Computer Associates: A Firm with a Scandal-Riddled Past

24NOV
Computer Associates (CA) is a multinational computer software company founded in 1980 and
headquartered in Islandia, New York. In 1989, it became the first software organization to generate
$1 billion in sales.28 Today CA employs nearly 14,000 people in 150 offices spread across
more than 45 countries. Its 2008 annual revenue was $4.3 billion.
In 1997, the chairman of Computer Sciences Corporation (CSC), Van Honeycutt, filed a $50
million bribery and extortion suit against CA’s founder, chairman, and CEO Charles Wang. Honeycutt
claimed that Wang had offered him a $102.5 million bribe to sell the company to CA for
$100 per share.29 Van Honeycutt further alleged that when he did not accept the offer, CA executives
“threatened to wrongfully harm CSC if it refused to agree to a transaction” at $98 per share.
It was a few weeks after this alleged incident that CA launched a hostile takeover bid. Eventually
the two companies dropped all lawsuits related to CA’s takeover attempt and announced a major
expansion of their global software licensing agreements.30
In 1999, a CA shareholder objecting to Wang’s compensation package took Wang and two
other executives to court and kept them from receiving a $1.1 billion payout. As a result, Wang had
to settle for a total compensation of $675 million for 1999—making him the highest paid executive
in the United States. This amounted to one of the largest executive compensation packages in history
at that time, and came at a time when CA’s earnings and stock price had fallen.31
The vice president of finance of CA pleaded guilty to conspiracy to commit securities fraud
and obstruction of justice in April 2004. The fraud involved backdating contracts worth hundreds
of millions of dollars to pump up the company’s quarterly earnings both to meet analysts’ expectations
and to make the firm’s stock look more attractive to investors.32 The former CFO and a former
senior vice president were also suspected of playing a role in the fraud.
In April 2004, Sanjay Kumar—chairman and CEO since Wang’s retirement in 2002—resigned
under pressure from the board, which feared he would become embroiled in the growing accounting
scandal.33 Also that month, the company restated its financial results from 2000 and 2001 to
reflect $2.2 billion in revenue that was booked prematurely. Kumar was charged with securities
fraud, conspiracy, and obstruction of justice in September 2004. Kumar was eventually found
guilty and sentenced to 12 years in jail.
CA agreed to pay $225 million to shareholders in restitution in order to defer criminal prosecution.
CA said it would cut its workforce by 800 to help pay the restitution. Also as part of the agreement,
an outside monitor was assigned to track CA’s financial reporting for one and a half years.
CA also agreed to assist the government in retrieving any compensation and bonuses awarded
based on the fraudulent financial results.34
In more bad news for CA’s Kumar, the indictment against him was revised in July 2005 to
include charges that he offered a $3.7 million bribe to discourage a business client from revealing
CA’s fraudulent accounting practices.35
As a result of these various scandals, many CA board members and executives were replaced
between 2004 and 2006, including the CEO, chairman of the board, executive vice president of
development,
CFO, COO, CTO, chief marketing officer, chief administrative officer, and co-general counsel.
Most of these executives were sentenced to jail, fined millions of dollars, or both.
1. CA executives involved in the accounting scandal were not accused of reporting bogus contracts
or hiding major problems in the business. The contracts that were backdated were real
sales agreements. Was this really a crime? Should the individuals have been punished so
harshly?
Yes it is an ethical crime, back dating agreements for your own profit is bad & should be punished
severly.
2. In December 2004, CA appointed Patrick J. Gnazzo as senior chief compliance officer to
demonstrate to the government and shareholders that the firm would take measures to operate
ethically. Gnazzo served in this role at United Technologies for 10 years and had been
a member of the board of directors of the Ethics Officers Association. Gnazzo reported to a
new executive vice president and general counsel at CA as well as the board’s Compliance
Committee. Outline some of the actions Gnazzo might have taken in his first six months on
the job.
He can check the financial statements as well as the Deals to ensure they follow the rules ethically.
3. John Swainson, a 26-year veteran of IBM, joined CA in November 2004 as CEO and president.
His first few months with the firm were rough—major customers threatened to dump the
firm; some products were behind schedule and were of poor quality; executives had to be
fired for breaking company rules; accountants continued to find past mistakes; and many
newly hired executives had to be brought on board. What sort of leadership could he have
demonstrated to show that he was determined to avoid future scandals at CA?
Be firm, hold steady, show to the others that he can lead and is determined to avoid future scandals
while following good ethics.
4. CA has been hit with numerous scandals since the late 1990s. These scandals raise questions
about how successful the firm might have been if not for the amount of time its executives
had to spend on these distractions. Compare the revenue growth and stock price of
CA to that of some of its competitors over the time period 2004–2008. (Be sure to use CA’s
corrected figures!) Can you detect any impact of these scandals on CA’s performance? What
else might explain the difference in performance?
The impact is very high! The CA’s figures were lower than the others, if only they did not lose their
integrity by doing those crimes it would have been all good.

