The long-running accounting scandal at Computer Associates International Inc is drawing to a conclusion, with the firm agreeing yesterday to pay $225m to shareholders defrauded by the so-called “35-day month” scam.
Former CEO Sanjay Kumar has now also been charged with fraud and conspiracy, along with a former senior sales executive. Kumar and others also may end up losing bonuses awarded during the period when CA was cooking its books.
CA accepts responsibility for the improper accounting practices and misstatements of revenue, said CA chair Lewis Ranieri. This conduct was wrong. I want to be very clear on this point, we fully support the government’s effort to bring wrongdoers to justice.
CA yesterday confessed in a Securities and Exchange Commission filing that employees it did not name fraudulently recorded and reported revenue by backdating software contracts so the company could meet its revenue and earnings targets.
And the Department of Justice said that Kumar has been indicted on charges that he was involved in the scam, which took place during CA’s fiscal 2000, and on charges that he then helped attempt to cover up the truth from federal investigators.
The firm will pay $225m to current and former shareholders as part of a broad deferred prosecution settlement with the US Department of Justice and SEC that will subject CA to 18 months of oversight, with the delayed threat of prosecution.
The deal comes at the end of a two-year investigation by the US and SEC, which discovered that CA kept its books open for several days after fiscal quarters had closed, in order to ‘beat the Street’ and keep its share price buoyant.
Under the settlement, CA pays $225m cash into a fund that will be distributed to shareholders by a government-approved administrator. Payments will be made in three $75m chunks, six months apart, starting 30 days after the administrator is chosen.
The $225m payment will be made in addition to earlier agreements to pay $163m to settle class action suits. The full details on how the money will be distributed have apparently yet to be decided.
The company will not be prosecuted, providing it complies with a broad set of corporate governance requirements, outlined in the deal. An independent examiner will monitor compliance for 18 months.
These requirements include adding two more independent directors, so that independents make up two thirds of the board, and creating a compliance committee, a disclosure committee, and creating a whistleblower hotline for employees.
CA’s Ranieri said that the firm will actively assist government in any efforts to recover compensation paid to executives who took part in the fraud that was paid as a result of artificially inflated share prices. It’s not clear if this recovered cash would go to CA or directly to shareholders.
CA’s executive compensation over the periods in question and earlier has been criticized many times as excessive, even without it being based on share prices inflated by the belief that CA was meeting its estimates.
Kumar and Stephen Richards, CA’s former head of worldwide sales, have been charged with securities fraud conspiracy, obstruction of justice and conspiracy to obstruct justice, according to the Department of Justice.
Kumar and Richards personally advanced the goals of the 35-day practice, the DoJ said. With former CFO Ira Zar, who pleaded guilty to similar charges in April, the two men kept books open if revenue targets had not been met, the DoJ said.
Richards was also charged with one count of perjury, and Kumar was charged with one count of making false statements to law enforcement officers, relating to the alleged cover-up that took place after investigations began in 2002.
The DoJ also said that Stephen Woghin, CA’s former general counsel who was fired in April, pleaded guilty yesterday to securities fraud conspiracy and obstruction of justice charges over his role in the scheme.
For more than two years, former CA executives are allegedly [sic] obstructed the government’s investigation, said US Attorney Roslynn Mauskopf. In fact, all they accomplished was getting themselves charged with the additional obstruction of justice crimes, which now carry stiff penalties under Sarbanes-Oxley.
Kumar and Richard theoretically face a maximum sentence of 100 years in prison each, if convicted on all counts, according to the DoJ. Woghin could get up to 25 years if convicted on the charges that he has already pleaded guilty to.
Kumar evaded any accusations of involvement for a long time, even asking for the resignations last October of three senior executives, including Ira Zar, that the DoJ now claims were his co-conspirators in the fraud.
In April he resigned from the CEO’s job, taking on the ostensibly non-managerial position of chief software architect. In June, CA offered $10m to settle the government probes, and later that month Kumar left the company completely.
It was occurring when Sanjay was CEO… the obstruction was on Sanjay’s watch, as a result we moved to remove Sanjay from any management position, Ranieri said in a conference call with analysts and investors yesterday.
Ultimately, as the information mounted, it became obvious he could no longer be with the company, so we asked him to leave, he added, noting that Kumar was COO during the period of the scam, and CEO during the alleged cover-up.
Kumar was replaced in April by Kenneth Cron, who is acting as interim CEO. The company also hired Jeff Clarke, former Compaq CFO, as its new COO and CFO, also in April. Well over a dozen senior executives have been replaced due to the scandal.