumstances, I'd be the first in line to file a shareholder lawsuit against the company.



Add Comment      Leave a comment on this blog post
Nov 30, 2011 1:14 AM Don Tennant Don Tennant  says: in response to Chamat

You seem to be under the impression that the SEC is only concerned with financial auditing. That is not the case. The SEC is concerned with any matter that relates to corporate governance. Just yesterday, the SEC announced an injucnction and relief against Atlantis Technology Group because it lied when it said it had relationships with television networks to offer content to its subscribers:

http://www.sec.gov/litigation/litreleases/2011/lr22171.htm

I suggest you familiarize yourself with the facts of the matter at hand before commenting here.

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Nov 30, 2011 1:19 AM SealTeam6 SealTeam6 SealTeam6 SealTeam6  says:

It would be good if more than one agency investigates Infosys. The more eyes on the systemic misdoings at Infosys Inc would make for a wider case against what seems to be a corporate wide issue, not just about visas.

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Nov 30, 2011 1:20 AM Don Tennant Don Tennant  says: in response to Chamat

I also find it telling that you singled out "accounting and auditing matters" and failed to mention "any conduct that results in a violation of law by Infosys." Your selective reading adds no value to the discussion.

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Nov 30, 2011 1:24 AM Chamat Chamat  says: in response to Don Tennant

I am talking about the report which you pasted here. It says "accounting or auditing matters" and till date there is nothing which suggests that Infosys has lied about their accounting or auditing matters.

There is an allegation by Palmer about misuse of B1 visa and the case is in court.

So even with your example of Atlantis Tech I am not clear on what capacity SEC will take any action on Infosys!

thanks for your suggestion anyway.

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Nov 30, 2011 1:25 AM Don Tennant Don Tennant  says: in response to SealTeam6 SealTeam6

You'll recall that DHS, DOJ and the State Department are also investigating Infosys. Don't be surprised if their criminal investigation results not only in criminal action, but civil action as well. But I think it's especially important for the SEC to get involved, because those guys are relentless.

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Nov 30, 2011 1:36 AM Don Tennant Don Tennant  says: in response to Chamat

The excerpt I pasted here also says "any conduct that results in a violation of law by Infosys." Please read it in its entirety. To repeat, the SEC is not just concerned with accounting and auditing matters. I used the Atlantis example in an attempt to make that clear to you.

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Nov 30, 2011 1:44 AM SealTeam6 SealTeam6 SealTeam6 SealTeam6  says: in response to Don Tennant

I think what people like Chamat (who I believe is involved in the outsourcing business) are worried about is that such investigations will reveal "standard" operating procedures that Infosys and related smaller companies have worked out over the years to game the system  in visas and the related creative accounting side to cover how perhaps such people on ineligible visas are paid outside the legal process and paper trail. I am always reminded of how finally Al Capone was indicted and convicted  not on murder, which he managed to dodge despite evidence,  but tax evasion.

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Nov 30, 2011 2:22 AM Transformer Transformer  says:

I agree with Don.SEC should investigate Infosys.

There may be another angle to consider . I believe Palmer raised the issue about B1 visa holders being contracted at fixed hourly/daily rates.If this is so, then how would Infosys reveal this "illegal " work in their audited accounts ?

Something to SCRUTINIZE CAREFULLY!

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Nov 30, 2011 6:24 AM AS AS  says: in response to Don Tennant

Don, Remember this is the same SEC that cleared Goldman Sachs and other banking companies of any wrongdoing.  A judge just thew out their agreement with Citigroup and others that allowed them to just pay a small fine and not admit any wrongdoing!!

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Nov 30, 2011 12:59 PM Chamat Chamat  says:

I fail to understand how is Financial auditing and visa abuse allegations are inter related?? I think Don got confused with the word Whistleblower and didn't pay much attention to "accounting or auditing matters". This usually happens in a preoccupied mind.