How Serious Was the Fraud at

Computer Associates?
The $3.3 billion securities fraud case against Computer Associates has been called the last
of the big Enron-era cases, involving alleged practices termed “the 35-day month,” “the
three-day window” and the “flash period.” Certainly, there are some parallels: Each case
involved a multi-billion dollar fraud that required participation by a wide group of top
executives and others further down.

But the cases of the Houston energy-trading firm and the Islandia, N.Y., software giant are
also different. Enron executives engaged in an extraordinarily complex hoax, creating a raft
of outside businesses that could be used to conceal the firm’s mammoth debt. Computer
Associates executives are accused of something far more prosaic: keeping the books open a
few days after the end of the reporting period so revenues could be counted a quarter
earlier than it ought to have been.

Computer Associates executives are not accused of reporting nonexistent deals or hiding
major flaws in the business. The contracts that were backdated by a few days were real.
Was this really a crime or should it fall under the heading of no-harm, no-foul?

It is indeed a serious offense, says Scott Richardson, professor of accounting at Wharton.

“While it appears innocuous to say it is revenue one day early, this type of practice allows
companies to draw on future earnings to deliver earnings and revenue growth, to help
justify high [price-to-earnings] multiples,” he notes, adding: “Clearly, while this appears
innocuous, the consequences are far from that.”
Late in September, the company agreed to pay $225 million in restitution to shareholders to
settle a civil case brought by the Securities and Exchange Commission and to defer criminal
charges by the U.S. Department of Justice. At the same time, a federal grand jury brought
criminal charges against former Computer Associates chairman and CEO Sanjay Kumar and
the firm’s former head of worldwide sales, Stephen Richards. Both men were forced to
resign in April, about two years after the scandal broke. They have denied wrongdoing. A
number of other executives were implicated as well.

In announcing the settlement, Mark K. Schonfeld, director of the SEC’s Northeast Regional
Office, boiled the case down to its essence: “Like a team that plays on after the final whistle
has blown, Computer Associates kept scoring until it had all the points it needed to make
every quarter look like a win.”

The SEC said the scheme began in 1998, possibly earlier, and continued through September
2000. In all, the company prematurely reported $3.3 billion in revenues from 363 software
contracts. This violated Generally Accepted Accounting Principles, or GAAP, which state that
revenues should not be counted until both parties have properly signed a contract. During
the four quarters of fiscal 2000, for example, the practice improperly inflated revenues by
25%, 53%, 46% and 22%, respectively. The SEC said the goal was to meet or beat per-
share earnings estimates of Wall Street analysts, a key to keeping a company’s stock price
rising.

The most extreme incident was the second quarter of 2000, when the company reported
$557 million in revenues beyond the $1.047 billion it could properly claim. The company
thus reported 60 cents in earnings per share, beating the consensus Wall Street forecast of
59 cents. Without the padded revenue, earnings would have been a mere 5 cents per share
and the stock price might well have fallen.

The victims in the case were the shareholders who were led to believe the company was
more profitable than it was, Richardson says. They paid more than they should have for the
stock, or kept in when, had they known the truth, they would have sold. These shareholders
suffered enormous losses once the practices were revealed. When the company stopped the
practice at the end of the first quarter of 2001, it fell short of the Wall Street earnings
estimate and the share price fell by more than 43% in a single day. Shares currently trade
around $27, down from more than $71 early in 2000.

There was another class of victims as well – employees. Late in September, the company
said it would trim its workforce by 800 people, or 5%, in order to pay the $225 million
settlement.

Richardson notes that companies are not required to keep mum about revenues received
after a reporting period ends. These “order backlogs” can be detailed in quarterly reports so
long as they are not in the quarter’s revenue and earnings calculations.

In theory, investors should care little whether a deal is signed by the end of the quarter or a
few days later, so long as the details are accurately reported. But in practice, investors tend
to focus on the quarterly revenue and earnings targets. “People, for whatever reason, are
fixating on certain numbers in the financial statement. If it’s not in the quarter, it’s not as
good,” Richardson says.

At Computer Associates and many other companies, big portions of executives’

compensation depend on meeting specific goals. Inflated figures meant Computer
Associates executives were paid more than they should have been – extra compensation
that came from shareholders’ pockets.

Moreover, executives at Computer Associates were big shareholders themselves, and many
held enormous blocks of stock options. They therefore had a big financial stake in the share
price, and thus an incentive to inflate results. “There will always be cases where incentives
to manage earnings are particularly acute for a given firm at a given time, and if you have
an unethical management, they will push the envelope,” Richardson says. Indeed, he adds,
improper timing of revenue recognition is “by far the most common” reason companies are
forced to restate earnings.

