Wednesday, January 7, 2009

Another Day, Another Fraud, Another Suicide

If a severe economic downturn is good for anything, it is unveiling fraudulent organizations that have been operating for years in an easy money bull market.  Today brought another shocking revelation of a large-scale financial fraud, when the founder and Chairman of one of India's largest technology companies, Satyam Computer Services, admitted that he had concocted key financial results for several years.  Among other things, B Ramalinga Raju claimed that the company's cash balance of more than $1 billion was a mirage (around $60 million.)  Furthermore, Mr. Raju overstated profits for the past several years, overstated the amount of debt owed to the company and understated its liabilities.  In other words, he was just making that accounting stuff up.  Granted Satyam was an Indian company, and we can all write it off as one of the dangers of investing in emerging markets.  This kind of thing never happens in the US (if you don't count Enron, Worldcom and all those telecoms that were engaged in revenue inflation at the turn of the century.)  The curious part of the story is that PricewaterhouseCoopers was Satyam's auditor and several high-profile independent directors including a Harvard Business School professor served on Satyam's board.  I understand that it is tough to root out fraud when a very motivated person is doing everything in his power to hide the truth.  But is it asking too much for an accounting firm to look at a copy of a bank statement to make sure that the amount of cash sitting in the firm's bank account actually ties out to the firm's balance sheet statement?  If you're billing $250 an hour (or whatever it is these accounting firm's charge) for your services, I think not.  Interestingly, the word Satyam means "truth" in Sanskrit.  But in the language of accounting and auditing, it apparently means "fools!"

Perhaps the saddest byproduct of the severe credit crisis and economic downturn is the increase in the number of suicides.  I am not speaking in the statistical sense, because I don't have any actual statistics to support this claim.  What I can say for certain is that the Wall Street Journal has had a few too many reports of businessmen facing financial problems that have chosen to take their lives.  Today brought the unfortunate story of Steven Good, the CEO of Sheldon Good & Co, one of the nation's largest real-estate auction firms, who took his own life earlier in the week.  Yesterday, the suicide of Adolf Merckle, one of Germany's wealthiest men, was attributed to mounting financial woes at his sprawling conglomerate.  Thierry Magon de La Villehuchet, manager of one of the feeder funds that invested in Madoff's ponzi scheme took his life the last week of December.  Early December brought the suicide of Alex W. Widmer, the head of private banking at Julius Baer.  Although Mr. Widmer's death wasn't linked to problems at the bank, according to a statement from Julius Baer, it's easy to assume that possible financial difficulties may have contributed to his decision to take his own life.  Several other finance executives reported in the press in the past few months have chosen suicide as the preferred method of dealing with what is either the loss of a significant amount of wealth or a complicated business situation that will take years and many lawsuits to resolve.  Prior to his suicide, Mr. Villehuchet was certainly at the center of a significant amount of fury from investors in his fund that were wiped out due to the Madoff fraud.  Suicide may have seemed like the most rational choice when confronted with the alternative: the loss of his own personal fortune coupled with angry phone calls and accusations from investors and regulators for the rest of his life.

I happen to believe that the purging of fraudulent enterprises from our economy is healthy, albeit very painful for those ensnared.  It's hard enough to sustain a healthy and aboveboard business in this economic environment, much less prolong a ponzi scheme or accounting fraud.  So if you're looking for a silver lining, it is the following: any company making it out of 2009 alive is probably worth an investment.  As for the increase in suicides, well, it's just sad.  One can only hope that those who are facing extraordinary stress and depression choose to get help and work through this tough period rather than taking the seemingly easier way out.  For it is most definitely not easier on the the families that they leave behind.            

1 comment:

Anonymous said...

Not to mention the many murder-suicides of regular Joe sixpacks dating back to 2007 due to the economic downturn. Examples:

The Morrisey Family in Berkeley, CA

Bruce Pardo

Karthik Rajaram

Carlene Balderrama

Very sad times we live in...