Is Infosys Setting Itself Up for a Massive Shareholder Lawsuit?

Don Tennant

As Infosys continues to botch its handling of both the lawsuit filed by Infosys employee and whistleblower Jay Palmer, and the subsequent criminal investigation of alleged visa fraud being conducted by the U.S. government, the potential loss of hundreds of millions of dollars in damages, and of customers who are no longer willing to place their trust in the company, is raising an extremely uncomfortable question: Is this entire fiasco a massive shareholder lawsuit waiting to happen?

 

In my Feb. 7 post, "Infosys CFO Publicly Claims No Visa Violations, Despite Company's Internal Admission," I wrote about the fact that Infosys CFO V. Balakrishnan, in reference to the Palmer case and the feds' investigation, had publicly made the astonishing claim, "We are very clear that we have not violated any of the rules." Never mind that Infosys' own corporate counsel had written in an internal email to Palmer and a second whistleblower, "The issues that you reported to us have made it clear to management that certain changes need to be made to our systems and processes to prevent the misuse of the [B-1 Visa] program." Never mind that Palmer and his attorney, Kenny Mendelsohn, are cooperating fully with the federal investigators in the criminal matter, which means the feds are sitting on a pile of incriminating evidence that, as Mendelsohn likes to say, "a show dog can't jump over." We know that the feds have met with Infosys' attorneys. Are we to imagine that they haven't made it clear to Infosys what they've got?

 

So given the fact that Infosys is telling the public, including its shareholders, that there have been no violations, when it's very much aware that that's simply not true, is that fair to those shareholders? Is it fair to them to wantonly antagonize U.S. government authorities, thereby potentially increasing the likelihood of massive punitive damages and sanctions that would dramatically restrict its business activities in the United States, the country where it amasses two-thirds of its revenue? According to Mendelsohn, what Infosys is doing is going to backfire on the company, big time:

When it all goes down, I think there will be a very strong case for a shareholder lawsuit. I certainly don't think Infosys has adequately disclosed to their stockholders the predicament that they're in. The other big problem that Infosys has is that they're snubbing their noses at the prosecutors and the investigators who are investigating them. There's the old saying, when you find yourself in a hole, you've got to quit digging. All they're doing is motivating people to work harder against them. At some point in time, somewhere, they're going to be begging for forgiveness, and that's kind of hard to get when you've been lying and going on TV saying you haven't done anything wrong, and the feds know what they have against them. It's just crazy to me that they're doing that, knowing what I know about the facts of this case.

Beyond the question of fairness to Infosys' shareholders, what are the legal ramifications of this shameless deception? What are the prospects for the U.S. Securities and Exchange Commission to take action? Here's Mendelsohn's assessment of the outlook for Infosys:

What I'm looking at, and what I think the SEC would want to look at, is has Infosys fully and properly disclosed to their stockholders what's going on? Have they manipulated their stocks through illegal activity? I think that's where the big issues are with the SEC. If Infosys keeps making comments like they've done nothing wrong, and the SEC were to file a claim against them-and I can't tell you they would or they wouldn't-but if they did, that would be, in my judgment, devastating to the company. But that's yet to be seen. If all this goes down, and they get hit for several hundred million, the IRS hits them and the SEC hits them, and all of a sudden the analysts think Infosys hasn't been truthful in their reporting, that could have a tremendous impact, and that's when you could have a shareholder lawsuit. From what I've seen, the big shareholder lawsuits happen after a company really goes down. Unfortunately, when companies are prospering, even if they're doing it through illegal conduct, the investors are OK with it. As long as they're getting their dividends and they're able to buy low and sell high, they don't worry about it.

But what happens if those investors see their dividends plunge because Infosys failed to muster the decency and fortitude to do the right thing when it was given the chance in the form of Palmer's whistleblower report, and because it lacked the competence and rectitude to take appropriate action in response to the U.S. government's criminal investigation? A lot will depend on how much deeper it digs the cavernous hole it has so senselessly chosen to dig for itself.



