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|Subject: Computer Associates||Date: 9/23/2004 7:23 AM|
|Author: zoningfool||Number: 517 of 532|
FOR IMMEDIATE RELEASE
WEDNESDAY, SEPTEMBER 22, 2004
FORMER COMPUTER ASSOCIATES EXECUTIVES INDICTED ON
SECURITIES FRAUD, OBSTRUCTION CHARGES
Former General Counsel Pleads Guilty, Company Enters Into Cooperation Agreement
WASHINGTON, D.C. - Deputy Attorney General James B. Comey, U.S. Attorney Roslynn R. Mauskopf of the Eastern District of New York, and FBI Director Robert Mueller announced today the unsealing of an indictment charging two former executives of Computer Associates International, Inc., for their alleged participation in a long-running, company-wide accounting fraud scheme and subsequent efforts to obstruct the government's investigation.
The 10-count indictment, returned last Friday by a federal grand jury in Brooklyn, New York and unsealed today, charges Sanjay Kumar, the former Chief Executive Officer and Chairman of the Board of Computer Associates International, Inc. (CA), and Stephen Richards, CA's former Head of Worldwide Sales, with securities fraud conspiracy, obstruction of justice and conspiracy to obstruct justice. Richards was also charged with one count of perjury, and Kumar was also charged with one count of making false statements to law enforcement officers.
In addition, Stephen Woghin, CA's former General Counsel and Senior Vice President, pleaded guilty this morning to securities fraud conspiracy and obstruction of justice charges for his role in the fraudulent scheme. Woghin entered his plea before U.S. District Judge I. Leo Glasser at the U.S. Courthouse in Brooklyn.
Also today, the Department of Justice announced that CA has been charged and has accepted responsibility for the illegal conduct of its former executives, adopted significant corporate reforms, agreed to continue its cooperation with the government's ongoing investigation, and agreed to pay $225 million to compensate victims of the fraud as part of a deferred prosecution agreement. If CA abides by the terms of the agreement, the United States Attorney's Office has agreed not to prosecute CA. The agreement does not protect any individuals from prosecution.
“The defendants are accused of perpetrating a massive accounting fraud that cost public investors hundreds of millions of dollars when it collapsed. Then they allegedly tried to cover up their crimes by lying,” said Deputy Attorney General Comey, who chairs the President's Corporate Fraud Task Force. “If proven true, such conduct cannot be tolerated and the Corporate Fraud Task Force's track record shows that it will be met with severe penalties.”
“For more than two years, former CA executives are allegedly obstructed the
government's investigation,” said U.S. Attorney Mauskopf, a member of the task force. “However, they failed to prevent the government from getting to the truth. In fact, all they accomplished was getting themselves charged with the additional obstruction of justice crimes, which now carry stiff penalties under Sarbanes-Oxley.”
The Accounting Fraud Scheme: The '35-Day Month'
According to the indictment, in fiscal year 2000, Kumar and Richards, along with others, allegedly took part in a systemic, company-wide practice of falsely and fraudulently recording and reporting within a fiscal quarter revenue associated with certain license agreements, even though those agreements had not in fact been finalized and signed during that quarter. This practice, sometimes referred to within CA as the “35-day month” or the “three-day window,” violated generally accepted accounting principles and resulted in the filing of materially false financial statements.
The goal of the 35-day month, according to the indictment, was to permit CA to report that it met or exceeded its projected quarterly revenue and earnings when, in truth, it had not.
The indictment alleges instances in which Kumar and Richards personally advanced the goals of the 35-day practice. For example, Kumar, assisted by former CA Chief Financial Officer Ira Zar, kept CA's books open at the end of fiscal periods. In the week following the end of fiscal periods, while the books were held open, Kumar and Richards directed CA sales managers and salespeople to finalize and backdate license agreements. Revenue from those falsely dated license agreements was then improperly recognized in the quarter just ended. Kumar and Richards allegedly met routinely and conferred with each other and with Zar during the week following the end of fiscal periods to determine whether CA had generated sufficient revenue to meet the quarterly projections, and closed CA's books only after they determined that CA had generated enough revenue to meet the quarterly projections.
Zar and three other individuals - David Kaplan, former Senior Vice President of Finance and Administration; David Rivard, former Vice President of Finance; and Lloyd Silverstein, former Divisional Senior Vice President in Charge of the Global Sales Organization - have previously pleaded guilty to charges arising out of the CA investigation.
The magnitude of the 35-day month accounting fraud scheme was made apparent on April 26, 2004, when CA filed forms with the Securities and Exchange Commission restating certain financial data for the fiscal years 2000 and 2001. The restatement was based on an internal investigation conducted by CA's Audit Committee which found that $2.2 billion of revenue was booked prematurely.
