U.S. Securities and Exchange Commission
Litigation Release No. 18891 / September 22, 2004
Accounting and Auditing Enforcement Release No. 2106 / September 22, 2004
SEC v. Computer Associates International, Inc., 04 Civ. 4088 (E.D.N.Y.)(Glasser, I.L.);
SEC v. Sanjay Kumar and Stephen Richards, 04 Civ. 4104 (E.D.N.Y.)(Glasser, I.L.);
SEC v. Steven Woghin, 04 Civ. 4087 (E.D.N.Y.)(Glasser, I.L.).
On September 22, 2004, the Securities and Exchange Commission filed securities fraud charges against Computer Associates International, Inc. and three of the company's former top executives - Sanjay Kumar, former CEO and Chairman, Stephen Richards, former Head of Sales, and Steven Woghin, former General Counsel. The SEC alleges that from 1998 to 2000, Computer Associates routinely kept its books open to record revenue from contracts executed after the quarter ended in order to meet Wall Street quarterly earnings estimates. In total, Computer Associates prematurely recognized $2.2 billion in revenue in FY2000 and FY2001 and more than $1.1 billion in premature revenue in prior quarters. In addition, Computer Associates, through former executives Kumar, Richards and Woghin and others, obstructed the SEC's investigation into the company's accounting practices.
The Commission's complaint against Computer Associates alleges that, based on this conduct, the company violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. The Commission's complaints against defendants Kumar, Richards and Woghin allege that, based on this conduct, they violated Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10(b)-5 and 13b2-1 thereunder. The complaints further allege that under Section 20(e) of the Exchange Act, Kumar, Richards and Woghin aided and abetted Computer Associates' violations of Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder.
Computer Associates has agreed to settlements with the SEC and the Justice Department in which the company will pay $225 million in restitution to shareholders and will make reforms to its corporate governance and financial accounting controls. Woghin has agreed in a partial settlement to a permanent injunction and officer and director bar with monetary sanctions to be decided at a later point.
The SEC's complaints, filed in the United States District Court for the Eastern District of New York, allege as follows:
With no regard for generally accepted accounting principles (GAAP) or their financial reporting obligations, the defendants manipulated Computer Associates' quarter end cutoff to align Computer Associates' reported financial results with market expectations.
During the period from at least Jan. 1, 1998, through Sept. 30, 2000, Computer Associates prematurely recognized over $3.3 billion in revenue from at least 363 software contracts that Computer Associates, its customer, or both parties, had not yet executed, in violation of GAAP.
Executives, including defendants Kumar, Richards, and Woghin, held Computer Associates' books open for several days after the end of each quarter to improperly record in that quarter revenue from contracts that were not executed by customers or Computer Associates until several days or more after the expiration of the quarter. As a result of this improper practice, Computer Associates made material misrepresentations and omissions about its revenue and earnings in SEC filings and other public statements. For example, in the first, second, third and fourth quarters of FY2000, respectively, Computer Associates inflated its properly recorded revenue by approximately 25%, 53%, 46%, and 22% by improperly including prematurely recognized revenue.
After Computer Associates substantially refrained from recognizing revenue prematurely from contracts that its customers had signed after quarter end during the first quarter of its fiscal year 2001, the company missed its earnings estimate and Computer Associates' stock price dropped over 43% in a single day.
Computer Associates continued the improper practice of improperly recognizing revenue from contracts that Computer Associates signed after quarter end through the fiscal quarter ending September 30, 2000.
The individual defendants furthered Computer Associates' fraud as follows:
Kumar (1) oversaw and implemented Computer Associates' extended quarters practice while knowing, or recklessly disregarding the fact that, such practice would result in Computer Associates prematurely and improperly recognizing revenue; (2) signed Forms 10-K and 10-Q, filed by Computer Associates with the SEC, which contained materially false and misleading revenue and earnings results; and (3) signed at least two contracts which were backdated or misleadingly dated, and participated in obtaining other backdated contracts, while knowing, or recklessly disregarding, that such contracts would result in improper revenue recognition by Computer Associates.
Richards (1) participated with other Computer Associates executives in the practice of extending Computer Associates' fiscal quarters; (2) instructed and allowed subordinates to negotiate and obtain contracts after quarter end while knowing, or recklessly disregarding the fact that, Computer Associates would improperly recognize the revenue from those contracts; and (3) failed to alert Computer Associates' Finance or Sales Accounting Departments that Computer Associates salespersons that reported to Richards were obtaining contracts with backdated signature dates after quarter end.
Woghin (1) signed a Form S-4 and a Form S-4 amendment that Computer Associates filed with the SEC in February and March 2000, while knowing, or recklessly disregarding the fact that, those filings contained materially false and misleading information regarding Computer Associates' prior revenue and earnings per share; (2) approved backdated contracts, including drafting a contract with misleading dates; and (3) allowed Computer Associates' Legal Department to approve contracts obtained by the sales force while knowing, or recklessly disregarding the fact that, those contracts contained false and misleading signature dates and that Computer Associates would recognize revenue from those contracts in the incorrect fiscal quarter.
While the accounting fraud was occurring, defendants Kumar, Richards and Woghin received ill-gotten gains in the form of compensation they received from Computer Associates. In addition to committing securities fraud, the defendants interfered with the SEC's investigation. During the course of the SEC's investigation, Kumar made materially false and misleading statements in a joint proffer session with the SEC and the United States Attorney's Office. During the same relevant period, Richards made materially false and misleading statements in sworn investigative testimony and Woghin encouraged several Computer Associates employees to make false and misleading statements to the SEC and/or Computer Associates' outside counsel.
JOINT SETTLEMENT WITH THE SEC AND USAO
Computer Associates has agreed to the following relief:
A permanent injunction against future violations of the antifraud, reporting, books and records and internal control provisions of the federal securities laws.
Forward looking remedial relief, including, for at least 18 months, that Computer Associates will be subject to the review of an Independent Examiner, reporting to the SEC, the Justice Department and Computer Associates' Board of Directors. Also, Computer Associates will establish a comprehensive new ethics and compliance program, overseen by a new Chief Compliance Officer, and a new Compliance Committee of its Board of Directors.
A deferred prosecution agreement with the USAO requiring Computer Associates to pay $225 million to injured shareholders and directing Computer Associates to undertake the same remedial measures in the SEC consent judgment.
Woghin has consented to a partial judgment imposing a permanent injunction prohibiting him from violating the antifraud reporting, books and records and internal control provisions of the federal securities laws. The partial judgment also permanently bars Woghin from serving as an officer or director of a public company. The Commission's claims for disgorgement and civil penalties against Woghin, and all of its claims against the other individual defendants, remain pending. The SEC's investigation is also continuing.
The SEC acknowledges the assistance and cooperation of the United States Attorney's Office for the Eastern District of New York and the Federal Bureau of Investigation in this matter.