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New York Times, November 21, 2002 article


November 21, 2002

U.S. Presses Inquiry Into Tech Concern

The federal criminal investigation into Computer Associates' accounting has intensified this fall, with prosecutors in Brooklyn issuing grand jury subpoenas for testimony and documents from former employees and the company's customers.

The investigation by prosecutors and lawyers for the Securities and Exchange Commission began in late 2001 and appeared to be moving slowly in the spring and summer. But the use of a grand jury signals that prosecutors have decided to devote significant time and effort to the inquiry, according to lawyers who specialize in white-collar criminal cases.

Prosecutors are examining whether top executives at Computer Associates, which is based in Islandia, N.Y., inflated the company's sales and profits during the late 1990's to reach a $1.1 billion payday that was tied to the performance of the company's stock. They are also looking into an accounting change that Computer Associates made in 2000 that effectively allowed the company to count some of its sales and profits twice. Some former and current employees have said the company made that change to hide the fact that it had previously inflated its profits.

Computer Associates has said its accounting is proper.

The Allstate Corporation, a client of Computer Associates, and Mary Welch, a former Computer Associates employee, said yesterday that they had received subpoenas to testify or provide documents to the grand jury.

''We are cooperating fully,'' said Michael J. Trevino, a spokesman for Allstate. He said that Allstate was not a subject of the investigation but that the company could not disclose what types of information it had been required to provide. ''We certainly do not want to impede the U.S. attorney's investigation,'' he said.

Ms. Welch, a former saleswoman for Computer Associates, said she received a subpoena in August or September to testify before the grand jury in Brooklyn. ''They were going to fly me out to New York,'' said Ms. Welch, who lives in Illinois.

But Ms. Welch said prosecutors had let her out of the subpoena after she told them that she did not have detailed information about the way the company accounted for its software sales. ''I wasn't at a level where I was high enough in the company where I was going to be able to tell you anything,'' she said.

Dan Kaferle, a spokesman for Computer Associates, said the company was cooperating with the investigation. Neither Computer Associates nor any of its current executives have received any subpoenas, Mr. Kaferle said. ''We have voluntarily provided documents,'' he said. ''All we know is that it's ongoing.''

On Monday, Charles B. Wang, the founder of Computer Associates, said he would retire immediately as the company's chairman. Mr. Wang's resignation was unrelated to the investigation, Mr. Kaferle said.

Several current and former board members declined to comment when asked whether they had been subpoenaed before the grand jury or spoke to prosecutors. They included Richard A. Grasso, the chairman of the New York Stock Exchange, who is a former director of Computer Associates and was a member of its compensation committee; Alfonse M. D'Amato, the former senator, who is a director of the company and a member of both its compensation and audit committees; and Willem F. P. de Vogel, a former director who was a member of both committees. Shirley Strum Kenny, the president of the State University of New York at Stony Brook, who is a former director of the company and was a member of its audit committee, did not return calls for comment.

Several lawyers who specialize in white-collar cases said that the subpoenas by themselves did not mean that the investigation into Computer Associates had reached a critical phase but that they showed that prosecutors had decided that the investigation was worth pursuing.

The subpoenas are ''not indicative at all of imminent indictments,'' said Seth Taube, the former branch chief of enforcement at the New York office of the S.E.C. and a securities lawyer who is not involved in the case. They are ''indicative of significant interest by prosecutors in pursuing this inquiry.''

Kevin Marino, a white-collar defense lawyer, said: ''When you really want to start compelling the production of documents and taking testimony, you do it by grand jury subpoena. Otherwise it's just a request.''

A spokesman for the S.E.C. declined to comment on the investigation. Eric Corngold, the prosecutor supervising the investigation and the head of the business and securities fraud division for the United States attorney's office in Brooklyn, did not return a call for comment.

In obtaining testimony from the company's clients and former employees, prosecutors and S.E.C. lawyers are trying to determine whether Computer Associates inflated its sales and profits to help its stock from 1995 to 1998.

During that period, Mr. Wang; Sanjay Kumar, who at the time was the company's president; and Russell Artzt, its executive vice president for research, stood to divide a 20.25 million share grant if shares of Computer Associates closed above $53.33 for any 60 trading days over a 12-month period.

In May 1998, the company's stock reached that level, and the three men got the grant, worth $1.1 billion at the time. Two months later, Computer Associates said its sales and profits would fall far short of analysts' forecasts, and its shares plunged. At the time, many investors wondered whether the company had known of the problems when it gave the three executives the grant. Computer Associates denied those accusations.

Last year, former and current Computer Associates employees said that the company had inflated its results in the late 1990's by booking most of the revenue from long-term contracts up front, even if it would not be paid for many years. The maneuver had the effect of making Computer Associates' sales seem much stronger than they were, the employees said.

Les Zuke, a spokesman for Ernst & Young, which audited Computer Associates' statements until July 1999, said his firm had not received a subpoena in the investigation. Bob Zeitlinger, a spokesman for KPMG, Computer Associates' current auditor, said KPMG did ''not discuss investigations relating to clients.''


Copyright 2007 The New York Times Company


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