Thursday, October 29, 2020

U.S Judge backs bribery lawsuit against cloud firm Cognizant

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Months after Cognizant was forced to end a contract with Facebook after a content moderation crisis, the multibillion-dollar cloud infrastructure firm has lost its bid to stop shareholders from pursuing claims the firm misled them over a bribery investigation.

Last week, a New Jersey federal judge green lit a shareholder complaint to proceed that claims the firm promoted the use of special permits in India to get tax breaks and loosened labor regulations, without disclosing that they were secured with more than $2 million in bribes. The opinion opens the door for thousands of investors to launch a class action lawsuit, and with more details to emerge, the case could drag on for months, or years.

A company spokesperson said in a statement that “Cognizant is committed to the highest ethical standards and has zero tolerance for illegal activity.” John Rizio-Hamilton, an attorney representing the shareholders, tells Forbes: “We are grateful for the court’s careful consideration of our claims, and look forward to moving this case forward.”

It is the latest setback for the New Jersey-based firm, which provides a range of IT and cloud consulting services and employs almost 300,000 people worldwide, 70% of them based in India. Cognizant has already paid $25 million to settle charges brought by the U.S. Securities and Exchange Commission over the scandal, and three former executives have faced individual charges.

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More recently, the company ended a major contract with Facebook in March following an investigation by The Verge that documented poor working conditions for employees in Arizona and Florida who were exposed to unsettling materials while moderating content on Facebook’s platform.

Taken together with the Covid-19 pandemic pushing down the technology budgets of its clients, Cognizant is facing a rough year ahead. A Morningstar report released last week forecasted that the firm’s net income would slip 22% to $1.7 billion, on $16.3 billion revenue, in 2020.

The report also cited the bribery scandal as a significant hurdle to securing outsourcing contracts, while the Facebook contract added to perception that the company takes on outsourcing projects “simply because no one else will.”

It’s the latest in a string of bad moments for Cognizant, which has faced the shareholder lawsuit since September 2016. Two former executives — Cognizant’s president and chief legal officer — are facing criminal charges from the Justice Department over their involvement in the scheme.

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In September, a third executive paid $50,000 to the SEC to settle additional charges relating to his involvement in video conferences where he and other executives authorized a $2 million bribe to secure a planning permit to build a new office in Chennai, India. The bribe, which was funnelled through a construction company, was then concealed in audits between 2014 and 2016, the agency said.

For all the reputation damage, Cognizant’s business is unlikely to vanish overnight. The firm is still forecasted to generate $17.8 billion revenue in 2021, with $1.8 billion in free cash flow, meaning it will still have large sums of cash, says Morningstar analyst Julie Bhusal Sharma. “It’s going to be a rough 2020,” says Sharma. “But past that, I don’t think it’s going to affect the valuation too much.”

Cognizant has more recently sought to reshape its image as a back-office outsourcer to a provider of high value technical products, including digital engineering and artificial intelligence. It also installed a new CEO, Brian Humphries, after settling the SEC charges in February 2019.

In a statement, the company further defended its role in the scandal. “This matter, which occurred three years ago, did not involve our work with clients, was self-reported by Cognizant to government authorities, and was resolved with such authorities nearly a year-and-a-half ago.”

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