Former Computer Associates Ceo Sanjay Kumar and Former Head of World-wide Sales Stephen Richards Plead Guilty to All Charges of Securities Fraud and Admit Lying to Federal Investigators to Cover up the Scheme
Defendants Deliberately Manipulated Over $2 Billion in Revenue to Prop Up Stock Price
SANJAY KUMAR, former Chief Executive Officer of Computer Associates International, Inc. (“Computer Associates”) and STEPHEN RICHARDS, Computer Associates’ former Head of World-Wide Sales, pleaded guilty to all the crimes with which they were charged, including securities fraud, obstruction of justice, and perjury. The defendants admitted fraudulently inflating the quarterly revenue and earnings of Computer Associates by keeping open the company’s books past quarter-ends in order to give the appearance that the company had met or exceeded quarterly revenue projections, when, in truth, the company’s performance had fallen short of those goals. Through this fraudulent scheme, KUMAR, RICHARDS, and others at the company deliberately manipulated over $2 billion in revenue during the time period 1999-2000 to prop up the price of the stock. KUMAR and RICHARDS also admitted obstructing the government’s investigation by providing false explanations for the fraudulent accounting practices to the company’s lawyers, with the intent that those lawyers would repeat those false explanations to the government, and by themselves lying to federal investigators to conceal the fraud scheme.
With today’s guilty pleas, the company’s Chief Executive Officer, Chief Financial Officer, Head of World-Wide Sales, General Counsel, and three additional top financial officers have admitted their guilt and accepted responsibility for their crimes. In addition, the company has paid $225 million to a shareholder restitution fund and continues to cooperate with the government pursuant to a deferred prosecution agreement.
The guilty pleas were announced today by ROSLYNN R. MAUSKOPF, United States Attorney for the Eastern District of New York, and MARK J. MERSHON, Assistant Director-in-Charge, Federal Bureau of Investigation, New York Field Office, and were entered this afternoon before United States District Judge I. Leo Glasser at the U.S. Courthouse, 225 Cadman Plaza East, Brooklyn, New York. KUMAR and RICHARDS each pleaded guilty to eight counts. Sentencing is scheduled for September 12, 2006.
“The guilty pleas today of Computer Associates’ former CEO and its former Head of World-Wide Sales are the culmination of the government’s successful investigation into a culture of corruption and fraud at Computer Associates,” stated United States Attorney MAUSKOPF. “The integrity of our financial markets depends on corporate executives reporting their companies’ performance honestly to the investing public. By choosing to lie repeatedly about Computer Associates’ financial position, the defendants violated their shareholders’ trust and the federal securities laws. They then compounded those lies, and further damaged the corporation, by presiding over a massive cover-up. The defendants’ efforts failed, however, as demonstrated by their guilty pleas.”
The Accounting Fraud Scheme: The “35-Day Month”
The government’s investigation leading to today’s guilty pleas revealed that prior to and during Computer Associates’ fiscal year 2000, KUMAR and RICHARDS, and numerous other Computer Associates officers and executives (several of whom have already pleaded guilty), engaged 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 Computer Associates 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.1
The goal of the 35-day month was to permit Computer Associates to report that it met or exceeded its projected quarterly revenue and earnings when, in truth, it had not. During each of the four quarters of fiscal year 2000, Computer Associates improperly recognized and falsely reported hundreds of millions of dollars of revenue associated with numerous license agreements that had been finalized after the end of the quarter.
KUMAR and RICHARDS personally directed the 35-day month practice, routinely meeting and conferring with each other and with other Computer Associates executives during the week following the end of fiscal periods to determine whether Computer Associates had generated sufficient revenue to meet the quarterly projections. When additional revenue was needed, KUMAR and RICHARDS personally negotiated contracts after the ends of quarters, knowing and intending that the revenue from those contracts would be improperly recognized in the prior quarter. For example, in early July 1999, KUMAR flew by Computer Associates corporate jet to Paris, France, where he negotiated and finalized a license agreement by which a Computer Associates customer agreed to pay Computer Associates approximately $32 million. The written license agreement, which KUMAR personally signed, was fraudulently backdated to make it appear that the agreement had been finalized and signed on June 30, 1999, and approximately $19 million in revenue associated with that falsified license agreement was improperly recognized as revenue in the quarter ended June 30, 1999.
Obstruction of Justice/Perjury
In early 2002, the United States Attorney’s Office, the FBI, and the Northeast Regional Office of the SEC began investigations into Computer Associates’ accounting practice (collectively, the “government investigations”). As the defendants admitted today in pleading guilty, KUMAR and RICHARDS orchestrated a scheme over a two-year period to obstruct the government investigations and carried out that scheme by providing false explanations for the 35-day month practice to Computer Associates’ outside law firms, with the intent that the outside law firms would repeat those false explanations to the government. In addition, KUMAR, RICHARDS, and other Computer Associates executives repeatedly coached and encouraged Computer Associates employees to echo the false explanations for the 35-day month to the outside law firms. KUMAR and RICHARDS themselves also lied directly to the government themselves in order to cover up the existence of the 35-day month. RICHARDS committed perjury in his testimony to the SEC on October 23, 2003, and KUMAR similarly lied at an interview at the U.S. Attorney’s Office on November 5, 2003.
KUMAR also obstructed the government investigations by paying a potential witness not to disclose accounting improprieties at Computer Associates. Specifically, in early 2003, an individual contacted KUMAR and threatened to reveal an improper “revenue swap” transaction that his company entered into with Computer Associates for the sole purpose of boosting Computer Associates’ revenue. In response, KUMAR dispatched Computer Associates’ General Counsel and another Computer Associates executive to Hawaii to offer money to this individual in return for the individual’s silence. When the individual threatened to tell the government about the improper transaction, KUMAR caused Computer Associates to pay several million dollars to the individual pursuant to a consulting agreement, despite the fact that Computer Associates did not need, and never used, the consulting services of this individual.
“The pleas entered today are admissions of guilt in one of the largest corporate accounting fraud schemes on record,” stated FBI Assistant Director-in-Charge 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.”
Ms. MAUSKOPF thanked the SEC for its assistance in this matter.
The government’s case is being prosecuted by Assistant United States Attorneys Amy Walsh, Eric Komitee, and Jason Jones, and Special Assistant U.S. Attorney William Estes.
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