Add Comment      Leave a comment on this blog post
Feb 22, 2012 1:56 AM Richard Richard  says:

Dan, while I appreciate your posts but I look forward to something that has happened for real on this case rather than your personal thoughts on the matter. Nevertheless the enthusiasm continues

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Feb 22, 2012 2:09 AM Don Tennant Don Tennant  says: in response to Richard

My name isn't Dan.

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Feb 22, 2012 5:48 AM R. Lawson R. Lawson  says:

Shirley (pun intended) you would agree that Infosys if Infosys is found guilty in a criminal case or if ruled against in a civil case their statements could come back to bite them.  ("Don't call me Shirley").  If that one was over your head, IMDB the movie Airplane

I don't understand why they didn't simply take the "we had some isolated cases and we are working to resolve them" approach.  Even though I don't think this is isolated, that would seem like a more prudent approach because you get to play the "I'm sorry card" while also saying to investors "we told you so". 

I would have handled the Jay Palmer case like this - give the guy an internal award at Infosys and publicly thank him for discovering this "isolated" event - include a little plaque and a small bonus.  Then you send the message of "our company follows the rules" and even more so "we encourage employees to let us know when rules aren't followed so we can rectify the situation".  Instead, they publicly call him a liar and dare him to sue.

They could have played this so much differently.  I'm not sure if it is arrogance or what, but I think they made some serious miscalculations.  Well, I'm cheering for the other team so miscalculate away Infosys.

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Feb 22, 2012 6:42 AM George Alexander George Alexander  says: in response to R. Lawson

I think that they initially thought that they could brush this under the rug and deny the whole thing. They put their faith in their legal department's ability to muzzle rogue employees like they've done through arbiteration and non-compete agreements which scare down most of their Indian employees (hence, the threatening mails after he blew the whistle and made it public). Since Palmer stuck to his guns, it got out of hand after the feds got involved. Now the whole issue has a life of its own till the verdict comes out so whatever Infosys says won't help them out much. As they are publicaly more worried about quarters to quarter earnings like most corporations, they toned down this issue by making statements like these so that share holders won't worry. Shirely they're budgetting for a final payout and will then explain to the shareholders that the payout was not a big deal as it was already planned for just in case they lost the case. I don't believe there is much of an impact with clients.... maybe just with the clients named in his testimonial to congress. From what I understand, the client part of the equation is still going fine.

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Feb 22, 2012 11:11 AM kprn kprn  says: in response to George Alexander

While not hunky dory, but I dont think the client part is going even fine.  While its competitors are projecting a growth of 18-22%, infosys is just protectinga growth of 10-12%. This might not be directly related, but still there would have been some impact. Unless the fine imposed runs into a billion, a few millions should be that big of a impact for a company which is sitting on couple of billions in cash.

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Feb 22, 2012 12:38 PM Truth Truth  says:

The SEC should fine these Infosys Crooks to say a Billion Dollars!

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Feb 23, 2012 1:32 AM Don Tennant Don Tennant  says: in response to George

August is the court date for Jay's civil case. You appear to be forgetting about the U.S. government's criminal case. I'm sure Infosys would love for there to be peace and quiet between now and August, and for all of us to wear blinders between now and then. That's not going to happen.

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Feb 23, 2012 1:40 AM George George  says: in response to Don Tennant

Ok. Your call .

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Feb 23, 2012 3:24 AM SS SS  says:

yaaaaawn!!!!

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Feb 23, 2012 5:35 AM Rahul Rahul  says: in response to R. Lawson

Wake up my dear friends. All the conversation as of today only revolves arouind Ifs and Buts. Just wait and see. Unfortunately Ifs and Buts don't matter to the court.

The matter will be handled at the highest level in both the countries & Infosys is bound come out clean.

Outsourcing will continue and that too big time. Visa regulations will be relaxed. Just wait for the election to take place. By this time next year all will be well.

I come back again to the same question. Will the middle class Americans be able to afford products and services that are produced at 3 times the cost they are today? If the answer is NO, then you dont have a choice but to outsource to countries who are ready to produce it at a lower cost.