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Dec 1, 2011 6:27 AM John C John C  says: in response to Don Tennant

Don,

What do you know about Infosys to write such a biased opinion against them? I work for IBM today, but used to work for Infosys before. Infosys is an extremely good employee and customer centric company. They follow the processes rigorously. Jay Palmer is after money and you don't seem to get it. It is ridiculous to get some section from the annual report filing and drawing conclusions from it. I really question your knowledge on anything - your column sounds so naive.

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Dec 1, 2011 10:37 AM Vincenzo Vincenzo  says: in response to John C

"I work for IBM today, but used to work for Infosys before."

'nuff said.

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Dec 1, 2011 12:46 PM R. Lawson R. Lawson  says:

I've been working allot lately with SEC data - most specifically data that isn't easily accessed by the public.  It's public data, but the source data is very difficult to import so most of the things people should be asking, they aren't asking.

As an example, most people look at the price a company's security (stock) trades at - and assume that if it is going up it must be good and if going down it must be bad.  There are for more useful data that is for the most part ignored.

If the SEC were really serious about protecting people from fraud, they would make their data more available. 

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Dec 1, 2011 12:58 PM hoapres hoapres  says: in response to AS

This is a nonstarter.

The SEC is not going to put on the front burner a case which is immigration related and not securities fraud.

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Dec 3, 2011 10:25 AM Wakjob Wakjob  says: in response to Don Tennant

And I suggest you familiarize yourself with just how rampant this kind of corruption and discrimination is within Indian IT companies all over the US. It's not just InfoSys.

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Dec 3, 2011 10:27 AM Wakjob Wakjob  says: in response to Chamat

"I am talking about the report which you pasted here. It says "accounting or auditing matters" and till date there is nothing which suggests that  Infosys has lied about their accounting or auditing matters."

Let's see - Indian CEO of Computer Assocaites went to prison for accounting fraud. So did head of Satyam for same fraud. The fact is, fraud and especially boasting are a way of life in India. The corruption is widespread all over Indian companies. It's a pretty safe bet InfoSys is doing some accounting scams in order to overstate profits as well.

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Dec 3, 2011 10:29 AM Wakjob Wakjob  says: in response to AS

"Don, Remember this is the same SEC that cleared Goldman Sachs and other banking companies of any wrongdoing.  A judge just thew out their agreement with Citigroup and others that allowed them to just pay a small fine and not admit any wrongdoing!!"

SEC is probably in the pocket of all the big Wall St. firms. Probably also in the pocket of NASSCOM.

"The SEC is not going to put on the front burner a case which is immigration related and not securities fraud."

It is the unstated policy of the US gov't to massively increase immigration. So the SEC probably won't do jack.

I agree with you Don that SEC should investigate IndoSys, but it just ain't gonna happen - too many entrenched interests want the invasion of the USA to continue in the name of 'globalization'.

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Dec 3, 2011 10:32 AM Wakjob Wakjob  says: in response to John C

"Don, What do you know about Infosys to write such a biased opinion against them? I work for IBM today, but used to work for Infosys before. Infosys is an extremely good employee and customer centric company. They follow the processes rigorously. Jay Palmer is after money and you don't seem to get it. It is ridiculous to get some section from the annual report filing and drawing conclusions from it. I really question your knowledge on anything - your column sounds so naive."

What do you know about what Palmer saw inside IndoSys? Were you there? The fact is, this kind of visa fraud is RAMPANT all over Indian, Inc. in America. After all, they're the ones who whine to our congress "We can't find enough qualifed Americans" when in fact, they are deliberately denying jobs to Americans who worked in IT before India ever saw a keyboard.

The corrpution on the part of India Inc. is RAMPANT in the US and has to be stopped. We're being reverse colonized by India as "payback" for what Britain did to India 200 years ago. I suggest you learn some history and just how much resentment towards the white west there is in India and China.

