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. 18665 / April 8, 2004

Accounting and Auditing Enforcement Release No. 1988 / April 8, 2004

SEC v. Ira Zar, 04 Civ. 1463 (E.D.N.Y.)(Glasser, I.L.);

SEC v. David Rivard, 04 Civ. 1464 (E.D.N.Y.)(Glasser, I.L.);

SEC v. David Kaplan, 04 Civ. 1465 (E.D.N.Y.)(Glasser, I.L.).

On April 8, 2004, the Securities and Exchange Commission filed three related actions against Ira Zar, the former Chief Financial Officer at Computer Associates International, Inc., ("CA"), and David Rivard and David Kaplan, former vice presidents of finance at CA, charging each defendant with committing accounting fraud while at CA. The Commission's complaints, filed in the United States District Court for the Eastern District of New York, allege that Zar, Rivard, and Kaplan 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 complaints allege that, based on this conduct, Zar, Rivard and Kaplan violated Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 10b-5, 13b2-1 and 13b2-2 thereunder. The Complaints further allege that Zar, Rivard and Kaplan are 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 Complaints, Zar, Rivard and Kaplan each consented to a permanent injunction and officer and director bar, as described more fully below.

Specifically, the Commission's complaints allege as follows:

  • Through the conduct of certain members of CA management, including Zar, Rivard and Kaplan, 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 (the "Extended Quarters practice"). CA personnel sometimes concealed the Extended Quarters 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 First, Second, Third and Fourth Quarters of FY2000, respectively, at least 18%, 33%, 26% and 7% 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 $1.4 billion in revenue from at least 116 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 First 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, among other things:

  • Zar, as CFO, helped orchestrate CA's improper revenue recognition in FY2000 by directing the improper extensions of fiscal quarters, and by signing and overseeing the preparation of CA's Forms 10-Q and 10-K while aware that those filings reported revenue improperly under GAAP. Zar also backdated his own signature on a large customer contract and authorized the backdating of other contracts.

  • Rivard, as head of Sales Accounting, allowed CA to record revenue from contracts in prior quarters while aware that the contracts were executed later, knew that CA customers were backdating signatures on contracts, and actually backdated his own signature on some contracts.

  • Kaplan, as a Divisional Vice President and the head of Financial Reporting, oversaw the preparation of CA's financial statements for inclusion in its Forms 10-Q and 10-K while aware that those statements included revenue from backdated contracts in violation of GAAP.

  • Zar, Rivard and Kaplan also each misled CA's outside auditors regarding the existence of CA's Extended Quarters practice.

In its lawsuits, the Commission seeks judgments: (a) permanently enjoining Zar, Rivard and Kaplan from violating, and aiding and abetting violations of, the securities laws; (b) requiring Zar, Rivard and Kaplan to disgorge their ill-gotten gains together with prejudgment interest; (c) imposing civil money penalties; and (d) barring Zar, Rivard and Kaplan from acting as officers or directors of any publicly held company.

Concurrently with the filing of the Commission's complaint, Zar, Rivard and Kaplan, without admitting or denying the allegations of the Complaint, each consented to entry of a permanent injunction prohibiting them from violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1, and 13b2-2 thereunder, and from aiding and abetting any violations of Sections 10(b), 13(a), 13(b)(2) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13. They each also consented to a permanent bar from serving as an officer or director of a publicly held company. Litigation against Zar, Rivard, and Kaplan 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.

See prior Litigation Release No. 18552.

SEC Complaint in this matter (David Kaplan)

SEC Complaint in this matter (David Rivard)

SEC Complaint in this matter (Ira Zar)

 

http://www.sec.gov/litigation/litreleases/lr18665.htm


Modified: 04/08/2004