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Feb 23, 2012 7:40 AM Dolores Dolores  says: in response to Rahul

No, your economic math is off. Salaries in third world countries we outsource to have skyrocketed over the last decade plus. And if the dollar falls that will be the end of it. Besides, we have our own people's lives to consider first. It doesn't matter how cheap the shirts are at Walmart once your salary goes to zero, and millions of Americans have discovered this in the "Great Recession." Besides, India wouldn't buy our fighter planes and wouldn't let in Walmart. Our companies who were salivating for Indian customers have gotten a slap in the face in return. Look for the romance with foreign workers and foreign economic ventures to chill.

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Feb 23, 2012 9:44 AM Devil's Advocate Devil's Advocate  says: in response to Don Tennant

It appears that Infosys simply followed the option given by the US Consulates of a "B1 visa in lieu of H1B" in which case work is allowed for the person on the B1 visa. It appears that IBM, Accenture, TCS, Infosys, Wipro, HCL etc. made use of this option quite often. So, their leadership saying that they followed all the rules seems quite accurate. We can choose to blame our own laws and lawmakers for permitting such B1 visas in lieu of H1B. It seems that Infosys will go scot-free in the visa case as they simply followed the law - which allows a special case of B1 to work. This may/should lead to a change in laws, though.

http://newdelhi.usembassy.gov/types_of_visas/temporary-employment-holp/b1-in-lieu-of-h2.html

Individuals may apply for a B1 or B1/B2 visa to perform H-1B work in the United States as long as they fulfill the following criteria:

    Hold the equivalent of a U.S. bachelor's degree

    Plan to perform H-1B-caliber work or training

    Will be paid only by their foreign employer, except reimbursement of incidental travel costs such as housing and per diem. The employee must not receive any salary from a U.S. source.

    The task can be accomplished in a short period of time.

These travelers would be admitted as B1 visitors, and may only stay in the U.S. for the time allotted by the Department of Homeland Security upon entry.

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Feb 23, 2012 9:55 AM R. Lawson R. Lawson  says: in response to Rahul

"Outsourcing will continue and that too big time. Visa regulations will be relaxed. Just wait for the election to take place. By this time next year all will be well."

Thanks for that motivation - as to why we need to step up our efforts to oppose the offshoring visa, tax incentives to offshore services, and to seek a VAT that Europe imposes on your services yet we don't, but should to counter your currency manipulation. 

Americans aren't going to sit quietly and watch more good paying jobs go offshore and repeat the mistake we made with manufacturing.  Many of us bought into to the notion of free trade lifting all boats.  It's clear now that our current guest worker and trade policy is based on a house of cards that fell down in 2008 and our boats are just about to bottom out.

"I come back again to the same question. Will the middle class Americans be able to afford products and services that are produced at 3 times the cost they are today?"

Will they be able to feed their children when they don't have jobs?  We produce enough food and energy domestically to get by.  At the end of the day I will pay $60 for a pair of sneakers instead of $20 if it means I have a job and can provide for my family.  They'll last 4 times as long if they are made here. 

I keep hearing the argument of inflation and that prices would go up.  Prices probably will go up some, but it will be on consumer goods that we can live without.  Also, there has been a dramatic drop in quality in consumer goods.  Things aren't built like they once were.  I use to wear a pair of shoes when I was a kid an entire school year.  I'm buying my kids a new pair every few months.  I buy myself New Balance shoes - made in USA.  I have a good pair that is 6 years old.  Just needs new insoles and I can wear them a few more years.

Half the Chinese toys I get (especially those little helicopters) are broken within a week.  I have bought a total of 7 helicopters made in China because my kids have a short term memory - none of them are flying.  Not one made it longer than two weeks.  Those things cost $20-$30 each.  Money we could spend on high quality American shoes.

We managed just fine without cheap foreign goods.  We'll survive.  Thanks for your concern though Rahul, I know it is out of a genuine desire to see that American workers prosper...

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Feb 23, 2012 10:25 AM George George  says:

I was checking google news and bing news about Infosys - guess what, apart from Don's blogs, every other news about Infosys is positive. The stock price has appreciated 14% in the last 2 months. Obviously they are doing something right! They continue to grow and add customers. Customers are not dumb!

Why not let this case play out in the court. Don - Chill! I can understand yours and this lawyer's frustration - but, it is only a few months away and all this will be decided one way or the other.

