Mumbai: Infosys Ltd’s regulatory problems mounted after a US law firm filed a suit against the company on behalf of American investors, seeking damages for manipulating earnings, even as the US securities regulator started a probe into a complaint by anonymous whistleblowers.
New York-based Rosen Law Firm, which filed the class action suit against Infosys on Wednesday, said it has the backing of several hundred American depositary share (ADS) holders and named chief executive Salil Parekh and former chief financial officer M.D. Ranganath as respondents, along with the company.
The allegations of accounting malpractices first came to light in a whistleblowers’ complaint sent to the US Securities and Exchange Commission (SEC) and the Infosys board on 30 September that became public on 21 October.
Regulatory heat on the company increased on Thursday, as SEC initiated an investigation into the whistleblowers’ complaint.
“The company has been in touch with the Securities and Exchange Commission regarding the anonymous whistleblower complaints (anonymous complaints) and has learnt that the SEC has initiated an investigation into this matter," Infosys said in a statement. The company will cooperate with the investigation, the statement said.
The US lawsuit, reviewed by Mint, alleges that Infosys violated federal securities laws by misrepresenting books of accounts, concealing whistleblowers’ complaint and causing losses to its ADS holders. Due to the misstatement, the company also artificially inflated its stock price and caused losses to investors from 7 July 2018 to 20 October 2019, the petition claimed.
The law firm has appealed in the court of the Eastern District of New York to direct Infosys and the two directors to compensate its US investors for the damages caused.
The law firm did not quantify the compensation it is seeking, nor did it specify the number of investors in the class action.
On Monday, Infosys’s US-listed shares plunged after the whistleblowers’ complaint, accusing Parekh and the company’s chief financial officer of “unethical accounting practices" to inflate revenue and earnings, became public.
According to the NYSE, between 6 July 2018 and 30 September 2019, Infosys ADS gained 18.75% from $9.575 to $11.37. But soon after reports of the whistleblowers’ complaint emerged on 21 October, Infosys ADS suffered steep losses. Since 21 October, US investors have lost $6.52 billion.
In the petition, Infosys and its two directors are accused of drafting, producing and disseminating materially false and misleading statements to US investors and choosing not to disclose the fraud at the company.
The law firm alleged that the company improperly recognized revenue to inflate short-term profit; Parekh bypassed reviews and approvals for large deals to avoid accounting scrutiny; the (Infosys) management pressured the company’s finance team to hide information from auditors and the company’s board; and as a result, defendants’ (Infosys, Parekh and Ranganath) statements about its business, operations and prospects were false and misleading and/or lacked a reasonable basis.
The company misled investors with these statements since July last year to artificially inflate the ADS, which ultimately “economically damaged" investors when the ADS price swooned after the whistleblowers’ complaint became public on 21 October, the petition stated.
It alleged that Infosys, with the help of Parekh and Ranganath, used the means of interstate commerce, including US mails, interstate telephone communications and the facilities of the national securities exchange to conduct the wrongdoings.
This is the second instance of an Indian company facing a class action lawsuit in the US. The first was related to the accounting fraud at Satyam Computer Services.
While the US securities holders of Satyam received a settlement of $125 million pursuant to the class action, their Indian counterparts received no compensation and were left only to benefit from the regulatory actions taken against the firm.
“This situation will likely not repeat itself. India recently paved the way for securities class action suits through the Companies Act, 2013. The Indian investors of Infosys can approach National Company Law Tribunal for damages. They now have rights of restitution that will and should change the power balance between shareholders and the management," a managing partner at a legal firm said on condition of anonymity.