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Satyam and Consequences

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"Satyam" means "truth" in Sanskrit. Unfortunately, when it comes to the news that emerged last week from Indian company Satyam (NYSE: SAY  ) , the truth is ugly and ironic to the utmost degree. Satyam founder and chairman Ramalinga Raju admitted to cooking the books for years.

I don't know much about Satyam other than what I've read about the fraud news. However, the revelations have captured my attention, and bring to mind how important it is to contemplate and acknowledge risk in investing.

"I'm sorry ... so sorry"
Raju's letter, disclosing his resignation and the history of fraud, included this closing statement: "I am now prepared to subject myself to the laws of the land and face consequences thereof."

Hmm, at least there's some acceptance of accountability. Looking at the massive mistakes that have been made by so many companies right here in the U.S., I had felt there was a remarkable and disturbing lack of conscience or remorse.

Lehman Brothers' Dick Fuld certainly didn't seem to feel too sorry about what went down at his firm. AIG's (NYSE: AIG  ) management threw parties while on the government dole. Merrill's John Thain apparently angled for a big bonus after only a year's work, even though shareholders suffered pretty badly before the company was passed off to Bank of America (NYSE: BAC  ) . (Granted, Thain backed off when the board pushed back.) And former CEOs of companies like Citigroup (NYSE: C  ) were able to run off with huge severance packages before everything really hit the fan. Among all that, apologies were definitely lacking.

This is no paper tiger
Raju's letter also likened the years of accounting irregularities to this colorful metaphor, which says a lot about the all-too-human failing of getting caught in the web of one's own errors and deceit. He wrote, "It was like riding a tiger, not knowing how to get off without being eaten."

It looks like the ride is over, now though, with all the expected gory consequences. Unfortunately, we investors can't forget that there may be metaphorical tigers lurking in our own stocks, and we must remain vigilant about and aware of risks.

Ear to the ground
Satyam was a Motley Fool Stock Advisor recommendation up until this terrible news, which spurred the team to recommend an immediate "sell." My Stock Advisor colleagues had been monitoring the increasingly unpleasant situation and communicating to subscribers their dwindling faith in Satyam's management. Unfortunately, the situation was much worse than anybody had dreamed. Outright fraud, after all, is pretty extreme, although it does happen. Enron and Worldcom, not to mention Bernie Madoff, all spring to mind.

I know my colleagues at Stock Advisor earnestly try to find good companies with stellar management teams. That's part of the Stock Advisor mission. Unfortunately, there are some things nobody could have known -- I mean, who was to say that the $1 billion in cash Satyam claimed to have did not exist. Most of us, after all, do trust that auditors are doing their jobs and that corporate balance sheets aren't embellished with downright lies.

If there's one thing this story underlines for me, though, it's that we investors must always keep our minds open to risk. Of course, international companies have their fair share of it, such as cultural differences and possibly different or lax regulatory or auditing standards, but they are not alone in that.

Since last week, several Satyam executives have been arrested (including Raju), the company now has a new board of directors (appointed by the Indian government), and the stock has again commenced trading here in the U.S. -- at just a buck and change per share, down 85% or so from Tuesday's close. In addition, it looks like the U.S. is not the only one looking to bail out beleaguered companies after managements make grievous mistakes. The Indian government is examining how it can help Satyam.

Don't ignore risk
I have often been accused of being a "cheerleader" for stocks I believe in, like Whole Foods Market (Nasdaq: WFMI  ) and Starbucks (Nasdaq: SBUX  ) . However, I at least try to challenge myself to address the risks or call out stupid decisions that management at my favorite companies sometimes make.

For example, I recently pondered Whole Foods' increasing levels of risk, even though it's a company I still ultimately believe in. I also recently discussed the importance of fully addressing risk by digging into Crocs' (Nasdaq: CROX  ) Form 10-Q, which brought up some red flags I thought shareholders should know about. There's a reason why companies are required to list risk factors in their SEC filings, and investors shouldn't underestimate the significance of the elements companies must disclose.

Addressing risk, even in companies and stocks we like, is not a sign of weakness, but of strength. It's what every investor should do when considering buying a stock.

Satyam is a terrible, disappointing situation. Despite unease about management, it seems to me the full extent of the ugly truth would have been very difficult, if not impossible, to see ahead of time. But let's not give up on the quest for truth, even while remaining aware that sometimes we just can't foresee certain outcomes. Finally, let's always remember, every company has risks, many in plain sight, and they must be adequately weighed.

Bank of America is a Motley Fool Income Investor selection. Starbucks is an Inside Value pick. Whole Foods Market and Starbucks are Stock Advisor picks and the Fool owns shares of Starbucks. Crocs is a former pick of Motley Fool Hidden Gems Pay Dirt. Try any of our Foolish newsletters today, free for 30 days.

Alyce Lomax owns shares of Whole Foods Market and Starbucks. The Fool has a disclosure policy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 12, 2009, at 4:13 PM, weiwentg wrote:

    One has to wonder how Pricewaterhouse, Satyam's auditor, missed this.

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