The CA Indictment Trail Gets Longer

By John Pallatto  |  Posted 2004-09-23

The CA Indictment Trail Gets Longer

Rarely in the history of American business has a major a U.S. corporation had to make such sweeping admissions of management misconduct and offer such massive levels of investor restitution as Computer Associates has.

The only factor that separates CA from the egregious likes of bankrupt Enron is that its still a going concern and has assets that it can offer up to compensate investors who were fleeced.

But its certainly a fair question whether any company deserves to stay in business that systematically deceived investors to the tune of $2.2 billion in prematurely booked revenue during its fiscal 2000 and 2001.

The only thing that has allowed the company to redeem itself in some measure is the belated effort of CAs board of directors to make a clean breast of the malfeasance. But where was the board when CAs top management was booking revenue on the "35-day month" accounting plan?

It was managements policy to extend the last month of the quarter so it could book revenue from software sales contracts that hadnt actually been signed, enabling the company to report revenue that met or exceeded the estimates of Wall Street analysts.

No board of directors should allow senior management to pull the wool over their eyes. Its hard to believe that at least some of the directors at the time didnt have some inkling that management was puffing up the financial reports.

But then its in top managers interest to only tell the board members what they want them to know and to keep them in the dark about what is really going on. They only look like fools and dupes when the chief executives are unmasked as the crooks that they truly are.

The cost of trying to set things right has been staggering. Not only has CA agreed to pay $225 million in restitution to current and former investors, but the company has also issued 5.7 million shares of CA stock at a cost of $163 million to compensate investors.

The cost in ruined careers and personal reputations has also been high. Former Chairman Sanjay Kumar has joined the growing roll of former CA executives who have either been indicted or pleaded guilty to securities fraud charges. Kumar resigned as CAs chairman and CEO in April as the investigation continued, but he was invited to stay on by the board as CAs chief software architect.

However, Kumar resigned from the company in June as the federal and CAs internal investigations of the companys accounting practices progressed.

Next Page: The growing lists of indictments and guilty pleas.

Indictments and guilty pleas

A 10-count indictment unsealed this week charges Kumar and Stephen Richards, CAs former head of worldwide sales, with securities fraud conspiracy, obstruction of justice and conspiracy to obstruct justice. Richards was charged with one count of perjury, and Kumar was charged with one count of making false statements to law enforcement officers.

Stephen Woghin, CAs former general counsel, pleaded guilty Wednesday to securities fraud conspiracy and obstruction of justice. Woghin faces a maximum sentence of 25 years on all the charges he pleaded to. Kumar and Richards face maximum terms of up to 100 years if they are convicted on all counts.

Click here to read why Computer Associates customers are worried that Kumars resignation will send the companys product strategy off track.

None of these people will receive anywhere near the maximum terms. Doubtless Woghin negotiated some kind of plea bargain in return for his cooperation and testimony in the cases against Kumar and Richards.

Three other former CA executives have also pleaded guilty and are awaiting sentencing. Ira Zar, former CA chief financial officer, pleaded guilty pleaded to securities fraud and conspiracy to commit securities fraud and obstruct justice.

David Kaplan, former senior vice president of finance, and David Rivard, former vice president of finance, pleaded guilty to conspiracy to commit securities fraud and obstruct justice. Kaplan and Rivard face maximum sentences of 10 years in prison. Zar faces up to 20 years in prison.

CA itself had to sign a "deferred prosecution agreement" in which it agreed to a sweeping list of measures to correct previous misconduct and to fully cooperate with the government in the continuing investigation and prosecution of former company executives.

Under this agreement the government has filed charges of securities fraud and obstruction of justice. But the government has agreed not to prosecute the charges as long as the company fulfills all the requirements of the agreement.

Click here to read John Pallattos commentary on why Kumar paid a stiff price for CA dismal accounting integrity.

This includes assisting the government in forcing former executives to disgorge the proceeds of stock options or bonuses they received as a result of fraudulent accounting practices.

The company also had to agree not to assert attorney-client privilege for any records or testimony relating to the investigation. And the company agreed to give government investigators virtually carte blanche access to all company documents and records the government might request.

Its clear that CA avoided active prosecution by fully admitting its responsibility and culpability in the accounting misconduct. It was wise for the company not to compound so many criminal acts by trying to stonewall the government investigation, as many other companies have done before when faced with similar inquiries.

But there are still many unanswered questions. One of the key questions is whether former CA Chairman Charles Wang, retired for several years now, knew about and was ultimately responsible for the chronic and pervasive accounting fraud. Did it all happen under Kumars watch? Or were both men part of an entrenched culture of deception that had continued unchecked for many previous years?

It should not be surprising if the government has at least a few more indictments to unseal in the coming months.

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