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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.


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