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The Wall Street Journal, September 24, 2004 article


The Wall Street Journal  

September 24, 2004


Read the text of the indictments3 against Sanjay Kumar and Stephen Richards, and the deferred-prosecution agreement4 between Computer Associates and the Justice Department. Also see a shareholder letter5 released by CA.




 Computer Associates Strikes Deal6
 CA Accounting Probe May End7
 CA Shareholders Reject Proposal8
 Computer Associates Lowers Forecast9

In CA Probe: Recovered E-Mails, Surprise Cache of Documents

September 24, 2004; Page A1

In September 2003, a year and a half into a probe of accounting at Computer Associates International Inc., federal investigators were stymied. Chairman and Chief Executive Sanjay Kumar said the company was cooperating fully. Top company executives insisted certain subpoenaed documents didn't exist.

Then Robert J. Giuffra Jr., an outside lawyer running a separate probe for the company's board, got word of a surprise delivery from a company officer: 23 boxes of paperwork. Inside were the supposedly nonexistent documents suggesting Computer Associates executives had systematically backdated huge sales contracts after the ends of quarters to make revenue targets.

[Giuffra hedcut]

He picked up the phone and called Walter P. Schuetze, a Computer Associates director and chairman of the board's audit committee, who lives in Texas. "Houston, we have a problem," Mr. Giuffra told him.

That problem snowballed into disaster for the software maker. Files resurrected from the hard drives of employee personal computers yielded more clues, after a high-technology procedure recovered old e-mails. As evidence piled up, the giant software maker fired nearly all of its top executives and admitted it had improperly booked more than $2 billion in revenue.

Now, seven former Computer Associates executives have been indicted or pleaded guilty, culminating in this week's charges accusing Mr. Kumar and former sales head Stephen Richards of securities fraud and obstruction of justice. The two pleaded not guilty yesterday in federal court in Brooklyn, N.Y. Computer Associates avoided indictment by agreeing to a deferred-prosecution deal by which it must reform governance and oversight.


Preceding this week's court action was an investigative odyssey of 2 years. One reason it took so long, investigators contend, is that nearly the entire top Computer Associates executive team was trying to stymie the probe. Meanwhile, the board initially treated the investigation as based on little more than unfounded claims by unhappy shareholders and ex-employees. It initially relied on General Counsel Steven Woghin to collect documents and provide other vital information.

Without crucial documents, investigators for a long time couldn't persuade any of those they suspected of wrongdoing to plead guilty and cooperate. The documents Mr. Giuffra saw a year ago, which he gave to prosecutors and the Securities and Exchange Commission, broke the logjam. But the probe also involved much sleuthing.

Computer Associates, although a software company, didn't archive its e-mails on central servers. Investigators had to get experts to resurrect files by examining the hard drives of hundreds of PCs and laptops.

Board investigators also did a surprise raid on the office of Mr. Woghin, the general counsel, whom they suspected of aiding a cover-up. Mr. Woghin this week pleaded guilty to conspiracy and obstruction-of-justice charges, admitting he coached executives to mislead investigators.

To spur on the board's probe, Mr. Giuffra at one point promised a bottle of champagne to the first member of his team to find documentary evidence implicating Mr. Kumar in backdating sales contracts.

[Sanjay Kumar]

Attorneys for Messrs. Kumar and Richards denied wrongdoing on behalf of their clients. Mr. Kumar fully cooperated and "insisted that all documents be made available," his attorney, Jack Cooney, said Wednesday.

Yesterday, Mr. Cooney added that Mr. Kumar "will have the opportunity to address the government's allegations in court at the appropriate time. We expect that some members of Computer Associates' board of directors may someday be witnesses, and the veracity of their present positions and their motives in asserting their positions can be tested at that time." Mr. Richards's attorney says his client wasn't responsible for the finance and sales accounting functions affecting when revenue was recognized.

Speculation that the company's accounting was questionable swirled for years, turning up in civil actions such as shareholder and employment suits. Fired employees described what they said was a penchant for keeping quarters open so executives could book in those quarters deals that actually concluded later.

When it began its probe in early 2002, the government told Computer Associates lawyers it was examining about five questionable procedures, people familiar with the matter say. By mid-2003, they homed in primarily on backdating. Computer Associates executives convinced the board that this narrowing of focus meant there wasn't much to the other allegations, and that the backdating suspicion also soon would be discredited, people familiar with the matter say.

But, they add, investigators grew increasingly suspicious: In response to subpoenas for data on specific sales, Computer Associates typically sent just the final documents, not a complete history of the transaction.

Prosecutors had another source. The company's customers, in response to subpoenas, turned over more material than the company -- including evidence some sales had been signed later than claimed.

In mid-2003, federal investigators expressed "extreme disappointment" to Computer Associates' board about the production of documents. They advised it to start its own probe. The board hired Mr. Giuffra and his New York law firm, Sullivan & Cromwell.


All the while, directors say, Mr. Kumar repeatedly said there were no problems with accounting. "He was as good a salesman, and in retrospect better than, any I've ever known," says Computer Associates Chairman Lewis Ranieri. A former investment banker, Mr. Ranieri was part of a new board cadre recruited by Mr. Kumar in a public campaign for better governance and ethics. Jay W. Lorsch, a Harvard University business professor, also joined the board, as did Mr. Schuetze, a former SEC chief accountant.

