Sources: SEC Probes Possible CA Stock Fraud
By Mark Harrington and Robert Kessler
February 21, 2002
The Securities and Exchange Commission has been conducting a civil
investigation into whether officials at Computer Associates International
Inc. inflated the company's stock price for their own benefit through
fraudulent accounting practices, according to several sources close to the
The SEC investigation tracks a similar criminal probe by the U.S.
attorney's office in Brooklyn, which is working with the FBI. All three
agencies have been cooperating, the sources said.
CA shares dropped 17 percent yesterday, shedding more than $2.5 billion in
value following a report by Newsday Tuesday night about the preliminary
criminal probe of its accounting.
In a statement to Newsday yesterday, CA said, "The reporting of our
financial results has always been in accordance with all applicable
Both the civil and criminal investigations are described as preliminary,
and there is no evidence that officials at the Islandia software company
violated any laws or regulations, the sources stressed. The inquiries seek
to determine whether top CA officials profited from share sales in advance
of disclosing to the public negative news about the company's financial
results, according to the sources.
Wayne Carlin, the head of the SEC's New York office, declined to comment
Asked if the company was being investigated by the SEC, Computer
Associates spokesman Robert Gordon said, "Not that I'm aware of.”
The SEC by itself can seek only civil penalties and fines and attempt to
bar violators from working in the securities or security-related
industries. CA yesterday said it had not been contacted by the U.S.
attorney, but Gordon said the company was "looking forward” to answering
any questions. He said it was "reasonable to assume our attorneys might
reach out” to the U.S. attorney's office. "If there are concerns, we'd
welcome the opportunity to defend ourselves from hearsay and innuendo from
unnamed sources,” Gordon said.
CA last year confirmed it had been subpoenaed by the SEC regarding an
investigation of insider trading of six "non-executive” employees. The SEC
investigation, which was launched following a July 1998 financial warning
and subsequent steep drop in the company's share price, was described by
CA last year as "routine.” Neither the SEC nor CA ever announced an
outcome of that investigation, which appeared to be still active last
CA has also answered SEC inquiries into its accounting practices,
including a Sept. 4, 1998, letter from assistant director James Daly. In
that inquiry, the SEC asked questions about CA's "revenue recognition”
policies, and asked CA to revise future filings to "describe in
significant detail” the nature of certain business transactions, according
to a copy of the inquiries obtained by SEC Insight Inc., a Plymouth,
Minn., financial information Web site.
One former CA employee contacted as part of the U.S. attorney's recent
inquiry said an investigator for the U.S. attorney's office asked
questions specifically concerning CA's "revenue recognition” policies,
with a particular interest in how the company has recorded the licensing
revenues of its software products and the fees its charges to maintain
Several former CA officials yesterday described the company's practice of
"re-rolling” maintenance contracts before their terms had expired in an
attempt to persuade clients to renegotiate their contracts.
The sources said that the company would include several pieces of software
in the renegotiated deals so that it could be argued that it was proper to
record most of the renegotiated price as new revenue at the time the sale
was closed. The company has always denied that the practice is improper.
It is common in the software industry, but critics charge it can be used
to give an inflated picture of a company's revenues.
SEC regulations require companies in their financial statements to
carefully delineate between licensing and maintenance revenues.
Though CA was never accused of breaking those rules, in October of 2000
the company altered its business so that both software licensing and
maintenance revenues are recognized over the life of a contract rather
than at the time a deal is signed. The new approach would appear to
address some concerns raised by critics, but CA's transition to the
so-called pro- forma pro-rata accounting method to accompany that change
left some even more confused.
The company said its practices have borne the test of relentless scrutiny.
"The company has been poked and prodded and put under a microscope for so
long it's hard to believe there would be any more questions,” said Paul
Verbinnen, another CA spokesman. He called the latest round of questions
about CA "another Salem witch-hunt.”
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