Obstruction of Justice
In early 2002, the United States Attorney's Office, the FBI and the Northeast Regional Office of the SEC began investigations into CA's accounting practices. In February 2002, CA retained a law firm to represent it in connection with the government investigations. Shortly after being retained, the company's law firm met with Kumar, Richards, Woghin and other CA executives in order to inquire into their knowledge of the practices that were the subject of the government investigations. During these meetings, the defendants and others allegedly failed to disclose, falsely denied and concealed the existence of the 35-day month practice. Kumar, Richards, Woghin and others allegedly presented to the law firm an assortment of false justifications to explain away evidence of the 35-day month practice.
The indictment alleges that Kumar, Richards and Woghin knew, and in fact intended, that the company's law firm would present these false justifications to the U.S. Attorney's Office, the SEC and the FBI in an attempt to persuade the government that the 35-day month practice never existed. The indictment further alleges that Kumar frequently instructed Woghin to meet with CA employees prior to their being interviewed by the government or the company's lawyers to coach them on how to answer questions without disclosing the 35-day month practice.
The indictment alleges that on Oct. 23, 2003, Richards perjured himself while testifying under oath before the SEC by attempting to conceal the existence of the 35-day month practice and his involvement in it. The indictment also alleges that Kumar, in an interview with the FBI and the U.S. Attorney's Office on Nov. 5, 2003, made materially false statements to conceal the same scheme and his involvement in it.
If convicted on all counts, Kumar and Richards each face a maximum prison sentence of 100 years. Woghin faces a maximum prison sentence of 25 years on the charges to which he pleaded guilty.
The charges in the indictment are merely allegations, and the defendants are presumed innocent unless and until proven guilty.
Computer Associate's Agreement with the Government
In the agreement executed today, CA has accepted responsibility for its conduct and acknowledged that, as a result of the conduct of certain of its former officers, executives and employees, the company filed multiple materially false and misleading financial reports with the SEC, made other materially false and misleading public statements and omissions in connection with the purchase and sale of CA securities, and obstructed the government's investigations.
Under the terms of the agreement, CA has also agreed to pay $225 million for purposes of compensating shareholders for losses arising out of the company's criminal conduct. Last year, CA settled a series of shareholder class action lawsuits through which it agreed to issue up to 5.7 million shares of CA stock and pay cash to compensate CA shareholders at a total cost to CA of approximately $163 million.
In addition, pursuant to the agreement, CA has agreed to continue its cooperation and to continue its implementation of numerous remedial steps undertaken to ensure that the fraud at CA does not recur. These remedial steps include:
the termination of CA officers and employees who were responsible for the improper accounting, inaccurate financial reporting, and obstruction of justice, as well as those who took steps to obstruct or impede CA's internal investigation;
The appointment of new management, including, but not limited to, an Interim Chief Executive Officer, a new Chief Operating and Chief Financial Officer, a new Head of Worldwide Sales, and a new General Counsel;
In addition to including former SEC Commissioner Laura Unger on CA's Board of Directors, adding a minimum of two new independent directors, so that no less than two-thirds of the members of CA's board will be independent directors;
Establishing a new Compliance Committee, a new Disclosure Committee, enhanced corporate governance procedures, and a comprehensive ethics program;
Reorganizing CA's Finance Department, including the appointment of a Corporate Controller, a Chief Accounting Officer, and a Financial Controller for each of CA's primary business functions, and the reorganizing of its Internal Audit Department.
Under the agreement, the court will appoint an independent examiner who will be empowered to review CA's compliance with all of the terms and conditions in the agreement.
In light of CA's acceptance of responsibility, continued cooperation, remedial measures, and agreement to compensate the victims of its fraud, the United States Attorney's Office has agreed not to prosecute CA for the fraudulent and obstructive conduct of its former officers, executives and employees. However, should CA violate the terms of the agreement executed today, or commit any other crimes, it shall be subject to prosecution, including prosecution for the fraud that is the subject of the indictment.
The President's Corporate Fraud Task Force was established in July 2002 to coordinate and oversee all federal corporate fraud investigations. In the first two years of Task Force operations, the Department of Justice charged more than 900 defendants in corporate fraud cases and obtained more than 500 convictions. The Task Force works to enhance cooperation among its member agencies and other federal, state and local authorities in connection with the investigation and prosecution of significant financial crimes.
The government's case is being prosecuted by Assistant United States Attorneys David Pitofsky, Eric Corngold and Eric Komitee.
SEC Files Securities Fraud Charges Against Computer Associates International, Inc., Former CEO Sanjay Kumar, and Two Other Former Company Executives
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.
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