U.S. Securities & Exchange Commission
SEC Seal
Home | Previous Page
U.S. Securities and Exchange Commission

U.S. Securities and Exchange Commission

Litigation Release No. 18552 / January 22, 2004

Accounting and Auditing Enforcement Release No. 1948 / January 22, 2004

SEC v. Lloyd Silverstein

Civil Action No. 04 Civ. 255 (E.D.N.Y.)(Glasser, I.L.)

On January 22, 2004, the Securities and Exchange Commission filed charges against Lloyd Silverstein, a former senior vice president of finance at Computer Associates International, Inc., ("CA"), for committing accounting fraud while at CA. The Commission's complaint, filed in the United States District Court for the Eastern District of New York, alleges that Silverstein participated in a widespread practice that resulted in the improper recognition of revenue by CA, one of the world's largest software companies. During at least CA's fiscal year 2000, which ran from April 1, 1999 through March 31, 2000 ("FY2000"), CA prematurely recognized revenue from software contracts that had not yet been consummated, in violation of Generally Accepted Accounting Principles ("GAAP"). The Commission's complaint alleges that, based on this conduct, Silverstein violated Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 10b-5 and 13b2-1 thereunder. The Complaint further alleges that Silverstein is also liable for aiding and abetting CA's violations of Sections 10(b), 13(a) and 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. Without admitting or denying the allegations of the Complaint, Silverstein consented to a permanent injunction and officer and director bar, as described more fully below.

Specifically, the Commission's complaint alleges as follows:

  • Through the conduct of certain members of CA management, including Silverstein, CA engaged in a practice in which CA held its books open after the end of each quarter and improperly recorded, in that elapsed quarter, revenue from contracts that had not been finalized and executed before the expiration of the quarter. CA personnel sometimes concealed this practice by using licensing contracts that falsely bore preprinted signature dates for the last day of the quarter that had just expired, rather than the subsequent dates on which the contracts actually were executed.
  • As a result of this improper practice, CA made material misrepresentations and omissions about its revenue and earnings in Commission filings and other public statements for at least FY2000. For the Second, Third and Fourth Quarters of FY2000, respectively, at least 33%, 26% and 5.5% of CA's reported quarterly revenues pertained to contracts not executed by CA or the company's clients by the quarter's end. For all quarters of FY2000 combined, CA prematurely recognized over $1 billion in revenue from at least 95 contracts that the client or CA signed after the quarter close.
  • CA's FY2000 reported revenues and earnings per share appeared to meet or exceed the consensus estimates of Wall Street analysts, but CA failed to disclose that those reported results improperly included prematurely recognized revenue and did not comply with GAAP. When CA refrained from recognizing revenue prematurely during the Second Quarter of FY2001, the company missed its earnings estimate and CA's stock price dropped over 43% in a single day.

The Commission further alleges that Silverstein facilitated CA's accounting fraud by, among other things:

(1) advising CA's sales force of the number of days CA's management and Finance Department had decided to "extend" a particular fiscal quarter;

(2) knowing or recklessly disregarding the fact that CA personnel were backdating contracts to conceal their true execution dates;

(3) participating in the process of negotiating contracts after quarter's end while knowing or recklessly disregarding the fact that CA would record revenue from those contracts in the quarter that had just elapsed;

(4) knowing or recklessly disregarding the fact that the purpose of extending fiscal quarters and backdating contracts was improperly to report in prior fiscal quarters revenue from contracts that were not executed and finalized until after those fiscal quarters elapsed, and knowing or recklessly disregarding the fact that such practices were improper under GAAP;

(5) allowing personnel to forward false and misleading contracts and paperwork to CA's Finance Department for accounting purposes; and

(6) advising CA's sales force about revenue recognition rules while he knew or should have known that GAAP required that both CA and the customer execute a software contract before CA could recognize revenue from that contract

In its lawsuit, the Commission seeks a judgment: (a) permanently enjoining Silverstein from violating, and aiding and abetting violations of, the securities laws; (b) requiring Silverstein to disgorge his ill-gotten gains together with prejudgment interest; (c) imposing civil money penalties; and (d) barring Silverstein from acting as an officer or director of a publicly held company.

Concurrently with the filing of the Commission's complaint, Silverstein, without admitting or denying the allegations of the Complaint, consented to entry of a permanent injunction prohibiting him from violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder, and from aiding and abetting any violations of Sections 10(b), 13(a), 13(b)(2) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1 and 13a-13. Silverstein also consented to a permanent bar from serving as an officer or director of a publicly held company. Litigation against Silverstein with respect to the Commission's claims of disgorgement and penalties is continuing.

The Commission acknowledges the assistance of the United States Attorney's Office for the Eastern District of New York and the Federal Bureau of Investigation in this matter. The Commission's investigation is continuing.

SEC Complaint in this matter



Modified: 01/22/2004