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Feb 23, 2012 11:12 AM Don Tennant Don Tennant  says: in response to George

The fact that the stock price has appreciated 14% in the last 2 months is part of the problem for Infosys. Read my post again in that vein. And for what it's worth, let me give you a little tip: If someone comes up to you today and bets you $1,000 that no major U.S. media outlet within the next month will do a story that will make Infosys squirm in discomfort, take him up on it. You'll thank me later.

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Feb 23, 2012 12:16 PM George George  says: in response to Don Tennant

I am not a betting person, Don. I will pass!

It is going to be reviewed in August in the courts. Why not wait? I simply don't understand your approach of sensationalizing something when it is going to be reviewed anyways!

Your blog suggests that you and the lawyer know everything and Infosys does not!

Do you think a company like Infosys is not preparing to defend itself? From what I have read about them, they know what they are doing.  I see that you guys are on a panic mode as you are not able to figure out what this company is upto. Just 6 more months. Let us wait and see how it plays out!

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Feb 23, 2012 12:33 PM R. Lawson R. Lawson  says: in response to Don Tennant

Because the mass media is an indicator of what good news looks like, right?

If Infosys had abducted a blond haired blue eyed girl they would be in serious trouble right now.

Something is clearly about to go down that the media cannot ignore.  Based on that statement Don obviously knows something he cannot report on just yet.  Looks like March could turn interesting.

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Feb 24, 2012 10:34 AM R. Lawson R. Lawson  says: in response to Devil's Advocate

Devil's advocate, that is one of many loopholes - and they are accused of violating the terms of that very loophole.  Meaning, their hours were billable to the client (a 3rd party).

If they showed up on site at an Infosys office to write an internal application for Infosys that may be legal use of the program you mention.  The problem is that they aren't here to do that, rather to work onsite at another company and bill for those hours. 

That program is intended to allow people to primarily attend meetings, and if developing software to gather requirements and perhaps do minor work like wire-framing/prototyping and then return to do the bulk of the work.  Indian offshore outsourcing companies typically do not care about the spirit of the law and do not make a good-faith effort to live within the spirit of the law. 

The spirit of the H-1b law is to first hire an American unless you cannot find one.  The letter of the law allows companies to completely disregard the intention of the law - and they do.  They go around placing ads in publications least likely to be read to "prove" they tried to hire locally.  They pay prevailing wages, which are defined legally as less than market wage so that undercuts our earnings.  You'll probably find IT jobs in obscure publications like "Cat Fancy Magazine".

What I predict will happen next is that Infosys is going to face criminal charges.  It will make national headlines.  Legislators will be forced to act in this election year.  American companies, who also violate the spirit of the law will say "it's those Indian companies".  Staffing agencies and offshore outsourcing companies will be barred from the program.  And they should be.

American immigration programs should not be seen as a nationalize temporary staffing pool.  Immigration is about making a new life in a new country, not getting a short-term gig to increase corporate profits.  The employer sponsored visa programs have corrupted immigration in America and have taken away the sanctity of what it means to become a citizen and to be an immigrant in America. 

We need to be welcoming our neighbors, not some guy who will share an apartment with 6 other guys, sit one cube down while working half price, and be gone in 6 months.  That isn't immigration, that is migrant labor.

As a supporter of immigrants, I don't want to see people abused under these programs.  As a supporter of the IT profession, I don't want to see this become a less prosperous career because companies want to import people who will be forced to work for less.  We are a sovereign democracy and the people decide who crosses our borders and under what conditions.  Not Infosys.  When the people are informed about this issue they will strongly oppose these programs. 

We told the Japanese and Korean automakers that they are welcome in our country so long as they build cars here and hire our people.  We need to send the same message to Infosys.  They don't need H-1b visas when they can hire locally.

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Feb 24, 2012 11:05 AM George George  says: in response to Devil's Advocate

Good information. Thanks.

Infosys customers continue to have confidence in the company:

http://www.mydigitalfc.com/news/client-deutsche-bank-takes-infy-stake-adrs-547

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Feb 24, 2012 12:15 PM Richard Richard  says: in response to Devil's Advocate

Infosys violated the last two laws you mentioned -

a) Will be paid only by their foreign employer, except reimbursement of incidental travel costs such as housing and per diem. The employee must not receive any salary from a U.S. source.