While outside auditors are sometimes blamed for not catching the practice, auditors must
rely on data from their clients, and timing infractions can be very hard to spot, according to
Richardson. Investigators say Computer Associates simply backdated contracts, so that
auditors would see that the paperwork confirmed the company’s claims.

Richardson argues that boards of directors and their compensation committees in particular
should be careful not to inadvertently give executives incentives to cook the books. An
executive sitting on a huge block of options about to vest may well get “a very myopic
focus” about meeting analysts’ revenue and earnings projections, he said, noting that
directors should be especially vigilant at such times.

Richardson does not believe the Computer Associates case and others like it point to the
need for regulatory reform. The accounting flexibility available to public companies is
necessary, he notes, even though it makes some breaches hard to detect. “Everything in
the financial statements is a result of choice – of some exercise of financial discretion. If you
eliminate choice, statements will be meaningless.”

The best way to address cases like that of Computer Associates is through rigorous
enforcement of existing rules and severe punishment for violators, he suggests.

Documents filed by the SEC and Justice Department show that the timing infractions at
Computer Associations required the participation not just of a few top executives but of
many people, including lower level people in sales. The government also alleges top
executives clearly knew what they were doing was wrong and went to great lengths to cover
up. Obstruction of justice is among the charges against Kumar and Richards.

How does a clearly improper practice become so firmly rooted? In many cases, says Thomas
W. Dunfee, professor of legal studies and ethics at Wharton, “the organization’s values have
evolved in such a way that they are perverse when they are objectively viewed from outside
… Sometimes you have companies that start getting an adversarial view of the world.” In
addition, Dunfee notes, studies have shown that “people who have been with an
organization longer tend to see the organization’s values as compatible with theirs.

“I don’t think that anybody actually sets out to establish evil norms,” he adds. “It’s just that
they develop ways of looking at things where they frame issues in a way that ultimately
becomes more and more incompatible with the outside world.”

A healthy company can minimize the risk of this downward slide by encouraging and
protecting whistleblowers Dunfee suggests. That way, problems are addressed internally –
well before they become big enough to drag the entire company over the cliff.
Hewlett-Packard ‘pretexting’ scandal leads to private investigators’
sentencing in San Jose

By ASSOCIATED PRESS and TERRY COLLINS |

July 12, 2012 at 5:56 am

SAN JOSE — Two former private investigators were each sentenced Thursday
to three years of probation for their roles in an infamous Silicon Valley spying
scandal in which prosecutors said they used false identities to access the Social
Security numbers and other information on Hewlett-Packard (HPQ) board
members, employees and journalists.
Joseph DePante, 66, and his son Matthew DePante, 33, also were ordered in
U.S. District Court to undergo six months of electronic home monitoring as part of
a plea deal after both pleaded guilty in February to conspiracy to commit Social
Security fraud.

As weeping family members looked on, the father and son expressed remorse,
even as their lawyers argued against home confinement, saying it would prevent
their clients from earning a living.

Federal prosecutors have said Palo Alto tech giant HP hired the DePantes in
2005 to discover who was leaking boardroom information to journalists.

During the covert operation, HP and private investigators obtained confidential

information on board members and employees as well as reporters for CNET,
the New York Times and Wall Street Journal. Family members of reporters also
were targeted, they said.

At the time, it was an embarrassing scandal at one of the world’s largest

technology companies that was long considered an icon of corporate integrity
and led to a federal investigation.
In court Thursday, veteran journalist Dawn Kawamoto said she was a victim and
told the DePantes that she didn’t believe they were remorseful.

“You clearly knew it was illegal what you were doing,” said Kawamoto, who was
a reporter at CNET when her information was compromised. “Six months of
house arrest eating bon-bons on your couch and watching ‘The Price is Right’ is
not a lesson.”

Joseph and Matthew DePante aimed their 18-month investigation against a total
of 33 people as their firm earned as much as $30,000, Assistant U.S. Attorney
Michelle Kane said Thursday.

The DePantes were accused of using the illegal practice of pretexting —

pretending to be someone else — to secretly secure copies of private telephone
logs. Their firm directed other investigators who posed as account holders or
phone company employees to illegally obtain personal information including
phone and Social Security numbers, birth dates and call logs, authorities said.

The DePantes’ former Florida-based firm, Action Research Group, was acting in
good faith when it made its inquiries because Florida allows pretexting, Joseph
DePante’s lawyer, Susy Ribero-Ayala, argued on Thursday.

“He made a mistake here,” Ribero-Ayala said. “He didn’t set out to violate any
laws. They all believed it was legal conduct.”

District Court Judge D. Lowell Jensen said the DePantes’ actions involved lying
and reminded Ribero-Ayala that acquiring Social Security numbers illegally is
against the law.

