FOR IMMEDIATE RELEASE|
WEDNESDAY, SEPTEMBER 22, 2004
TDD (202) 514-1888
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:
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.