Infosys charged the foreign employer just as it does for H1/L1 visa holders. Infosys did not pay taxes to the US government for that income earned. Infosys underpaid those B1 workers from India. In short Infosys is the sole winner in this trio - B1 employee, Infosys and foreign employer

b) The task can be accomplished in a short period of time.

Infosys deliberately extends the stay of B1 visa holders after they complete 3 months even if their i-94 is expired. And after another 3 months safely ports them back to India thus making sure homeland security does not catch them. In short the definition of short time as defined in B1 visa application is misused by Infosys to a great extent.

I fail to understand why some US citizens are still supporting the rogue firm Infosys without knowing full inner details

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Feb 25, 2012 1:56 AM Devil's Advocate Devil's Advocate  says: in response to Richard

Thanks for the explanation.

Here is a restatement of the above to see if it makes sense:

1. Infosys and their peers pay employees in India as the law requires when they work in the US at the clients on "B1 in lieu of H1B" visas.

2. Infosys and their peers charge their US clients for the work done and pay corporate taxes applicable in the US. Naturally there are no income taxes to be paid for these individuals in the US because there is no US income.

3. Infosys (and IBM, Accenture, TCS, Wipro, HCL) make huge profits by paying a much lower salary in India than would be applicable in the US (perhaps about 20% of a US salary).

4. The employees from India likely go along with it because they want to work in the US more than they care about the salary.

5. This part still seems to be big gaping loophole in the letter of the law than a violation of it as it stands today. So, these companies may have violated the spirit of the law by exploiting their employees' desire to work in the US, as was suggested above.

6. If the consulates simply stop giving "B1 in lieu of H1B" visas, then the problem does not exist. B1 remains B1 with no work to be done, H1B remains for workers we truly cannot find in the US.

7. It makes one wonder why the consulates started giving out these "B1 in lieu of H1B" visas in the first place. Perhaps the original intent was to help companies who had an H1B petition pending to get an employee to start work in time, in light of delays in approvals. Perhaps some of these outsourcing giants made this into a regular business practice rather than using it as a once in a while exception.

From a detailed reading of the law, it appears perfectly OK to do billable H1B work on "B1 in lieu of H1B" visas. This brings up two questions:

1. Is Jay Palmer or the government claiming that employees at Infosys were asked to do billable work on regular B1 visas (business visitor visa) as well?

2. Do these companies make people overstay the "B1 in lieu of H1B" visas to do the work? That would be a really serious violation. It is worth checking why this hasn't been pursued by the Department of Homeland Security for so many years.

Separately, the practice of giving H1B visas to companies that bring what amounts to temporary workforce to replace IT departments or engineering departments in the US sounds like bad implementation of a law that already has teeth. The law seems to be clear that the H1B employer must have a direct employer-employee relationship with the H1B employee. The enforcement is missing or is seen subject to interpretation by immigration lawyers and the companies involved.

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Feb 26, 2012 1:01 AM Truth Truth  says: in response to Don Tennant

Excuse me for the typo, Don.  Thanks

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Feb 26, 2012 2:09 AM ITJob ITJob  says: in response to Truth

Small correction...the case was for duration 2006-2010...and if you didn't try to see what this company has done here is the data.

He had started a company named Laconia Associates Inc which filed 643 H1b applications from 2006-2011 and 41 PERM (for Permanent Residence) applications. Only 6 of those 643 H1b applications was denied and 1 out of 41 applications was denied.

How pathetic USCIS & DOL in reviewing those applications!!!! out of 643 applications 147 was fraud (which got approved by USCIS). I bet this company applications got reviews only after someone (his employee) filed a complaint otherwise no way this could have came out.

Also for sure those 147 is not direct employment lost for US because there is no way this fraudulent company would create one genuine job with decent payment...and he would have collected money in India for visa sponsorship and got people here and let them roam her to find a job on their own which cannot be attributed to job lost by Americans.

Without any doubt these fraud has to be punished not just 40 months...it should be 40yrs.