Kane said the elder DePante knew what he was doing and should stick to the
terms of his plea deal.

“He has admitted to his knowing involvement in this conspiracy,” Kane said.
“Anything lower would not address the seriousness of his conduct. To say he is
less responsible is a bit disingenuous.”

Kawamoto told the judge the DePantes’ actions caused enormous stress to her
family and within her profession, as some sources would not work with her.

“As journalists, we’re only as good as the people who return our calls,” said
Kawamoto, 51, who is now an associate editor at a technology news and job
website.

In 2007, a Santa Clara County Superior Court judge dismissed charges against
then-HP Chairwoman Patricia Dunn in connection with the case. The judge’s
 decision came after the state attorney general’s office reduced charges against
several other defendants, including Matthew DePante.

Matthew DePante told the judge Thursday that he began working with his father’s
business when he was 12 and did so throughout high school and community
college.

“When we accepted this case, I never would’ve imagined I’d be standing before
you six years later,” DePante said. “I have shamed my family name.”

The judge said he also remained open to the possibility of restitution for the
victims and noted the case had helped spur passage of state and federal
legislation specifically outlawing pretexting.

In addition, the state reached a $14.5 million civil settlement with HP in

December 2006 intended to fund state and local investigations into privacy rights
and intellectual property violations.

CA accounting scandal raises questions

about CEO's fate
Questions linger about CEO Sanjay Kumar's involvement in CA's accounting
manipulations



By Stacy Cowley
IDG News Service | APR 19, 2004
Following a wave of indictments this month that netted guilty pleas to securities fraud and other
charges from several former finance executives at Computer Associates International Inc. (CA),
speculation is turning to the fate of the company's chief executive officer (CEO).

CA has already admitted to improper accounting practices in its 2000 fiscal year that were under
investigation by the U.S. Securities and Exchange Commission (SEC) and U.S. Department of
Justice (DOJ). The company has since revamped its accounting methods, replaced most of its
board and pushed out a number of executives tainted by fraud. But one executive from that era,
Sanjay Kumar, now serves as the company's CEO. And questions linger about the then-president
and chief operating officer's involvement in CA's accounting manipulations.

The DOJ complaint against Ira Zar, CA's chief financial officer (CFO) until last October, charges
that he regularly met with two other unnamed "high-level" executives who allegedly knew and
approved of the financial sleight of hand. Zar at the time reported directly to Kumar, who in turn
answered to then-Chairman and CEO Charles Wang, a company co-founder who has since
retired.

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The DOJ is continuing its investigation in conjunction with the SEC, and speculation in the IT
and financial sectors persists that Wang and Kumar may be targets of future actions.

Some financial analysts are already calling for Kumar's resignation, arguing that as the
company's operational head, he either knew or should have known what was going on. Mike
Trigg, an analyst at Morningstar Inc. in Chicago, issued a report blasting CA for "a management
team that we don't trust," and New York-based Credit Suisse First Boston LLC wrote of
"increasing fear" that Kumar is one of the DOJ's implicated but unnamed executives. Credit
Suisse called Kumar's forced departure "a scenario that is being widely reported by Wall Street."

CA on April 8 released a statement acknowledging that the company and its officers could face
civil and criminal proceedings, but it declined further comment.

Complicating the issue of Kumar's future is the general consensus among IT industry observers
that he has done a good job as CA's leader. When Kumar ascended in August 2000, he inherited
a company that investors didn't trust and that customers castigated for hardball sales tactics. In
response, Kumar overhauled CA's accounting and corporate governance, reformed its sales and
customer service organizations and made customer satisfaction a top priority.

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The changes have worked, according to Jeffrey St. Germain, a project manager for the
Massachusetts Department of Education's Virtual Education Space project, which runs on CA's
portal software. "At least on our side, things have gotten better," he said. "Perhaps because of
what's been going on, they've been more attentive to us."

Javed Matin, CEO of Myriad Solutions Inc. in Silver Spring, Md., said his consultancy, which is
based around CA products, hasn't lost any deals because of the accounting scandal. "I don't think
it's affected us or our clients in any way, shape or form," he said. "It's been going on for so long,
and Computer Associates isn't the only company that's had this sort of problem."

If Kumar is indicted, some disruption is possible. "That would get a lot of visibility. People
would take notice," Matin said. "We'll have to wait and see. I'm hoping it wouldn't have any
adverse effects on our business or CA's business."

Michael Dortch, an analyst at the Robert Frances Group Inc. in Westport, Conn., said CA will
weather any shake-up. "I'm not worried about them, and none of our customers seem to be very
worried, either," he said. "What most IT executives care about are the next deliverables. If
something were to happen to impede Sanjay's ability to lead, they'd find the engine would keep
going. CA is bigger than any one individual in the management team."