"Every time Sanjay got out in front of some group, he talked about the importance of improving corporate governance at CA," Mr. Lorsch says. "That's part of why everything he was saying [about the accounting practices] was so believable."

Mr. Giuffra and a law-firm colleague met in early August 2003 with a dozen federal officials, including lead Justice Department investigator David Pitofsky. For the first time, prosecutors told the board's lawyers they had evidence members of top management engaged in securities fraud "with the specific intent of falsely representing quarterly revenues," Mr. Giuffra says.

Alarmed, Mr. Giuffra began a full-scale document hunt. It meant a piecemeal search through hundreds of employee computers, many of which had e-mail files that were overwritten. Technical experts from PricewaterhouseCoopers used a computer-disk imaging technique to resurrect many files. Several dozen forensic accountants and attorneys then embarked on the arduous task of reading through all of them.

Then came the surprise appearance of the 23 boxes of documents. Computer Associates General Counsel Mr. Woghin, who had been in charge of such matters, brought them in. He told the Sullivan & Cromwell lawyers the documents were in response to a more-specific subpoena received in mid-2003, say people familiar with the matter. Included, these people say, were contracts, records and internal status reports on deals prepared near the end of a quarter. Computer Associates previously had told prosecutors the status reports didn't exist.

By early October, Mr. Giuffra says, the lawyers had substantial evidence of widespread backdating in the form of e-mails, drafts of contracts and other documents. Suspicion fell on Chief Financial Officer Ira Zar, a workaholic who was a constant Saturday fixture at corporate headquarters in Islandia, N.Y.

The board called him to an interview at Sullivan & Cromwell's Manhattan office on Friday, Oct. 3. With three directors present, including Mr. Schuetze, the accounting expert, Mr. Giuffra confronted Mr. Zar with documents pointing to backdating. Mr. Zar told them Computer Associates made minor modifications to contracts in the days after a quarter ended but that the contracts were legitimately signed in the quarter the company placed them in.

"It was obvious this was an after-the-fact justification that he was coming up with at the 12th hour," Mr. Giuffra says. The board recommended to Mr. Kumar that afternoon that Mr. Zar be fired. Mr. Kumar waited until after the imminent Yom Kippur holidays and then did so.

Also fired were two of Mr. Zar's lieutenants. One, Lloyd Silverstein, began negotiating with prosecutors, and on Jan. 22 pleaded guilty, saying that improper booking of contracts after the close of a quarter was "widespread."

The afternoon of Mr. Silverstein's plea, Sullivan & Cromwell lawyers, plus director Mr. Schuetze, called Mr. Kumar in Europe to ask if he had any involvement in fraud or a cover-up. He denied it, people familiar with the call say.

Then prosecutors pointedly told Computer Associates' lawyers and directors, in effect, that they weren't looking hard enough for evidence against Mr. Kumar, say people familiar with the discussion. They also implied the involvement of top executives in fraud and obstruction could result in an indictment of the company itself. That would have far-reaching consequences that might lead to a sale or breakup of the company.

The meeting prompted Mr. Giuffra to make his promise of champagne to the team member scrutinizing e-mail who came up with one that pointed to Mr. Kumar. One problem was that Mr. Kumar's laptop from the time of the alleged fraud was missing.

Investigators did locate a former Computer Associates salesman who had been involved in a questionable deal. He had a copy of an e-mail exchange that prosecutors believed pointed to Mr. Kumar's knowledge of the backdating practices, according to people familiar with the matter.

It showed that on April 6, 2000, several days after the close of the company's fiscal fourth quarter, the salesman e-mailed Mr. Kumar and sales chief Mr. Richards that he was working assiduously to land a deal that would be backdated to March 31. The next day, he reported to the two men that he had wrapped it up, and said he was taking his children shopping. Mr. Kumar replied: "Shopping is on me." The exchange, which featured prominently in the indictment of Mr. Kumar this week, convinced some directors, including Mr. Schuetze, that Mr. Kumar was part of the accounting problem.

On April 8 came three more guilty pleas, by Mr. Zar and two other former finance executives. Mr. Zar said his co-conspirators included two unnamed executives. The directors, some of whom previously had been agitating to remove Mr. Kumar, took the hint.

On April 20, the board gathered at Sullivan & Cromwell offices in a marathon meeting to decide Mr. Kumar's fate. Mr. Lorsch and Gary Fernandes, a retired Electronic Data Systems Corp. vice chairman, strongly favored removing the CEO from the payroll. Among Mr. Kumar's supporters were Alex Serge Vieux, Mr. Ranieri and Kenneth Cron, knowledgeable individuals say.

"There was some ambivalence on the board about taking this guy who had been a huge contributor to the company's success and firing him outright," one person close to the board recalls. The upshot: Directors stripped him of his two titles and board seat, then relegated him to the powerless new post of "chief software architect."

He was pushed out for good on June 4.

Write to Charles Forelle at charles.forelle@wsj.com1 and Joann S. Lublin at joann.lublin@wsj.com2

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