Sanjay Kumar, former Computer Associates boss, has been charged with securities fraud, conspiracy and obstruction of justice over a $2.2bn company-wide accounting fraud. Stephen Richards, CA's ex-head of worldwide sales, faces the same charges. Stephen Woghin, CA’s former general counsel and senior vice president, pleaded guilty today to securities fraud conspiracy and obstruction of justice charges for his role in the fraudulent scheme.

Kumar and Richards face a maximum sentence of 100 years apiece if found guilty on all charges, while Woghin could face up to 25 years in jail.

Deputy Attorney General James Comey said 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.”

Ira Zar, CA's former chief financial officer, and three former senior executives have already pleaded guilty to charges arising from the accounting fraud.

Kumar's charge sheet was revealed today, as CA announced it had settled investigations with the Department of Justice and Securities and Exchange Commission. The DoJ is to defer prosecution of CA for 18 months, giving the software maker a chance to show that it has changed its financial reporting practices. CA is also paying $225m to shareholders for "losses caused by the misconduct of certain former company executives". It has accepted full responsibility for its conduct during the period, which resulted accounting fraud and mis-statement of revenue, and for trying to stymie the investigation by the DoJ and the SEC.

CA Chairman Lewis Ranieri said: “Some former members of CA’s management engaged in illegal activity. Violations of law and ethical standards, including securities fraud, obstructing a government investigation, and lying to CA’s Board of Directors and CA’s lawyers cannot be condoned. We fully support the government’s efforts to bring all responsible parties to justice. In addition, we will do everything in our power to help the government recover unjust enrichments. The Restitution Fund, the numerous changes we have made over the past year, and the changes we will make in the future will help rebuild confidence in our Company."

And now for the DoJ's statement on the accounting fraud and obstruction of justice allegedly committed by Kumar and other CA executives. ®

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.

®

Related links

DoJ statement
CA statement

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