A resolution to questions about Kumar's future may come this week: The New York Times
reported Monday that CA's board will meet shortly, possibly Tuesday, to consider Kumar's role.
As many as a dozen employees may be forced out as the board tries to resolve issues stemming
from the accounting violations, the newspaper reported.

Kumar, 41, was CA's heir apparent for years before he stepped into the CEO position. This time,
the company doesn't have a clear number-two.

Earlier this month it hired former Hewlett-Packard Co. global operations head Jeff Clarke as its
CFO. Analysts say he's well-regarded and, as a skilled executive from outside CA's inner circle,
a potential CEO candidate if Kumar is forced out.

"I think Jeff would be great at almost any position he'd be willing to take on," Dortch said.

Clarke is a "very talented and seasoned executive," according to Susquehanna Financial Group
LLP analyst Gregg Moskowitz , in New York. But he's also an executive who has enough to sort
out as CFO without taking on even greater responsibilities, he said.

"CA has a pretty deep bench -- there are a lot of experienced executives -- but, to my mind, not
one that stands out as a natural replacement (for Kumar)," Moskowitz said. "It's not out of the
question for CA to hire another outsider."

Still, Moskowitz said he's not terribly worried about the effects of a leadership change on CA.

"There's always the risk of temporary disruption, but looking back, CA has done a very good job
of focusing on the business and the customers," he said. "Given the severity of the charges, this
certainly had the opportunity to derail their strategy, but they've done a very good job executing
and running the business."
Sanjay Kumar, the former CEO of Computer Associates International Inc., pleaded guilty to
financial fraud charges today when he appeared in federal court in Brooklyn, N.Y., according to
a spokesman for the U.S. attorney handling the case.

Kumar and co-defendant Stephen Richards, the company's former worldwide sales head, both
pleaded guilty to all eight counts against them, including securities fraud, obstruction of justice
and perjury, according to the U.S. Attorney's office.

Sentencing is set for Sept. 12. Both men faced the prospect of up to
20 years in jail prior to their guilty pleas. That maximum sentence will be reduced because of the
pleas, according to the U.S. Attorney's spokesman.
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Kumar and Richards had been accused of fraudulent accounting practices, including falsely
reporting hundreds of millions of dollars in revenue for licensing agreements during fiscal
quarters in which the deals had not yet been finalized.

"The guilty pleas today of Computer Associates’ former CEO and its former head of worldwide
sales are the culmination of the government’s successful investigation into a culture of
corruption and fraud at Computer Associates,” said U.S. Attorney Roslynn Mauskopf.

"By choosing to lie repeatedly about Computer Associates’ financial position, the defendants
violated their shareholders’ trust and the federal securities laws," Mauskopf said in a statement.
"They then compounded those lies, and further damaged the corporation, by presiding over a
massive cover-up."

“The pleas entered today are admissions of guilt in one of the largest corporate accounting fraud
schemes on record,” said FBI Assistant Director-in-Charge Mark Mershon. “The actions of these
defendants, along with others who have already pled guilty, led to the deliberate misstatements
of Computer Associates’ revenues to the tune of over $2 billion. This apparent but ephemeral
performance by the company propped up its stock price, causing investors to suffer untold losses
when the scheme collapsed."
According to a statment from Mauskopf's office, Kumar and Richards admitted obstructing the
government’s investigation by offering false explanations for fraudulent accounting practices to
the company’s lawyers, with the intent that those lawyers would repeat the explanations to
government investigators. The two men also lied to federal agents in an effort to conceal the
scheme, the statement said.

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Several former CA executives have already pleaded guilty to related charges and were expected
to testify against the two men. CA, which earlier this year changed its name from Computer
Associates International Inc. to CA Inc. as part of an attempt to improve its image in the wake of
the fraud charges, was forced to pay $225 million in 2004 to compensate victims.

"It's about time," said Dale Ross, senior database consultant at Polaris Technologies Ltd. in
Calgary, Alberta, and a user of CA products. "Once you see guys like Sanjay led away in
handcuffs, maybe it will put the fear of God in others."

Ross has been an enthusiastic early adopter of a new CA product, Unicenter Database Command
Center, announced today, and has been familiar with CA and its products for years.
Since Kumar was charged and CA began making efforts to reform -- including hiring new top
managers and an ethics officer -- the company has been "taking the right steps," Ross said,
adding that he never felt CA had a cultural problem with poor ethics.

Rich Ptak, an analyst at Ptak, Noel & Associates in Amherst, N.H., said he was "surprised to
some extent" to hear of Kumar's guilty plea. Ptak, who has met with Kumar in the past and has
followed CA extensively, said the plea and the initial charges "are obviously not a nice thing for
Sanjay."