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Dec 3, 2011 10:33 AM Wakjob Wakjob  says: in response to Vincenzo

IBM is currently being sued by the State of Indiana to the tune of $867 MILLION for a failed solution. IBM is also being sued by the state of TX for the same reason.

We really need to have IBM investigated too along with IndoSys while the gov't is at it.

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Dec 5, 2011 5:42 AM Su Su  says: in response to SealTeam6 SealTeam6

"I am always reminded of how finally Al Capone was indicted and convicted  not on murder, which he managed to dodge despite evidence,  but tax evasion. " ~

Yes you say time and again about this. What you don't understand the difference between 2 scenario. The entire offshoring or outsourcing is still not hated or subject to investigations for all the US authorities.

If US wants they will do whatever they have in their power to "stop something", "hunt someone", or "destroy something". But just because you want that doesn't become priority for your own Government.

In all of comments and blogs I can categorize one type - who always wants to do "everything what they can to stop outsourcing". If US as a country want the same that will be acheived in 1 month. All these Infosys et all will be out of US in no time. BUt unfortunately for you that is not happening. You might want that to happen but that is not going on currently.

SOmeone personally might want DOL, DOJ, SEC and what not ....every organization possible to channelize their entire energy to stop outsourcing or invest in Infosys. Deep down you also know that is not gonna happen.

When you hate something real bad and you can't do nothing about it - you just hope and hope whole world turn against it. Often that never happens just because you want it so. Their are people sitting at every department who decides what to do and when and who to treat as Al Capone.

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Dec 5, 2011 5:58 AM SealTeam6 SealTeam6 SealTeam6 SealTeam6  says: in response to Su

If US as a country want the same that will be acheived in 1 month. All these Infosys et all will be out of US in no time. BUt unfortunately for you that is not happening. You might want that to happen but that is not going on currently.

If only it were that simple and possible. The US doe not have that god like prowess, much as we would like it to be. It took 10 years to find one man in Pakistan  with all the politics, blundering and miscommunication between various agencies both here and abroad. But in the end one lucky break was seen through to the end. But did that end terrorism ? Nope and it never will.

Same here. There is an alphabet soup of agencies directly and indirectly involved . But all have differing agendas and levels of competency. Whether Infosys is fined and convicted is based on all these factors.

It doesn't need the world to "turn against it". Just need the few right people at the right time making the right judgements. In fact too many people being involved (as we have seen with other cases) tends to slow things down. I am actually amazed we have got as far as we have in this case. I wouldn't have imagined it possible even a year ago.

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Dec 6, 2011 5:58 AM fulmonty fulmonty  says: in response to SealTeam6 SealTeam6

If USA can intervene with Indian govt with regard to US companies (Facebook, Google etc)   then I think Indian govt will also intervene in USA's affairs on behalf of Infosys which is a major company for India. Besides Infosys has strong clout in India. [See http://sabhlokcity.com/2011/02/mr-narayana-murthy-please-do-something-or-admit-you-are-a-stooge-of-congress/  and all the URLs inside that comments section. Also http://sabhlokcity.com/2011/08/getting-hard-to-believe-narayana-murthys-integrity-after-this/ and comment below linking Murthy to broadcaster NDTV which in turn is allegedly linked to a major part of the "2G scam" that is considered barely emerging news because of complicit media houses].

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Dec 6, 2011 10:25 AM SealTeam6 SealTeam6 SealTeam6 SealTeam6  says: in response to fulmonty

I am sure that Infosys will spare no effort in terms of lobbying on all fronts, Indian and American to ensure their interests are served. As regards getting the Indian government to intervene on their behalf, that is obviously their prerogative. But they have to weigh the consequences of doing that in 2012, very close to a US Presidential election during one of the worst economic downtrends ever. An unprecedented amount of attention will be on this case, one which most people thought would never go to trial.

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Dec 10, 2011 6:49 AM AS AS  says:

Hey Don - Why are you always presuming Infosys is guilty while whatever the accuser says is kosher? Did you short their stock and are looking to ensure that the stock price drops?

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