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Feb 26, 2012 10:57 AM George George  says:

http://economictimes.indiatimes.com/news/news-by-industry/jobs/how-the-tata-group-infosys-wipro-essar-are-the-biggest-job-creators-in-the-us/articleshow/12035814.cms

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Feb 26, 2012 12:38 PM Truth Truth  says:

http://www.andhrawishesh.com/home/hot-buzz/24839-h1b-visa-fraud-ravinder-reddy-sentenced-to-federal-prison-investigation-by-ice-uscis.html

This fraud from India, brought in 147 other frauds from India on H1B Visas from 2005-2010. In other words, 147 American Citizens would have had jobs, but for these fake H1Bs!

Dan, could you let the US Senators, especially Sen. Grassley,  know of the H1B scamming going on? Thanks

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Feb 26, 2012 12:47 PM Don Tennant Don Tennant  says: in response to Truth

My name isn't Dan.

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Feb 27, 2012 2:34 AM Arun Arun  says: in response to R. Lawson

Quiet cleverly said Mr Lawson. This is what any clever and mature company would do. However the management of Infosys live in the shadow of their past days glory and feel people still look upon them as the role models of honest people succeeding. They are cashing this reputation, which could have been true in the past, but no longer true.

Any person working in Infosys would tell you how they are treated if they raise a concern about any serious issue. First there is no confidentiality maintained. Next they would pull in the persons supervisor to make one feel intimidated. Even if that does not work they will try to spoil the apprisal of the person and try tricks to make the person either stop or quit the organisation.

The process of a legal recourse is very weak in India, so no one really considers that as an option.  

The least I would expect from this legal suite is that Infosys learns its lessons of treating whistleblowers with dignity. And if the visa misuse issue is real they should get a penalty for it. The hardest penalty would be to ban them from getting visas for the next few years. This would be damaging and would send a strong signal to other large corporations who feel that they are not defeat-able.

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Feb 27, 2012 6:06 AM Richard Richard  says: in response to Arun

Good comment Arun. You wrote everything that is on my mind. Appreciate that an Indian can support honesty and truthful behavior over suupporting crime just because Infosys is an Indian company. I have seen many Indians who feel proud that they could cheat foreign countries and make wealth and if you speak of cheat behavior they claim they are above all and inturn give examples of foreign country frauds.

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Mar 8, 2012 3:09 AM Raj Raj  says: in response to Richard

I am an Indian and I need to state this. Most of these offshore companies work on a model of exploitation. They exploit the poverty of the Indian middle class. I worked for one of these companies and invariably ended up with long hours only to be abused and made a scapegoat at the end of the project. Had this happened in the US, I would have sued the hell out of them. However, there is really no hope of legal recourse in India and I decided to quit. Having said this why is the US government hand in glove with these companies? Why can't the US have a point-based system so that individuals can directly apply for a green card and work in the US. The current visa-slave model which offshoring companies employ would perish the moment the green card was separated from the H1B visa. Yet, while making the green card more and more difficult to obtain for an individual, it has become easier to obtain employment visas for these offshoring companies.

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Mar 9, 2012 4:39 AM R. Lawson R. Lawson  says: in response to Raj

"Why can't the US have a point-based system so that individuals can directly apply for a green card and work in the US"

Because companies don't want you to have the ability to move freely in this country.  They want to control your right to seek another job with another employer.  And they control Congress.

What you suggest is a far more fair solution.  But it does not have political support because it does not have corporate support. 

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Mar 25, 2012 11:40 AM jrogers222 jrogers222  says:

Infosys covered in CNN

http://money.cnn.com/galleries/2012/news/companies/1203/gallery.greatest-entrepreneurs.fortune/11.html

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Apr 16, 2012 12:14 PM Tired Tired  says:

Here you go more info on the Indian mafia.

Infosys

http://online.wsj.com/article/SB10001424052970204358004577031430210465846.html

http://www.firstpost.com/business/palmer%E2%80%99s-lawsuit-against-infosys-gets-teeth-as-allegations-snowball-79660.html

Please do not forget WIPRO, TATA, COGNIZANT, HCL and others

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