Ptak said he "always respected Sanjay, since he seemed to be doing the right thing for the
company and was moving it out from under the image of the old CA run by Charles Wang. That
old image of CA seems to be in the past, although some competitors like to keep reminding
people of CA's past."

Sanjay was "very customer-friendly, people-oriented, and was getting things away from Wang's
restricted management style by giving more responsibility to the managers," Ptak said. CA's
current CEO, John Swainson, has gone even further with Sanjay's customer focus, he said.

"CA has done remarkably well, especially with getting reorganized with Swainson and
company," Ptak said. "There is no question in my mind that the company has strong leadership
and has made significant progress going forward. Clearly they were shell-shocked for a year or
so, but now customers are pleased with the way things are working out."

In February, lawyers for Kumar and Richards had asked the judge in the case to dismiss charges
that they interfered with government probes into fraudulent accounting practices at the Islandia,
N.Y.-based software company.

But U.S. District Court Judge I. Leo Glasser denied that motion.

Last summer, while preparing for their case, government prosecutors filed a superceding
indictment that outlined some of the charges and evidence against Kumar and Richards.

In that revised indictment, the government asserted that Kumar and Richards knowingly
distorted CA's accounting and took steps to hide their actions.

In early 2000, for instance, CA signed a $44.5 million license deal with a "nearly insolvent"
customer in which it also had an ownership stake. It then back-dated the contract so it could be
recorded in the prior quarter, according to the indictment. In the next quarter, expecting that it
would not be able to collect on the contract, CA reversed the revenue in its internal records but
did not publicly restate its results.

Kumar was also accused of authorizing a $3.7 million consulting contract in early 2003 that
essentially amounted to hush money for an unnamed executive at a CA customer company who
knew of CA's accounting improprieties. According to the indictment, this executive had arranged
a $27 million license contract with CA in March 2000, but as part of the deal, CA spent a similar
amount on software from the executive's company. Neither software package was ever used,
making the deal a "revenue swap" that can't legally be treated as a sale.
When the unidentified executive threatened to alert government investigators to the arrangement,
Kumar conspired with CA's general counsel to arrange the consulting payoff, the indictment
said.

CA reached a deferred prosecution agreement with the government in September 2004, under
which it agreed to pay $225 million to a restitution fund to compensate victims of its fraud and
take various steps to strengthen its corporate governance and cooperate with government
investigators. If after 18 months CA is deemed to have complied with its obligations, the U.S.
Attorney's Office will seek to dismiss charges against the company.

he chairman and chief executive of Computer Associates has stepped

down, as the software company's long running accounting scandal
finally reached the top.

After heading up CA for four years, Sanjay Kumar resigned from his executive
positions and the board of directors. He will take a new position of chief
software architect. The chief executive officer position is temporarily remaining
open.

CA is being investigated by federal prosecutors and the Securities and

Exchange Commission for misrepresenting the timing of contracts in order to
meet Wall Street's quarterly expectations.

"We believe the decisions we have made today are fair and responsive to the
situation and in the best interests of CA's customers, shareholders and
employees," said CA director Lewis Ranieri, who is taking over as chairman.

"The changes in Sanjay [Kumar]'s role are not based on the conclusion that
he engaged in any wrongdoing. Nonetheless, the conduct in question
occurred during his tenure, and the board felt this action was appropriate."

Four former finance executives have pleaded guilty to fraud or obstruction of

justice charges, including Ira Zar, the former chief financial officer.
Zar implicated two other high-ranking executives and although their names
were not disclosed, prosecutors noted that Zar reported to Kumar.

In January, a former senior vice-president who pleaded guilty said, CA had a

"widespread practice" of inflating revenue by closing the books on a quarter a
few days late.

SEC Files Securities Fraud Charges Against Computer Associates

International, Inc., Former CEO Sanjay Kumar, and Two Other Former
Company Executives
FOR IMMEDIATE RELEASE
2004-134

Company Agrees to Settlement with SEC and Justice Department Including $225
Million in Restitution and Corporate Governance Reforms

Washington, D.C., Sept. 22, 2004 -- The Securities and Exchange Commission today
announced securities fraud charges against Computer Associates International, Inc. and
three of the company's former top executives -- Sanjay Kumar, former CEO and Chairman,
Stephen Richards, former Head of Sales, and Steven Woghin, former General Counsel. The
SEC alleges that from 1998 to 2000, Computer Associates routinely kept its books open to
record revenue from contracts executed after the quarter ended in order to meet Wall
Street quarterly earnings estimates. In total, Computer Associates prematurely recognized
$2.2 billion in revenue in FY2000 and FY2001 and more than $1.1 billion in premature
revenue in prior quarters. In addition, Computer Associates, through former executives
Kumar, Richards and Woghin and others, obstructed the SEC's investigation into the
company's accounting practices.

