CAs Greenmail Offer to End Federal Probe Is Premature

Computer Associates is hoping that $10 million will buy a lot of mercy from the federal investigators. But it's premature to beg for forgiveness when the government hasn't said publicly what CA's sins are.

Its not every day that a major corporation offers to pay $10 million in greenmail to encourage prompt settlement of a federal investigation. But that is what Computer Associates International seems to be doing.

At first glance it may seem quite laudable that CA wants to make a clean breast of its accounting misconduct by seeking a deal with the government. Doing so would allow the company to restore a smidgen of luster to its badly corroded image and let it turn its full attention to growing the business.

But its premature to make an offer, since so far the government hasnt said officially whether it intends to charge CA for violating any accounting or securities regulations. Individual former executives have been charged as a result of the investigation, but not the company itself.

/zimages/5/28571.gifClick here to read about CAs $10 million settlement offer.

Setting aside a $10 million reserve for a potential legal settlement is a routine and prudent accounting measure for a lot of companies. Its also a blatantly public way to signal that you are highly motivated to make a settlement. But it will do little to help the companys negotiating position. The government may have a very different opinion about whether $10 million is an adequate settlement for accounting misconduct that dates back years.

CAs settlement offer only raises new concerns about what other disclosures may still be in the offing. It seems highly unlikely that the Securities and Exchange Commission would be so accommodating as to accept any settlement before it finishes examining CA books under a microscope. Only then can it consider what charges or penalties would be appropriate.

/zimages/5/28571.gifClick here to read about the firings that were the culmination of CAs internal investigation of the companys accounting practices.

Right now the cards are all in the federal investigators hands. While the current status of the SEC probe is unclear, the investigation has already resulted in guilty pleas from three former senior CA executives on fraud conspiracy charges. Its still quite possible that the SEC probe could produce additional indictments of other current and former CA executives.

The company fired nine other executives in April shortly before the CA board of directors ousted former chief executive Sanjay Kumar, who remains with the company as chief software architect. The SEC could find CA as a whole or any of the disciplined executives from Kumar on down liable for prosecution.

Next Page: CA seeks straight and narrow path.

John Pallatto

John Pallatto

John Pallatto has been editor in chief of QuinStreet Inc.'s since October 2012. He has more than 40 years of experience as a professional journalist working at a daily newspaper and...