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Exclusive: Satyam’s settled US class action had no hope in India?

Expert academic witnesses Vikramaditya Khanna and Sandeep Parekh locked horns with law firm JSA and ex-CJI Ahmadi’s testimony in the lead-up to yesterday’s $125m settlement before a New York court, US dockets reveal.

In the US class action securities claim against Satyam Computer Services that part-settled yesterday for $125m, sworn statements by two Indian academics for the shareholder plaintiffs opined that the plaintiffs would have had “effectively no recovery” or recourse in India due to judicial delays and because India did not allow securities fraud class actions.

Their witness statements clashed with those of former Chief Justice of India (CJI) Aziz Mushabber Ahmadi instructed by J Sagar Associates (JSA) on behalf of co-defendants PricewaterhouseCoopers (PwC).

Leading up to yesterday’s $125m settlement between the plaintiffs and one of the defendants Mahindra Satyam, as it is now called after the fraud of its founder B. Ramalinga Raju (pictured) had almost brought the company to its knees, the defence argued that the New York District Court should dismiss the claim because the court was an inappropriate place to hear the case, under the doctrine of forum non conveniens.

The six lead plaintiffs and eight consolidated plaintiffs were looking to claim damages from the 14 defendants and seven consolidated defendants including Satyam, auditors PwC and others. The lead plaintiffs’ lawyers, Grant & Eisenhofer, brought evidence resisting the motion, arguing that India would not be the correct place to hear the claim.

The potential of adequate Indian justice delivery was central to the arguments whether New York was the best place to hear the case.

Satyam was represented by Jones Day New York partner Jayant W. Tambe and PwC by Wilmer Hale partners Charu Ambat Chandrasekhar and Fraser Lee Hunter, Jr in the US, according to court records that also showcased dozens of other lawyers.

India: the opinionated legal players

University of Michigan law professor Vikramaditya Khanna and former visiting associate professor of law at IIM Ahmedabad and ex-SEBI executive director Sandeep Parekh submitted declarations for the lead plaintiffs in the matter in January 2010.

Former Chief Justice Aziz Mushabber Ahmadi was instructed by JSA Mumbai partner Somasekhar Sundaresan acting on behalf of co-defendant PwC to file a sworn witness statement that the Satyam matter would be expedited through the slow-moving courts because of its national importance.

Ahmadi, Khanna and Parekh would have received remuneration by the respective parties under standard US litigation procedure as independent expert witnesses.

India: justice denied or expedited?

Khanna, who currently teaches as a visiting professor at JGLS Sonipat, stated in his declaration: “The lengthy delays in the Indian Judicial System would leave plaintiff shareholders with effectively no recovery even assuming, arguendo, there might be a potential cause of action.”

In particular he added that in Satyam’s home state of Andra Pradesh where it would have to be sued, each of the 30-odd sitting judges had a caseload of nearly 6,000 pending civil and criminal matters: “This is likely to result in substantial delays in adjudication of civil cases.”

Ahmadi argued for PwC in his sworn statement that the “Andhra Pradesh High Court has already approved the establishment of a fast-track court for the trial of Satyam founder B. Ramalinga Raju and the other accused. Because the litigation initiated by the Lead Plaintiffs also deals squarely with the alleged Satyam fraud which will be the focus of the said trial, I believe that the Indian Government could readily be persuaded to create a fast-track court for this case upon its transfer to India.”

“Even if such a fast-track tribunal were not created,” added Ahmadi, “the court in India would be sensitive to promptly hear a case of such magnitude and importance, involving numberous persons who have borne the brunt of the alleged fraud of such great monetary scale. Therefore, the argument of delay in India courts should not deter the Lead Plaintiffs from proceeding with the case in India.”

Can the Indian courts hear class action securities fraud?

Parekh, who has since set up boutique securities firm Finsec Law Advisers, argued on behalf of the plaintiff shareholders that they as “private parties have no right to sue to recover damages resulting from the Satyam fraud under Indian statutory or common law because the Indian civil courts have no power to hear disputes where, as in this case, SEBI is empowered to act”.

Furthermore, Satyam investors would “not be able to use the representative action procedure to recover damages because Indian law bars their substantive claims in civil court and the representative action is only a procedural mechanism that cannot create any substantive rights”, added Parekh in his statement.

Elaborating, he stated that “Indian civil courts have no authority to preside over cases where their jurisdiction is explicitly or implicitly barred by statute” under section 9 of the CCP and citing the Bombay High Court case of Kesha Appliances v Royal Holdings Services Ltd 2006. “Indian securities law is one of the areas in which the civil courts' jurisdiction has been barred by statute. Specifically, the statutes empowering SEBI to act in the area of securities and securities fraud, bar the civil courts from exercising jurisdiction over such matters.”

Thus, common law rights, such as rights under the tort of deceit (or claims of damages under that tort), cannot be heard or enforced by civil courts. In addition, only SEBI can initiate actions in response to violations of the statutory provisions and the cause of action of shareholders is barred under the SEBI Act by express provision.”

Parekh concluded: “It is relevant to note that any penalties collected by SEBI related to the Satyam fraud would not go to shareholders of Satyam under Indian securities law. Unlike the Fair Fund introduced in the United States, penalty amounts collected by SEBI go to the Consolidated Fund of India (See SEBI Act, Section ISlA). Thus even if SEBI imposes monetary penalties against the various persons alleged to be a part of the fraud, Satyam shareholders cannot expect any relief from such action.” He added that if the case itself was barred, a class-action or representative suit by extension would also be unsuccessful in India.

Ahmadi by contrast, swore that Indian law could provide redress in the case of securities fraud under common law tort principles. “A fraud action may proceed against corporate entities based on common law theories of vicarious liability such as agency and alter ego liability. If the Lead Plaintiffs are able to prove their allegation in an Indian court, they would be entitled to appropriate redress. Thus persons who suffered on account of the alleged fraudulent acts of commission and omission of the defendants would even be entitled to initiate a class action-representative law suit in a competent court in India situated in the State of Andhra Pradesh in the district where the fraud was practiced or the cause of action arose under Order I Rule 8, CPC […]. The persons initiating such action, for and on behalf of and for the benefit of all such persons, must have a locus standi, that is, an individual stake in the claim to be redressed along with several others. The Lead Plaintiffs, therefore, have an adequate remedy to initiate action in India. Such action could be initiated against the company or its officers; the cause title should clear reflect that the action is a representative action.”

The defendants also argued in their memorandum that the Indian courts fulfilled a different function from SEBI, in that it was able to conduct a trial for damages.

Enforcement in India

In respect of the question whether the plaintiffs could enforce the US courts’ awards in India, Ahmadi wrote that “parties are likely to find themselves re-litigating many of the same issues previously argued before the foreign court. As a result, suits involving enforcement of foreign judgments tend to become time-consuming and costly, and effectively result in a re-trial of the case in which the disputed judgment was rendered.

“The outcome of enforcement proceeding, which could take additional years, is uncertain, and Indian courts may even refuse to enforce foreign judgments.”

Khanna and Parekh both argued however, that the US court’s judgment in the class action would be enforceable in India.


While Satyam has now settled with the shareholders in the US claims remain open against any of the other defendants, including PwC.

The US court has still not decided on forum non conveniens and the actual claims are still pending admission.

Download some of the above cited court documents, which can also be downloaded for a fee via freecourtdockets.com:

Update: Corporate Law Blog’s Mihir Naniwadekar disagrees with Parekh’s interpretation of the Kesha case and has offered his own take.

Photo by World Economic Forum

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