Computer Associates has agreed to settlements with the SEC and the Justice Department in
which the company will pay $225 million in restitution to shareholders and will make
reforms to its corporate governance and financial accounting controls. Woghin has agreed
in a partial settlement to a permanent injunction and officer and director bar with monetary
sanctions to be decided at a later point.

Mark K. Schonfeld, Director of the SEC's Northeast Regional Office, said, "Like a team that
plays on after the final whistle has blown, Computer Associates kept scoring until it had all
the points it needed to make every quarter look like a win. With these charges we have
demonstrated our commitment to hold the highest levels of management responsible for
fraud on the company's shareholders."

Alexander M. Vasilescu, Senior Trial Counsel in the SEC's Northeast Regional Office, added,
"The combined actions of the SEC and the Justice Department, including the $225 million in
restitution, should send a clear message that public companies will pay a heavy price for
obstructing the government's investigation."
The SEC's complaints, filed in the United States District Court for the Eastern District of New
York, allege as follows:

 With no regard for generally accepted accounting principles (GAAP) or their financial
reporting obligations, the defendants manipulated Computer Associates' quarter end
cutoff to align Computer Associates' reported financial results with market
expectations.

 During the period from at least Jan. 1, 1998, through Sept. 30, 2000, Computer
Associates prematurely recognized over $3.3 billion in revenue from at least 363
software contracts that Computer Associates, its customer, or both parties, had not
yet executed, in violation of GAAP.

 Executives, including defendants Kumar, Richards, and Woghin, held Computer

Associates' books open for several days after the end of each quarter to improperly
record in that quarter revenue from contracts that were not executed by customers
or Computer Associates until several days or more after the expiration of the
quarter. As a result of this improper practice, Computer Associates made material
misrepresentations and omissions about its revenue and earnings in SEC filings and
other public statements. For example, in the first, second, third and fourth quarters
of FY2000, respectively, Computer Associates inflated its properly recorded revenue
by approximately 25%, 53%, 46%, and 22% by improperly including prematurely
recognized revenue.

 After Computer Associates substantially refrained from recognizing revenue

prematurely from contracts that its customers had signed after quarter end during
the first quarter of its fiscal year 2001, the company missed its earnings estimate
and Computer Associates' stock price dropped over 43% in a single day.

 Computer Associates continued the improper practice of improperly recognizing

revenue from contracts that Computer Associates signed after quarter end through
the fiscal quarter ending Sept. 30, 2000.

The individual defendants furthered Computer Associates' fraud as follows:

 Kumar (1) oversaw and implemented Computer Associates' extended quarters

practice while knowing, or recklessly disregarding the fact that, such practice would
result in Computer Associates prematurely and improperly recognizing revenue; (2)
signed Forms 10-K and 10-Q, filed by Computer Associates with the SEC, which
contained materially false and misleading revenue and earnings results; and (3)
signed at least two contracts which were backdated or misleadingly dated, and
participated in obtaining other backdated contracts, while knowing, or recklessly
disregarding, that such contracts would result in improper revenue recognition by
Computer Associates.

 Richards (1) participated with other Computer Associates executives in the practice
of extending Computer Associates' fiscal quarters; (2) instructed and allowed
subordinates to negotiate and obtain contracts after quarter end while knowing, or
recklessly disregarding the fact that, Computer Associates would improperly
recognize the revenue from those contracts; and (3) failed to alert Computer
Associates' Finance or Sales Accounting Departments that Computer Associates
salespersons that reported to Richards were obtaining contracts with backdated
 signature dates after quarter end.

 Woghin (1) signed a Form S-4 and a Form S-4 amendment that Computer Associates
filed with the SEC in February and March 2000, while knowing, or recklessly
disregarding the fact that, those filings contained materially false and misleading
information regarding Computer Associates' prior revenue and earnings per share;
(2) approved backdated contracts, including drafting a contract with misleading
dates; and (3) allowed Computer Associates' Legal Department to approve contracts
obtained by the sales force while knowing, or recklessly disregarding the fact that,
those contracts contained false and misleading signature dates and that Computer
Associates would recognize revenue from those contracts in the incorrect fiscal
quarter.

 While the accounting fraud was occurring, defendants Kumar, Richards and Woghin
received ill-gotten gains in the form of compensation they received from Computer
Associates. In addition to committing securities fraud, the defendants interfered with
the SEC's investigation. During the course of the SEC's investigation, Kumar made
materially false and misleading statements in a joint proffer session with the SEC
and the United States Attorney's Office. During the same relevant period, Richards
made materially false and misleading statements in sworn investigative testimony
and Woghin encouraged several Computer Associates employees to make false and
misleading statements to the SEC and/or Computer Associates' outside counsel.

Joint Settlement with the SEC and USAO

Computer Associates has agreed to the following relief:

 A permanent injunction against future violations of the antifraud, reporting, books

and records and internal control provisions of the federal securities laws.

 Forward looking remedial relief, including, for at least 18 months, that Computer
Associates will be subject to the review of an Independent Examiner, reporting to the
SEC, the Justice Department and Computer Associates' Board of Directors. Also,
Computer Associates will establish a comprehensive new ethics and compliance
program, overseen by a new Chief Compliance Officer, and a new Compliance
Committee of its Board of Directors.

 A deferred prosecution agreement with the USAO requiring Computer Associates to

pay $225 million to injured shareholders and directing Computer Associates to
undertake the same remedial measures in the SEC consent judgment.

Woghin has consented to a partial judgment imposing a permanent injunction prohibiting

him from violating the antifraud reporting, books and records and internal control provisions
of the federal securities laws. The partial judgment also permanently bars Woghin from
serving as an officer or director of a public company. The Commission's claims for
disgorgement and civil penalties against Woghin, and all of its claims against the other
individual defendants, remain pending. The SEC's investigation is also continuing.

The SEC acknowledges the assistance and cooperation of the United States Attorney's Office
for the Eastern District of New York and the Federal Bureau of Investigation in this matter.
 For further information contact:

102 viewsJun 30, 2005, 05:15pm

Computer Associates Details Problems

By Fahmida Y. Rashid

On the same day a U.S. attorney filed indictments against former Computer
Associates executives Sanjay Kumar Sanjay Kumar and Stephen Richards Stephen Richards , the
company detailed problems in its internal financial controls in a filing to the U.S. Securities
Exchange Commission.

CA finally filed its annual report for the fiscal year ended March 31, 2005, on Wednesday. The
company said in late May that it would delay filing to investigate additional accounting issues
that occurred before 2000.

At the time, it said the improper accounting occurred between 1998 and 2001, and that it would
require relatively small changes in reported results for recent years. The eventual filing contained
previously restated financial statements for the fiscal years 2001 through 2004, as well as
additional corrections to 2005 earnings.

The explanatory note in the filing identified two kinds of transactions recorded incorrectly during
that time period. In some cases, CA, in order to artificially boost revenue, sold and purchased
products and services from other companies, even when there was no business reason to do so. In
other cases, CA recorded the initial software license agreements but delayed when the
subsequent revenue would be recorded. So, even though the agreements began in the fiscal years
1998 through 2001, deferring revenue for these agreements to a later period affected the financial
statements for each of the subsequent fiscal years, including fiscal year 2005.

The issues in internal controls, found in its audit and mentioned in the report, is listed to comply
with the Sarbanes-Oxley Act. The enterprise software maker says it is taking steps to fix them.
"We are committed to the highest standards of financial reporting and fiscal transparency,"
says John Swainson John Swainson , CA's president and chief executive, in a statement.

The filing acknowledged that CA did not have policies in place that would have detected or
prevented improper accounting during the fiscal years 1998 through 2001. A variety of new
controls have been added since, such as management-level approvals and order-to-shipment
reviews of software. Control activities in financial reporting, software development and indirect
sales are being documented, as well.

The report also listed efforts to improve controls over financial restatements. Software contracts
executed under the older business model used "credits," which would now be maintained in a
separate schedule. The financial department is also required to review those contracts on a
quarterly basis.

As part of its efforts to prevent similar accounting problems, CA is updating and improving
existing financial-reporting and operational-planning systems. The filing listed a license for the
enterprise resource-planning software from SAP .

CA also found problems within its European, Middle Eastern and African operations. The
ineffective control environment within those sectors enabled the "overlooking of conduct
involving conflicts of interest" between employees and vendors, and overriding attempts to
frustrate and discourage the reporting and investigation of improper conduct. The report said
several employees and managers were fired or resigned, and new executives have been appointed
as the head of the region, procurement chief and general counsel. New finance personnel will
also be hired in the coming months.

Last year, the company restated $2.2 billion in revenue from 2001 and 2002 and replaced most of
its top executives as a result of the accounting scandal, many of which have plead guilty.
Because the improper accounting involved booking real contracts sooner than they should have
been booked, the restatements boosted results for more recent years. For the year ended March
31, 2005, it said income from continuing operations was $13 million, or two cents per share--$1
million more than previously reported. Revenue was $3.53 billion, or $6 million less than
previously reported.

The company also reaffirmed its outlook for the current quarter, saying it expects to report
income of 10 cents to 11 cents per share from continuing operations, compared with a restated 8
cents per share a year ago. It said revenue will be $910 million to $930 million, compared with
restated year-earlier revenue of $850 million.

CA mentioned in its filing that despite the accounting errors and ongoing investigation by the
SEC and the government, the company has been effective in maintaining relationships with
vendors and customers